When a business owner finds a new location, the empty space is often just the beginning. The layout, lighting, and walls may not be suited for their specific operational needs, initiating a transformation to customize the space. This process turns a generic commercial unit into a tailored environment. It requires careful planning, funding, and collaboration among several professionals to bring a business’s vision to life.
Defining a Commercial Build Out
A commercial build out, also known as “tenant improvements” or “leasehold improvements,” is the process of modifying an interior commercial space for a particular business. It is a specialized construction project tailored to the unique operational requirements of a tenant. For example, a restaurant may need a commercial kitchen, or a medical clinic may require specific room layouts and plumbing to make the space functional.
The scope of a build out can range from minor cosmetic changes to a complete overhaul of the interior. It can include erecting new walls, installing specialized electrical and plumbing systems, adding custom lighting, laying new flooring, and painting. This process must comply with commercial building codes, zoning regulations, and the terms of the lease agreement. The goal is to transform a space to align with the tenant’s business model and brand identity.
Key Parties Involved in a Build Out
A build out is a collaborative effort between several parties. The two primary participants are the tenant, the business occupying the space, and the landlord, who owns the property. The tenant’s interest is creating a space that meets their operational needs, while the landlord aims to keep changes flexible for future tenants.
A team of specialized professionals is assembled to execute the project. An architect or designer creates the detailed plans and construction documents that serve as the project’s blueprint. They translate the tenant’s needs into functional layouts and ensure the design complies with building codes.
The general contractor oversees the construction phase, managing the project from start to finish. They hire and coordinate subcontractors, who are the specialized tradespeople performing the hands-on work. This team can include electricians, plumbers, painters, flooring installers, and HVAC technicians. A project manager may also be hired to act as a central point of communication for all parties.
Understanding Build Out Costs and Funding
A central concept in funding these modifications is the Tenant Improvement Allowance (TIA). This is a sum of money the landlord provides to the tenant to help cover construction costs. The TIA is negotiated as a specific dollar amount per square foot of the leased space and is detailed within the lease agreement.
The TIA is intended to cover “hard costs” associated with permanent fixtures, such as framing walls, installing drywall, and updating electrical and plumbing systems. It does not cover “soft costs” like architectural fees or movable items like furniture, trade fixtures, or IT equipment. If the total cost of the build out exceeds the TIA, the tenant is responsible for paying the difference.
An alternative arrangement is a turnkey build out. In this scenario, the landlord manages and pays for the entire construction process based on specifications agreed upon with the tenant. While this is a simpler option for the tenant, the costs are factored into a higher rental rate. The tenant also relinquishes direct control over the construction process and material selection.
The Build Out Process Step by Step
The build out process begins with the space planning and design phase. The tenant works with an architect or designer to create detailed floor plans and construction documents. These plans outline every aspect of the project, from wall locations to finish materials, and must be approved by both the tenant and the landlord.
Once the design is finalized, the project moves into the contractor bidding and selection stage. The tenant or their project manager solicits bids from several general contractors based on the construction documents. After reviewing the bids and vetting the contractors, one is selected to oversee the project.
Before physical work can begin, the necessary permits must be obtained from local municipal authorities. The general contractor handles this process, which involves submitting the architectural plans for review to ensure they comply with building codes, fire safety regulations, and zoning laws. This step can sometimes cause delays.
With permits in hand, the construction phase commences. The general contractor coordinates all subcontractors to perform the work as specified in the plans. This phase involves demolition, framing, installation of mechanical systems, drywall, and the application of finishes like paint and flooring.
Upon completion of construction, the project enters the final inspection stage. A local building inspector visits the site to ensure all work has been done according to code. Once the space passes all inspections, the city issues a Certificate of Occupancy, which legally allows the tenant to occupy the space.
Common Types of Commercial Space Conditions
The starting condition of a commercial space impacts the scope, cost, and timeline of a build out. There are three common conditions a tenant might encounter when leasing a property, and understanding them helps with budgeting and planning.
A “grey shell,” also known as a cold dark shell, is the most basic state. This is an unfinished space with bare walls, a concrete floor, and no services like HVAC, lighting, or plumbing. A build out in a grey shell is the most extensive and costly, as it requires installing all interior systems from scratch.
A more finished option is the “white box” or “vanilla shell.” This space includes basic finishes like drywall, a finished ceiling, standard lighting, a functioning HVAC system, and a completed restroom. It provides a neutral canvas for the tenant’s specific improvements and is a common delivery condition for new office and retail spaces.
A “second-generation space” is a unit that was previously built out and occupied by another tenant. These spaces can be advantageous because infrastructure like restrooms and ductwork may already be in place. However, they often require modifications to suit the new tenant’s needs, ranging from cosmetic updates to significant demolition and rebuilding.