Commercial leasing has its own vocabulary with a range of terms that can mean different things to different audiences. “Shell” happens to be a popular keyword, and it comes with several variations to represent the leasable condition of a commercial building. It is important for the building owner, tenant, real estate agent, and other stakeholders to agree on one definition of such lease terms. This will allow everyone to be on the same page before any improvement is made to the property – and it will also clarify both the expectations of the tenant as well as the level of work to be done by the owner. In this article, we will zoom in on two derivations of shell spaces: cold dark shell vs white box.
What is meant by shell condition?
To begin with, the word “shell” refers to the original, unfinished condition of a building that is available for commercial leasing. Think of it as an actual shell with just an outer covering and nothing significant inside – this is exactly what a newly-constructed building looks like without major finishes. Shell types represent different levels of interior finishes within a building that has not yet received any tenant improvements, so this really is the condition in which the property is delivered to you for the first time. A shell with bare-minimum finishes will have a long way to go before it can be used for commercial activities, whereas a partially finished shell will be halfway ready and quicker to improve for occupancy. For this reason, the type of shell you lease will decide how move-in-friendly the space is, and you will set your budget accordingly.
Commercial tenants may prefer leasing a building in its cold dark shell condition or white box condition for various reasons – both represent two very different building interiors, as we will see below.
The cold dark shell
What it means
The cold dark shell is the first leasable condition of a commercial building – before this, the property will not be safe or ready for improvements and occupancy. So, yes, it is a first-generation building that has not been occupied before, and you are likely the first tenant to lease the space. It is both cold and dark, which means that it lacks HVAC and lighting, including most other key amenities. Applicable commercial synonyms for such a shell space include a grey box, a dark shell, and simply a shell. If you come across these terms in your lease, it generally means that the property will be delivered to you in its bare-minimum condition without any significant utilities in place. However, as we said earlier, lease vocabulary gets interpreted differently by different people, so make sure to sit down with your building owner and agent and find out exactly what the word entails for your specific lease.
What it lacks and includes
A cold dark shell will be quite vacant and uninhabitable, so there will not be any usable mechanical/electrical/plumbing (MEP) amenities. This means that nearly everything from lighting and HVAC to elevators and sprinklers will be missing from the interior – remember, it is both cold and dark in here! The space might include only basic structures like unfinished floors, bare stud walls, exterior walls, and unfinished ceilings. So, it really is an empty shell that requires a lot of work before it can be considered safe and ready to be occupied.
Why you might lease it
Fitting out a cold dark shell will take more time and budget because you are basically starting from scratch – the building could not be any simpler and emptier than it already is. Still, many tenants prefer leasing their commercial space in its cold dark shell condition. This happens when the customization scope has a high priority for a business.
If you want to customize your building from the very beginning, it will be easier to lease a first-generation, cold dark shell that already lacks finishes, details, utilities, technologies, décor, rooms, etc. In this way, you can control the whole build-out process by choosing custom materials, sustainable designs, creative layouts, smart technologies, and so on. Another reason for renting a cold dark shell is the duration of your stay. After micro-managing the improvements to the smallest detail, you want to be able to occupy this custom-built space for several years before moving out – or else all the work and expenses will be for nothing. Therefore, cold dark shells are the ideal choice for those looking for increased customization freedom and a longer lease duration. Hospital/medical tenants generally prefer such a lease type for the technical and specific nature of their build-out requirements.
This brings us to the costs of building out a cold dark shell. Though you are in charge of the tenant improvements, you can ask for a tenant improvement allowance (TIA) from the owner – who has so far only paid to bring the property to its bare-minimum status. Owners are also more willing to financially contribute to such a project because this is a huge undertaking and will secure them rents for the next several years – not to mention the value it will add to their property. To sum up, as a tenant, here is why you should consider a cold dark shell for your business:
- Better customization for infrastructure, utilities, finishes, materials, technologies, space planning, and décor.
- Longer lease duration.
- Greater allowance scope with more room to negotiate funds.
How it benefits the owner
Building owners have the key benefit of low upfront costs because the cold dark shell will not require any upgrades, so this is very cost-effective for most owners. It saves them time and money by not having to build out the space – which the tenant might as well not approve of, in which case, everything will need to be torn down, and all the construction will be wasted. In addition, this means that the empty space can appeal to a variety of long-standing businesses, so the target pool increases thanks to the adaptability of a vacant shell. Also, the owner can retain the changes added by the previous tenant according to the lease terms, so these can be reused for the next tenant opening the same type of business (like a medical office). To sum up, here is why building owners might choose to invest in first-generation, cold dark shells:
- Lower building construction costs.
- Faster completion and delivery.
- No wasted construction.
- Wider tenant pool.
- Regular rents for consecutive years.
What drawbacks it comes with
A cold dark shell offers many benefits to both tenants and owners as we saw above. However, there are some key negatives as well, including:
- Longer move-in delays.
- Availabilities in only prime locations.
- Higher upfront costs for tenants.
Image credits: Austin Tenant Advisors
The white box
What it means
A white box is a step up from a cold dark shell. It is partially finished, so it makes a good middle ground between an empty shell and a finished space. The interior is halfway ready when you lease it, which means that instead of bare walls and grey concrete, you will have a white blank canvas-like space ready for the final touch-ups.
Such a white box is also known as a warm vanilla shell or simply a warm shell. These buildings can be second-generation buildings as white box spaces are commonly used for short-term leasing, so there is always someone who occupied the space before you. While a cold dark shell build-out is tenant-controlled, a white box comes with owner-installed features. As with cold dark shells, make sure to get the definition right with your involved parties before signing the lease to know which features will be available to you so that you do not encounter any surprises on the move-in day.
What it lacks and includes
A white box is a halfway approach, so it does include most of the amenities you will need as a tenant. It generally comes with a proper MEP infrastructure, which means that essential utilities like lighting, HVAC, and plumbing are ready to use. There is a dropped ceiling, finished walls, finished roof and floors, doors, windows, restrooms, ADA designs, lit-up signage, and similar amenities. Things like paint, wallpaper, fixtures, and equipment will be missing, so there is only a little you have to do before moving in. Quite often, a white box space will be just a furniture placement away from being occupied if the tenant is happy with the available features and does not want to add anything else.
Why you might lease it
White boxes appeal particularly to short-term, on-budget tenants who do not have time or money for full customization – for example, office and retail tenants. You might want to lease a second-generation, partially finished space if you do not have strict custom requirements and need to get your business up and running soon. Since you are not spending significant money on the improvements, you might not need as much TIA as the owner has already taken care of most of the work. You can simply focus on the paint and layout instead. This is also the best commercial leasing option for those who do not intend to stay for a long time – obviously, you would not want to pay much for improving a space where you will stay just for a year or two. To sum up, here are the benefits of leasing a white box space as a tenant:
- Faster move-in times.
- Significantly less upfront costs.
- Pre-installed features ready to use.
- Perfect for short-term leasing.
How it benefits the owner
Building owners may choose to deliver their spaces in white-box condition if there is a competitive tenant pool lining up to join the neighborhood. Office and retail tenants are always around for short-term leasing opportunities, and the same white box can be painted with different commercial stories without having to reverse everything back to its shell form. This cookie-cutter approach benefits owners in terms of consecutive leasing and not having to pay as much TI allowance to fit out the building with custom and expensive finishes. From the owner’s perspective, a white box offers the following benefits:
- Standard, cookie-cutter designs for short-term leases.
- Not much to be reversed at the end of each lease.
- Minimum to no additional allowance to be paid.
What drawbacks it comes with
That said, a white box does come with the following drawbacks for both tenants and owners:
- The possible lease requirement to restore the space back to its white-box condition for the tenant at the end of the stay.
- Little to no allowance scope for the tenant (and not much room for negotiations).
- Larger upfront costs for the owner.
- Longer space vacancy if there are no office tenants around (especially with increased home working and hybrid workspaces in town).
Image credits: AQUILA Commercial
Like night and day
And that was our insight into the differences between a cold dark shell and a white box. We will repeat what you are probably tired of reading by this point: always get your definitions right! The main problem with the commercial real estate “dictionary” is that it has very volatile meanings that change depending on who is reading them. So, it is important to sit down with all the involved parties and clarify what you are working with, which features will be available to you, which ones will need to be installed, and so on.
In general, if you are willing to build out your commercial space from scratch and do not mind the budget or time that goes into the project, then cold dark shells are for you. This is particularly true for those looking for better customization freedom for their buildings. On the other hand, if you have a tight budget and need to move in quickly to run your business, then choose a white box instead. While there are striking differences between the two, both the shell and box enclose a commercial future inside them, accessible through the right time and budget at hand. Make sure to play to your strengths as a business owner and tenant and get your expectations in black and white before signing the papers!