Real estate and tenant improvement construction is it’s own world and with our world of TI construction comes a language that may seem a little foreign to others if you are a potential tenant looking at spaces or if you are just starting to perform tenant build outs as a general contractor. In this article we review what actually makes up a “white box” in real estate within new or existing buildings and some other types of spaces that you may run into while looking to lease an interior space within a building.
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What is a White Box in Construction?
A white box in construction or real estate is the condition of a core and shell building space, typically available for leasing, that already has heating, venting, air conditioning (HVAC), a finished ceiling, lights, and painted walls or walls that are ready to be painted. The most common color of finishes in this case are white, so it is typically called a “white box” because the space is usually devoid of features other than everything being white. Flooring is not usually installed yet unless it is left over by a previous tenant since flooring can vary so much depending on what a tenant is looking for.
What is a White Box vs. a Cold Dark Shell?
A white box is advantageous for potential tenants because if a potential tenant is happy with the finishes then the work required to “build out” the space is minimal compared to a core and shell space in varying conditions. This means that a potential client can move in significantly faster then if the leasable space were in a “less complete” condition, and the costs to prepare the space will be less than if custom finishes were required. Some examples of other “conditions” of a core and shell space that is not yet leased by a tenant are listed below.
Disadvantages of a White Box in Real Estate
A white box condition would be disadvantageous to a potential tenant if the tenant doesn’t like the finishes or if the tenant has some very specific requirements or custom finishes for their space. Since the landlord has hypothetically already spent money installing the ceiling and utilities (lights, HVAC, plumbing, etc) they would have to spend more money removing the finishes first and then installing new finishes.
What is a White Box in Retail?
White boxes are popular for landlords to build in a retail setting because retail space (especially in the smaller range, say under 10,000 sf or 5,000 sf) do not require a lot of customization in their layout, walls, restrooms, or employee spaces. Typically it is pretty safe to say that a small retail space is going to require a large front room for customers, and a smaller back area for employees to include restrooms, storage, and a breakroom. For this reason a landlord can usually predict that a large percent of their potential tenants will be happy with a wide open space that that can then customize with their own “FF&E” or furniture, fixtures, and equipment.
Vanilla Box Construction
Vanilla box construction is another way of saying “white box construction”. It is kind of an “in-between” step that takes a cold gray shell – which is basically a building that has the “shell” completed – roof, walls, windows, windows, doors, and the skin of the building, and makes it into a “finished” or at least close to finished space. Vanilla box construction demises each leasable space into its own area and gives a potential tenant the “basic necessities” needed to occupy a space and begin conducting business including HVAC, electrical, lighting, and plain finishes to finish a space out.
This white box or vanilla box in construction is different than a few other conditions including:
What is a Warm Gray Box in Construction?
A warm gray box in construction or real estate is when heating, venting, and air Conditioning (HVAC) is in place including all of the plumbing and electrical required, but the ceiling is not installed yet and usually that means that permanent lighting is not installed yet. This is usually common in climates that go below freezing during the winter because the space is required to be heated so that any fire suppression system (usually required by building code for most buildings now) located within the space will not freeze and cause a flood. Typically minimal lighting and fire alarm protection will be in place as well as required per most jurisdictions nowadays.
What is a Cold Gray Box in Construction?
A “Cold Gray Box” in construction is a space within a building (the building has roof, walls, skin, doors, and windows) that has no permanent HVAC, no finishes. Pretty much as “incomplete” of a core and shell as you can get. Basically a weathertight roof and perimeter walls are in place, and the space is ready to be built out nearly however a tenant or landlord would like it to be built. Another way of saying this is that it’s an unfinished space within a core and shell building. Sometimes the slab on grade is completed, sometimes it is not so it’s really important to dig into the plans or landlord work letter to see what state the building will be in when a tenant or a tenant improvement contractor accepts the space for a TI project.
What is a Fully Finished Space in Real Estate?
A fully furnished space in real estate means that the space has all of the finishes of the previous tenant or a new space is fully built out with all finishes (flooring, ceiling, paint, doors, cabinetry, etc…) completed before a tenant is signed up. This is pretty common in existing buildings if a tenant has recently moved out and if the landlord believes that another potential tenant would like to take the space “as-is” and move in without major modifications to the space. This arrangement is typically a “win-win” as long as the tenant likes the finishes and layout of the space as it saves in construction costs and time needed to prepare the space but the risks in this approach are that it may turn away potential tenants who may not like the space or a tenant may have to sacrifice in the layout or finishes that are already selected when they move in.
Tenant Fit Out Conditions
Each space that you look at as a tenant or a tenant improvement general contractor is going to be slightly different. The work that is required of the landlord and work that is required of a tenant is always defined in the Landlord Work Letter or Tenant Work Letter– I usually see the landlord work letter as the “Exhibit C” in a lease. Read this landlord work letter VERY carefully as single sentences in the lease can cost a tenant or landlord tens of thousands of dollars of work in tenant buildout costs!
Tenant improvement allowance (TIA)
What Makes White Box Buildouts Budget-Friendly?
To summarize, a white box is just the bare-minimum, blank canvas space available to be leased for commercial use. It comes with basic features such as walls, doors, windows, roof, HVAC components, concrete floors, stairs, and simple lights. This gives tenants all the freedom to add upon the partially-finished interior and customize it the way they like. Since the main infrastructure is ready, you can make the required improvements and only pay for your customizations.
White box construction costs are usually split into licensing, permitting, demolition, construction, and inspection costs. Your building owner has already paid for these beforehand, so you should only worry about the changes needed to run your business. This makes white box buildouts quite budget-friendly and time-saving, as you can transform the available space to fit your commercial goal and move in quickly – compared to starting from scratch.
How To Finalize Your Customizations?
White box spaces are not move-in-ready, and this is their defining feature. They have plenty of room for improvement because everything that is missing is for the tenant to fill out. This brings us to lease agreements. Both the landlord/landlady and tenant must have their requirements clearly stated in black and white. Your lease agreement is going to show all the tenant improvements needed before moving in, so it is important to be crystal clear about what you want. Based on your commercial operations, workforce size, and specific needs, the scope of customization will vary. Discuss with your teams and general contractor to get the details right and work out the overall costs for your white box buildout.
Will You Pay All Of These Costs?
Improvements on white box spaces are very tenant-specific, as each tenant will have different expectations for the given area in terms of commercial identity, workplace décor, operational use, etc. An improved space will be occupied faster because now it is ready to run the tenant’s business. And quite often, some of the changes a tenant adds might be approved by the next tenant, securing a consecutive lease agreement for the building owner. So, it only makes sense for owners to seek these win-win possibilities. They do this by offering a tenant improvement allowance (TIA) calculated per square foot to cover some of the total buildout cost. This allowance addresses the building’s functionality and technicality as opposed to aesthetics or décor. For example, TIAs will include various hard costs and space planning aspects, but they will exclude any costs for paint, wallpaper, and furniture, fixtures, and equipment (FFE). The main idea is that such an allowance helps tenants finish the white box space quickly and cost-effectively – and makes the key component of any lease agreement.
Why Are Lease Negotiations Important?
Strong negotiation skills are always important in real estate. Although building owners might not offer 100% of the total improvement costs, a good negotiation can bring you to a closer value. Depending on your level of customization and specialty upgrades, you can negotiate the allowance amount by also considering the lease term and improvements that the owner gets to retain at the end of your lease. The physical changes you wish to add to the white box space and the mutually agreed TI allowance should be covered by your lease agreement in generous detail. Well-established lease terms are crucial for 2 main reasons: securing the owner’s investment and avoiding legal implications for both parties.
My construction group has performed many white box “build outs” over the past couple of decades. Please feel free to contact me at dan@danspros.com or call me at 720-432-6002 if you have any questions or need assistance budgeting or remodels/build outs in Denver, Los Angeles, Chicago, Phoenix, Tucson, Nashville, San Diego, or really anywhere in the US!
