Cold Dark Shells: Everything You Need to Know
Leasing a commercial space can be compared to buying a classic car in some respects.
Sure - the space space may be move-in ready, but you’ll likely have to do a little work and fine-tuning to get the space up and running.
While you could spend the money and purchase a fully restored vehicle, some classic cars come without an engine, may be missing an AC compressor, or could be completely empty except for the shell of the car - leaving some upside and cost savings on the table for anyone willing to put in the work.
Sound a bit familiar to a specific type of commercial space?
That’s because it is!
Here’s everything you need to know about cold dark shells.
Cold Dark Shell Space
Many tenants will run across a shell lease during their search for space.
The term “shell” is also not universal, as a shell lease may be an entirely unfinished shell or it may have certain improvements that place it slightly beyond a shell lease classification; it can vary depending on the type of property and the ownership.
However, you can expect a shell lease to have the structural components of the building completely intact, such as a roof, a floor slab or gravel, and exterior cladding to protect the space; hence, why it’s a called “shell” lease.
What is a Cold Dark Shell?
Although there are variations of the cold dark shell, let’s dive a bit deeper into the one that’s ideal if you’re looking to customize the entirety of a space starting with the bare bones.
Many businesses like the idea of customizing their space from scratch because it can improve their workflow and efficiencies above and beyond what a second generation build-out could offer them.
Wouldn’t you like a space that allows you to pour your creativity and the essence of your business into every component of the interior down to the location of the light fixtures and trim?
A cold dark shell is, well, cold and dark; it refers to a commercial space without:
Plumbing
Elevators
HVAC
Electrical
It is essentially the “skeleton” of a space.
Why Tenants Would Want to Lease Cold Dark Shells
Building out a commercial space from a cold dark shell sounds like quite a bit of work.
So, why would you want to lease such a space?
As I mentioned earlier, a cold dark shell gives the tenant a greater range when it comes to improvements and customization.
The tenant has the liberty of deciding where they would like to place their bathrooms, how their ducting system will be designed, which interior finishes and selections to use, and so much more.
If an owner makes the improvements themselves, they will likely finish the space out to “building standard finishes,” which may not be up to spec for the tenant’s desired finishes.
Costs are Also Different Than Second Generation Space
Cold dark shells are typically offered at lower rates than fully finished suites due to the up-front costs of improvements that the tenant must provide to get the space ready for business.
Tenants may be able to recover some their initial cost through a combination of the lower rent rate and tax write-offs from space improvements.
But tenants aren’t always responsible for paying for 100% of the costs involved in the new build-out.
Completely renovating a space can be quite costly, which can make it very difficult for a landlord to lease their space, which is why they’ll often offer tenant improvement allowances (TIA).
Tenant improvements are funds paid to the lessee by the landlord after the build-out has been completed in order to help with the build-out - think of it as a refund for improving the landlord’s building.
Depending on the lease agreement, an owner delivering a space as a cold dark shell may offer TIA to offset the costs of improvements to the tenants and make the lease more attractive.
Why Commercial Space Is Delivered in Cold Dark Shell Condition
You may be wondering why an an owner would deliver a space as a cold dark shell.
Well, there are multiple reasons, namely:
Financing
Flexibility
Appeal
The lower the cost of the building is to the owner, the less financing the owner will incur. Of course, they’ll be incurring these expenses at some point, but by not drawing on those funds before having set plans, property owners won’t be incurring any interest carry involved with the loan.
Not having the space built out already also gives the landlord flexibility as to which kind of business they can allow to occupy the space. Whether the tenant needs an open floor plan or a number of private offices, the space could be built out to suit their needs.
Another benefit is that construction will not be wasted; a tenant is going to add the amenities and features they need whereas the tenant may find that they don’t need certain amenities and features if the space had undergone improvements prior to their lease.
Think about it this way - most of these spaces have poured concrete floors that are either finished and exposed or covered by some sort of flooring. If a dentist came along and needed a significant amount of plumbing and gas lines in the floor, they’d have to tear up a significant amount of concrete to do so, incurring expenses they wouldn’t have otherwise had.
The Negatives of a Shell Space
These delivery conditions are far from perfect for some tenants, too, and dark shells do come with a few drawbacks.
A building without lighting and HVAC can be unattractive for some companies because of the additional time requirements and expenses that can be incurred; thus, you typically don’t find cold dark shells outside of prime locations in your city.
Also, the more improvements a tenant must make on a space, the further along the tenant’s move-in day will be pushed along. Most of these improvements can’t be made quickly, which can lead to a delay in the tenant’s grand opening.
But What About Warm Shells?
Cold dark shells aren’t for everyone - so what other delivery options do you have?
Well, the next step-up is a warm shell, which is sometimes referred to a warm vanilla box. These spaces have typically been occupied by a previous tenant and have been prepared for a newer, incoming business.
As you’d imagine, this type of space is outfitted with electrical, plumbing, and HVAC (which is why it’s a referred to as a “warm” shell), as it had undergone the build-out process to make it rentable.
Just as the definition of a cold dark shell is not precise, a warm shell could lack certain amenities that other warm shells have; it depends on the owner’s definition of a warm shell.
You can also expect a shorter build-out period since there will be less improvements.
There are Other Delivery Conditions, Too
Cold dark shells and warm vanilla boxes aren’t the only type of delivery conditions.
Those phrases can actually be broken down to better understand what type of delivery condition is being referred to by the broker or landlord.
You could have a “warm dark shell,” where the space has HVAC but no lighting, or a “cold vanilla shell” where the walls, flooring, and fixtures have been prepared for the incoming tenant’s build-out but there aren’t any mechanical systems.
Warm vs. Cold Dark Shell
Warm shells are significantly easier to deal with since they’re a low-maintenance alternative and allow you to move on a quicker timeline.
So why wouldn’t you want a warm shell?
It’s certainly less work and less money that you’ll have to deal with on the front end.
But the tenant with a warm shell will likely be paying a higher price per square foot than the tenant that chooses a cold dark shell.
Naturally, you will pay less in build-out costs than a tenant with a cold dark shell would, so the landlord captures their cost of delivering the space as a warm shell through this rent rate as well.
Benefits of a Cold Dark Shell
Let’s review our options. With cold dark shells you have:
Fully custom-built space
Lower rent rate
More finish options during build-out
Benefits of Warm Shells
With warm shells you have:
Lower build-out cost
Shorter build-out period (if any)
Less work on the front end
So, Which Should You Choose?
If you’re ready to move in, open for business ASAP, and don’t want to endure the costs and process of a longer build-out, a warm shell is right up your alley.
It allows you to move quickly and worry far less about space plans, construction, and reimbursements.
However, if you are ready to build-out your space from the ground up, want more options during the build-out, and don’t mind the cash expenditure up front to get your space in perfect condition for your business, then you should take a look at spaces delivered as cold dark shells.
Ben Dotye's passion and eagerness to learn about commercial real estate lead him to join the team as our brokerage and acquisition intern. He has proven himself valuable by assisting our brokers, being involved in renovation projects, and much more! His goal as our intern is to learn as much as possible so that he can soon be a part of Music City's growth.
A current Business student at Rhodes College, Ben is expected to graduate in 2022. Upon graduation, he plans to dive into commercial real estate!
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