It can make a difference
By DOUG PRICE
There is no shortage of interesting terminology in Commercial Real Estate. One specific area of interest is found in the descriptions between a Cold Grey Shell and Warm Vanilla Shell. The overall definitions have to do with how raw or unoccupied spaces can be delivered to new tenants prior to the space being built out for its specific use. This topic is especially important as the differences of how a space is delivered can affect the cost of a transaction by tens of thousands to hundreds of thousand dollars for the tenant. With this much at stake, understanding the various definitions of how a space is delivered is worth learning.
While there are multiple synonyms for how spaces are delivered, an unoccupied or new space is often described as being a ‘Shell’ space. The two most commons types of unoccupied spaces or ‘Shells’ come with the terminology of either a ‘Cold Grey Shell’ or a ‘Warm Vanilla Shell’. Let’s take a further look.
What is Shell Space?
Shell Space denotes the interior condition of a specific commercial real estate space that does not have substantial interior improvements or finishes. With a new development or new construction, most spaces are typically delivered in a Shell condition; which means the space is essentially four perimeter walls with a primarily open floor plan. The tenant then builds out the space to their specific parameters which makes it no longer a shell, but a finished or built out space.
Additionally, a landlord or tenant may choose to demolish the interior finishes of an already built out space if the specific finishes are not beneficial or needed by the next tenant. This is considered returning a space to a Shell Condition and is often required prior to performing a new build out on a second-generation space.
Shell construction typically denotes the floor, perimeter walls and roof of an enclosed premises and may include some HVAC, electrical or plumbing improvements, but not internal walls, interior space partitioning, individualized tenant finishes or fixtures.
Essentially, a Shell Space is an open box that is ready for a tenant to build out or install their unique fixtures in. However, the difference of the ‘type of shell’ is where the details can make a significant impact on the cost for a tenant. Let’s take a look at the differences between a Cold Grey Shell and a Warm Vanilla Shell.
What is a Cold Grey Shell?
A Cold Grey Shell is most often defined through understanding the two main descriptor words before the word shell:
- Cold: typically means the space does not have HVAC (heating, ventilation and air conditioning) available or installed in the space; and hence, the space cannot be heated (or cooled) prior to the HVAC being installed. In this instance, an HVAC unit or units will need to be installed or supplied into the space in order to bring heating, ventilation and air conditioning to the space. Hence, the space is cold.
- Grey: typically means the space has no other improvements to it such as the walls being finished with drywall and painted, a drop ceiling grid and tiles or a drywall ceiling, appropriate lighting installed, flooring, or any other standard improvements such as a restroom, built out offices, etc. The word grey speaks to the fact the floor and any exterior walls are often the color grey because of the untreated concrete floor or walls.
A Cold Grey shell is essentially a space with no HVAC or finishes of any real substance. Many times, landlords will also leave a portion of the floor or even the entire floor in dirt condition without pouring any concrete, if they assume the future tenant will need to install heavy plumbing.
What is a Warm Vanilla Shell?
In comparison, a Warm Vanilla Shell is close to the opposite of a Cold Grey Shell, as defined by:
- Warm: the space does have an HVAC system connected and functional, or at least is attached to the premises and ready to be hooked up. Warm means the space can be heated and / or cooled without adding a new HVAC system.
- Vanilla: typically refers to the space having finished exterior walls with drywall, a drop-grid ceiling with ceiling tiles or a drywall ceiling, with lighting installed, HVAC that is distributed, and often also includes some level of additional build out such as a finished restroom(s) with running water, sewer, plumbing, fixtures, etc. The space may also contain some level of additional build out such as any amount of offices or additional walls and interior rooms.
A Warm Vanilla Shell is essentially a space with HVAC and the four walls and ceiling being finished.
Many landlords of both retail and office buildings will prepare a vacant space in the condition of a Warm Vanilla Shell delivery so that certain tenants might be able to immediately move in with very minor adjustments to the space or with simply the installation of their tenant specific furniture, fixtures and equipment.
However, there are some tenants who prefer a Cold Gray Shell vs. a Warm Vanilla Shell if they have unique requirements for their mechanical systems, plumbing or other finishes. A Vanilla Shell might require the Tenant to replace some of the improvements a landlord may have already performed such as relocating the restrooms or upgrading their finishes, selecting a different type of ceiling and light fixtures and more.
Depending on the level of finishes in a Warm Vanilla Shell, it’s possible for a landlord to spend $50,000 to $100,000 in improvements that the tenant might immediately tear out or upgrade. Meaning, if the landlord spends money on a specific ceiling grid, lights and restroom location but the tenant wants something different, there can be a healthy waste of both time and money. That money would have been better slated for the tenant to use on the exact items and finishes they wanted verses what the landlord already put into the space.
While many retail tenants or traditional office tenants may prefer the delivery of a Vanilla Shell to expedite their occupancy and lower their expense of build out, most healthcare providers are much better off taking a space in a Cold Grey Shell format. The reason is that a healthcare tenant can better utilize the equivalent of the money the landlord would have spent on a space and instead utilize that money for the exact upgrades the tenant wants. There are times when the landlord has already spent the money on delivering a Vanilla Shell, which in that case you simply get what the landlord has already decided. However, there are also many situations, especially with new construction, where if you get to the property or landlord early enough in the negotiations that you can determine the type of delivery as part of your negotiations for the space.
Understanding these unique terms when evaluating commercial real estate spaces will help you make the most informed decision and give you an advantage during your negotiations.
Doug Price is an agent with CARR Healthcare, the nation’s leading provider of commercial real estate services for healthcare tenants and buyers. Every year, thousands of healthcare practices trust CARR to achieve the most favorable terms on their lease and purchase negotiations. CARR’s team of experts assist with start-ups, lease renewals, expansions, relocations, additional offices, purchases, and practice transitions. Healthcare practices choose CARR to save them a substantial amount of time and money; while ensuring their interests are always first. Contact Doug at Doug.Price@carr.us
