Tenant Improvement Work and Shell Condition

Small cardboard house, keys and dollars on wooden table

The Landlord has provided a Tenant Improvement Allowance for your new office space.
What is the condition of the premises when the Landlord delivers the new office space? Is electrical and Heating, Air Condition and Venting (HVAC) been brought to the premises? Is there a finished ceiling? When are the TI dollars the Landlord has provided to a Tenant applicable to improving the premises?

Understanding the condition in which the premises are delivered to a Tenant is essential to avoid conflict and costs in the future.

If you’re renting a space that has been previously occupied (known as a second-generation space), you can reasonably expect that is in “finished” condition, meaning it has finished floors, painted walls, plumbing and electric, etc. If you are renting a new space or previously occupied space that has been demolished, a clear understanding and documentation of the “shell condition” is required.

What is “Shell Condition?”

“Shell condition” refers to office space in a building that generally includes structural elements such as external walls, an exterior roof and an entry doors.

There are two main categories of shell condition that a space can be in at the time of leasing, although these definitions are not absolute, and even the two category names can differ to reflect what specifications are included. The main types are “Gray Shell” and “Vanilla Shell”, to denote an unfinished and semi-finished space respectively.

“Gray Shell”

A “Gray Shell” typically refers to a completely unfinished space with the bare minimum of structure. It will likely have bare stud walls, unfinished floors, and no plumbing or electric set up. While it may have HVAC, it may not have ductwork or controls set up, and it may have a sprinkler system installed but not yet dropped to finished ceiling height.

The benefit to renting “Gray Shell” space is the increased opportunity for customization.
The Downside is the amount of work, time, and money that must be invested before the space can be occupied.

“Vanilla Shell”

This term is used to denote a near-finished space. It will likely have all of the above structural features in addition to minimal interior and finishing. It will likely still not have interior walls or plumbing, wall coverings, paint, or flooring.

It will have the “basic finishings”, which tend to include fire tapes walls ready to be painted, electrical panel and outlets, a sealed concrete or finished flooring and ceiling with lighting, HVAC with ductwork and controls. Depending on code, it may also have a sprinkler system. A Vanilla Shell typically is the condition of delivery in an office lease.

Customization & Cost for Occupancy

Tenant Improvement dollars are a key metric to negotiating a lease and through skilled negotiating Landlords will absorb some or all of the costs associated with improving the premises.

Tenant Improves allowances vary from transaction to transaction. The length of the lease term weighs significantly on the final dollar that a Landlord will contribute.

The rental rate, the credit worthiness of the Tenant, the vacancy factor in the building as well as the market are some of the factors that come into play when negotiating a Tenant Improvement Allowance.

It is possible to have a Landlord provide a Tenant Improvement allowance that will cover all cost, provided all the key metrics of a lease are met for both the Landlord and the Tenant.

There are no laws governing the condition of a space being delivered to a tenant in a lease, so you need to be sure to know what you’re getting into before you sign. You will want to ensure that the exact conditions of the space are detailed, in writing, in the lease.

Every day of the year, Mazirow Commercial negotiates leases to protect and save tenants rent dollars on many lease terms. The landlord is fully informed about the terms of the marketplace, are you? Don’t go to the table alone, contact us today. We are the tenant advocate for the Greater Los Angeles and West Los Angeles Area, San Fernando Valley, Conejo Valley, Ventura County, Santa Monica, Glendale, and more.

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