Shell Lease

What Is a Shell Lease?

A shell lease is a commercial real estate lease agreement for an unfinished interior that the tenant will customize to their specific requirements.

Understanding Shell Leases

The term shell lease is used when the rented property is an unfinished "shell" of a piece of commercial real estate, such as the floor of an office building or a unit in a new shopping center, where the tenant must complete design and construction and add any necessary furniture, fixtures, and equipment. A shell lease specifies the types of construction and improvements for which both the landlord and tenant are responsible. Often the landlord will provide a financial incentive to the renter for completing the work under a shell lease.

A shell lease can exist in several forms depending on the work that has already been completed on the property and the work that remains to be done. The tenant in a shell lease, for example, might undertake considerable portions of the construction by installing ceilings, interior walls, lighting, plumbing, elevators, wiring and heating, and ventilation and cooling (HVAC) systems.

Two main types of shells and shell leases exist. A “cold shell” refers to a space that has no furnishings or infrastructure (e.g. utilities). This is effectively a skeleton of a building, and the tenant would need to plan for an extensive build-out of the property. A “warm” shell, by comparison, could have some basic amenities already, like heat and other features in place. The rest of the property would need to be designed and built out.

Shell Lease Benefits to Tenants and Landlords

Tenants and landlords may see a shell lease as a mutually beneficial option. The minimal, unfinished interior of the space means the tenant will need to install the features and infrastructure that are needed. This way, the tenant will not encounter wasted amenities or costly features that will not be used because only the particular services and structures that the tenant needs will be installed.

A shell lease is also an opportunity for tenants to design the space for their specific needs. If the property is a warehouse or industrial space, the tenant could have loading ports created or special storage units installed for the type of goods they will bring in. The tenant might want to combine the industrial activities with a showroom on the premises. A shell lease would allow them to create the exact type of space they want.

Companies that want to make a lasting mark with the space they occupy might pursue a shell lease. Such an agreement would let the tenant design their offices and define how their operations would be established. Tenants could make the property conform to their corporate brand and standards rather than force the company to adjust to its new space.