Commercial Real Estate Lease Says the Space is “White Box” – What Now?

You’ve narrowed down a few spaces for your company’s new home and now you’re reviewing leases and contracts. As you know, this is a very critical point in the process. Having a complete understanding of the terms within a contract/lease can help you cut costs and avoid future setbacks.

Property managers and owners can provide contracts and leases with similar language, but varying interpretations. It is extremely important to make sure the agreement is thorough, detailed, and includes the specific construction conditions. Additionally, it can be in your favor to have an extensive knowledge of industry standards.

One term that commonly appears in a commercial real estate agreement is “white box.” There are many other terms for the same condition, including but not limited to:

– Vanilla shell

– Warm shell

– Warm white box

– Warm white shell

– Vanilla box

– Lit shell

– Plain vanilla shell

With all the different terms to describe the condition of a space, it is important confirm exactly what the condition is in reference to tenant improvement (TI) construction (also known as tenant buildout).

What is White Box Construction?

In short, a white box, vanilla shell, lit shell, etc. is a partially finished commercial space. It is called a white box because it quite literally looks like a white box with a sub floor (typically made of concrete or plywood), exterior or demising walls that are primed or painted white to a certain height, and an acoustical ceiling or drywall ceiling in common building areas. Typically, there are no ceilings installed in the tenant’s area of a white box. This is done purposefully so the tenant can better access the space for HVAC, electrical, and plumbing rough-in. This arrangement allows for new tenants to alter the space to fit their needs and requirements. Many companies enjoy infusing their brand and certain company culture elements into this virtually blank canvas.

What is Included in a White Box Commercial Space?

To start, the space is at a point where it is protected from the elements with an exterior shell and separation between tenant spaces and common building spaces such as corridors, bathrooms, and lobbies. This is typically a complete structural system, finished roof, insulated drywall tenant separation walls, windows, and concrete or wood sub-flooring. Additionally, the space will commonly have an Americans with Disabilities Act (ADA) compliant restroom and some basic electrical wiring and outlets. Lastly, the space will have minimal sprinkler coverage as required by local code for an unoccupied portion of the building, basic fire alarm elements such as smoke detectors and pull stations, and code required lighting for prospective tenants to move through the space safely.

The plumbing fixtures and connections should be installed for the required restrooms, closets, and fountains based on the area’s code. It is important to check if you, as the tenant, will be relying on the common bathrooms provided by the landlord or if you are to provide your own bathrooms. Heating, ventilation, and air conditioning (HVAC) will be installed to meet basic air exchanges for fresh air and temperature requirements. The specific areas or points in which the HVAC system is installed to can and should be provided by the landlord. It is important to clarify if any HVAC systems installed by you, the tenant, can utilize base building utilities such as electric, chilled water, hot water, and/or natural gas. Being required to install these utilities for use in a tenant space can eat up a significant portion of a budget. It is important to understand each utilities’ location, size, capability, and intended use prior to signing the contract/lease.

Some landlords will provide all exterior blinds to make the building look uniform from the exterior. If the tenant space is on the ground floor with its own access to the exterior, the contract/lease should clarify which party is providing the exterior door and vestibule. The lease should also discuss number of parking spots, access to building amenities, and which party is responsible for maintenance of building systems.

What is Not Included?

It is of equal or more importance to know what is not included in a white box commercial space. The tenant will typically be responsible for:

– Finishing, painting, or adding wallpaper to the interior walls

– Acoustical ceiling, drywall ceiling, or decorative ceiling panels in tenant spaces

– Flooring materials such as ceramic tile, stone, vinyl, or carpet

– Millwork or finish carpentry

– Installing plumbing fixtures beyond what was required

– Upgrading electrical fixtures and lighting

– Installing low voltage systems (security, audio-visual, telephone, cable, and data)

– Branding and signage

– Modifying the HVAC system layout and upgrading air diffusers

– Reworking the existing sprinkler and fire alarm system for a new layout

– Structural modifications as needed for a new layout or internal stairway

– Permits with the local Authorities for improvements

Lease/Contract Review and Negotiation

It is important to realize that regulations and codes can change from city to city and market to market. Additionally, what was considered white box by one owner can be very different than what is considered white box by the next owner. Based on the contract/lease, it can be difficult to understand the current condition of the space and which party is financially responsible for specific tenant improvements.

A company renting their new commercial space can improve their negotiating power, avoid delays, lower costs, and sidestep future legal challenges by having someone there during the contract/lease review stage who:

– understands industry standards and regulations,

– can intelligently compare and analyze site conditions with contract/lease language,

– can provide questions and comments to clarify the condition of the white box so that the tenant can create an accurate budget and timeline,

– can supply a comparison of the provided white box conditions to industry standards, and help negotiate the tenant improvement allowance,

– and provide recommendations based on your specific project.

To start your project off on the right path, reach out to KMC Partners today and we can provide a site analysis and contract/lease negotiation.