What’s the Difference Between Dark and White Shells?
A cold, dark shell describes a building that does not have most (or any) interior improvements, while a warm, vanilla shell comes ready for occupancy with minor adjustments.
What’s the Difference Between Dark and White Shells?
Industrial property owners and leasing professionals often refer to how finished a property’s available space is by describing it in one of two ways: as a cold, dark (or gray) shell or a warm, white (or vanilla) shell. These terms are not exclusive to industrial assets, however. Retail properties and office buildings are also frequently described using these terms.
While there is no definitive distinction between the two, some general principles can help differentiate between them.
Broadly speaking, a cold, dark shell describes a building that does not have most (or any) interior improvements. A warm, vanilla shell would generally have significant finishes already complete.
Read below for some examples specific to each.
What Do Cold, Dark Shells Have?
All structural components in place, from exterior walls to windows
Few, if any, internal improvements
The ability to fully customize the space
HVAC, plumbing, and electrical systems in place
Bathrooms
Interior walls (for example, drywall)
Less ability to customize the space
What is a dark shell company?
A dark shell company is a company that has been formed but has not yet begun operations. It is usually created for the purpose of being acquired by another company, or to be used as a vehicle for a merger or other corporate transaction. A dark shell company typically has no assets, employees, or operations, and is often referred to as a "shell corporation" or "shell company".
Source: Investopedia
What is a white shell company?
A white shell company is a type of shell lease that is similar to a warm shell, but with more interior improvements. A white shell typically has heating and A/C, plumbing, restrooms, and lighting, as well as finished walls, ceilings, and floors. In some cases, a white shell may also include additional features such as a kitchen, elevators, and other amenities. In contrast to a dark shell, a white shell is usually more expensive to lease, but it is also easier to find tenants willing to occupy the building.
Source: https://industrialproperty.loan/investor-glossary/dark-vs-white-shell
How do dark shells differ from white shells?
Dark shells differ from white shells in that dark shells are leased to tenants without any interior improvements, such as heating, lighting, interior walls, plumbing, or air conditioning. White shells, also referred to as warm shells, vanilla shells, or white boxes, typically have heating and A/C, plumbing, restrooms, and lighting, but may have other parts of the interior that are unfinished. Source
In many cases, a building may start out as a cold shell, but with the agreement that the landlord will make the necessary improvements to convert the building to a warm shell once the lease agreement is fully signed. Sometimes, a tenant improvement (TI) allowance will be offered in order to defer some of the costs that a tenant will incur by improving the building themselves. Source
What are the advantages of a dark shell company?
The main advantage of a dark shell company is that it requires less upfront costs for the property owner. This can be beneficial for those who are looking to take on less commercial financing and don't need to make any interior improvements to the property. However, it can be more difficult to find tenants for a dark shell property, as it is not as attractive to potential tenants as a warm/vanilla shell property.
What are the disadvantages of a white shell company?
White shell companies are typically used for short-term financing, such as bridge loans. Disadvantages of white shell companies include:
- Higher interest rates than permanent financing
- Shorter loan terms
- Higher prepayment penalties
- Less flexibility in terms
For more information, see Multifamily Life Company Loans and Permanent Financing.
What are the legal implications of using a dark shell company?
The legal implications of using a dark shell company depend on the jurisdiction in which the company is located. Generally, dark shell companies are used to facilitate mergers and acquisitions, and the legal implications of such transactions can vary significantly. For example, in the United States, dark shell companies are subject to the same laws and regulations as any other company, including those related to corporate governance, securities, and taxation. Additionally, dark shell companies may be subject to additional regulations related to the specific transaction, such as those related to anti-trust laws or disclosure requirements. It is important to consult with a qualified attorney to ensure that all legal requirements are met when using a dark shell company.
What Do Warm, White Shells Have?
How Are Leases Different?
Leases for a cold, dark shell are generally much less expensive than for fully completed space. Of course, the lack of interior finishes means a tenant will need to invest significant capital into adapting space to its needs.
For industrial users with very specific requirements, cold, dark shells can be ideal. After all, these tenants would generally find value in customizing their space. What’s more, landlords may offer a tenant improvement allowance to defer some costs involved in customizing the space.
On the other hand, warm, white shells are ready for occupancy without much, or any, additional cost borne by tenants. While lease costs are higher, tenants can begin operations faster, provided they have everything they need.
Note that build-to-suit leases can encompass a building with either type of shell. In the case of a warm, vanilla shell, the landlord and the tenant will typically define the finishes well in advance. For cold, gray shells, further improvements are the tenant's responsibility.
Landlord Implications
Understanding the dynamics of your local industrial market is essential in identifying the type of space you will offer. Cold, dark shells need less capital — and lower levels of industrial financing. However, if demand in your area is for built-out, ready-to-occupy space, it may be wiser to invest more upfront. That said, tenants in markets with tight vacancy are likely to be far less picky — particularly for well-located assets.