Shell space is the unfinished interior of a commercial building, delivered stripped down to its structural bones so the tenant can build out a layout suited to the business. It comes in two varieties: a cold shell, which is essentially raw structure with no systems, and a warm shell, which adds HVAC and basic finishes. The gap between them can mean tens of thousands of dollars in build-out costs and months of additional construction time, so understanding which version you’re leasing matters before you sign anything.
Cold Shell vs. Warm Shell
A cold shell, sometimes called a cold dark shell, is the most bare-bones commercial space you can lease. Expect exposed concrete slab flooring, unfinished perimeter walls with no insulation or drywall, and open structural deck overhead. No heating, cooling, or ventilation. No lighting. Utilities like electricity and water are typically stubbed to a single connection point at the building’s perimeter rather than distributed through the space.
A warm shell picks up where the cold shell leaves off. The defining difference is a functioning HVAC system. Warm shell spaces typically also include a finished dropped ceiling with basic lighting, perimeter walls covered in taped and sanded drywall ready for paint, and a smooth concrete floor prepared for carpet or tile. Electrical service runs throughout the unit rather than sitting at a single stub.
Cold shell gives you maximum design freedom, but you pay for it. You install everything: climate control, restrooms, fire suppression, distributed electrical, lighting. Build-out timelines on cold shell projects run roughly four to eight weeks longer than comparable warm shell work, and total construction costs can easily double. Tenants who take cold shell are usually planning a long occupancy where the upfront investment pays off: restaurants, medical offices, and large retail operations are typical. Standard office build-outs almost always start from warm shell.
How Long a Build-Out Takes
Permit review alone usually takes six to eight weeks before any construction begins. Once permits are issued, typical construction timelines look roughly like this:
- General office space: 8 to 12 weeks
- Retail space: 10 to 14 weeks
- Restaurants: 16 to 20 weeks
- Medical or dental offices: 16 to 20 weeks or more
Cold shell conversions add another four to eight weeks on top of those estimates. A restaurant starting from cold shell can take seven months or longer from permit submission to opening day. During most of that stretch, you may be paying rent with no revenue coming in. Many tenants negotiate a rent abatement period or a delayed rent commencement date tied to substantial completion of the build-out, and the time to raise that is during lease negotiations.
The Work Letter and Tenant Improvement Allowance
The legal backbone of any shell space build-out is a document called the work letter, attached as an exhibit to the commercial lease. It spells out which improvements the landlord handles, which fall to the tenant, how costs are divided, how plans get approved, how change orders are processed, and the timeline for completion.
At the center of most work letters is the tenant improvement (TI) allowance: a dollar amount the landlord contributes toward your build-out. The size varies with local market conditions, property type, lease length, and leverage. A landlord in a soft submarket with high vacancy typically offers more than one with a waiting list.
What the Allowance Covers
TI allowances are generally structured to cover hard costs: framing, electrical wiring, plumbing, flooring, and the rest of the physical construction. Soft costs like architectural fees, engineering plans, permits, and construction management are often excluded unless you negotiate them in. Architect bills and permit fees can easily add 15 to 20 percent on top of hard construction costs, and if the work letter doesn’t cover them, they come out of your pocket.
Disbursement matters as much as the amount. Most landlords release TI funds as construction milestones are hit rather than as a lump sum, and a landlord who sits on reimbursement requests can create serious cash flow problems mid-project. Pin down a clear disbursement timeline in the work letter.
When Costs Run Over
Anything above the TI allowance is yours to cover. This is where shell space projects go sideways financially. Tenants who design their ideal space first and check the budget second often find themselves tens of thousands of dollars short of what the project actually costs. Get contractor bids before you finalize lease negotiations, not after, so you’re negotiating the allowance against real numbers.
Who Pays for Maintenance After Move-In
The shell condition at move-in is only half the picture. Your lease structure decides who pays for maintenance and repairs on the systems installed during the build-out.
In a gross lease, the landlord handles repairs and maintenance and bakes the estimated cost into your rent. In a triple net (NNN) lease, you pick those costs up directly: HVAC servicing, lighting maintenance, pest control, parking lot upkeep, minor structural repairs. The landlord in a NNN lease typically retains responsibility for major structural elements like roof, foundation, and exterior walls, but even those lines blur. Some NNN leases push partial roof repairs onto the tenant.
This hits hardest after a cold shell build-out. If you install a brand-new HVAC system on a NNN lease, you own the maintenance obligation for that system from day one. The boundary between routine maintenance and capital improvements can also become a point of friction. Replacing a few ducts is clearly maintenance, but repeated expensive repairs start to look like a capital expense the landlord should share. Negotiate those thresholds before you sign.
ADA Compliance Is Not Optional
Any commercial build-out that alters a space open to the public triggers federal accessibility requirements under the Americans with Disabilities Act. The altered portions must be accessible to people with disabilities to the maximum extent feasible. And if your alterations affect access to a “primary function area” (essentially any space where the main business activity happens), you also have to make the path of travel to that area accessible, including restrooms, drinking fountains, and telephones serving the area.
There’s a cost cap on the path-of-travel piece. You aren’t required to spend more than 20 percent of the total alteration cost on accessibility improvements to the path of travel. On a $200,000 project, that can still mean up to $40,000 you hadn’t budgeted for. Eligible expenses include widening doorways, installing ramps, making restrooms accessible, and relocating fixtures to accessible heights.1eCFR. 28 CFR 36.403 – Alterations: Path of Travel
Tenants who budget only for their desired interior layout and skip accessibility planning can face expensive change orders mid-construction or fail their final inspection.
Tax Treatment of the TI Allowance
How you handle tenant improvements on your tax return depends on your lease structure and the type of space. Generally, a TI allowance received from a landlord is treated as ordinary income to the tenant. That creates a tax hit in the year you receive it, even though the improvements get depreciated over many years.
For retail tenants on leases of 15 years or less, Section 110 of the Internal Revenue Code offers a workaround. If the allowance is used to construct or improve “qualified long-term real property” at the retail space, and the improvements revert to the landlord at lease termination, the tenant can exclude the allowance from gross income up to the amount actually spent on construction.2Office of the Law Revision Counsel. 26 US Code 110 – Qualified Lessee Construction Allowances for Short-Term Leases
Section 110 is narrower than many tenants expect. It applies only to retail space, defined as property used to sell goods or services to the general public, and only to leases of 15 years or shorter. Office tenants, industrial tenants, and anyone on a longer lease don’t qualify and must recognize the allowance as income.
On the depreciation side, interior improvements to nonresidential buildings generally qualify as “qualified improvement property” under Section 168 of the tax code, which carries a 15-year recovery period rather than the standard 39 years for nonresidential real property. Following the enactment of the One, Big, Beautiful Bill in July 2025, 100 percent bonus depreciation is available for qualifying property placed in service after January 19, 2025, meaning you can potentially deduct the full cost of your build-out improvements in the year they’re completed rather than spreading deductions over 15 years. Work with a tax professional to confirm eligibility, since not all improvement types qualify.3Office of the Law Revision Counsel. 26 US Code 168 – Accelerated Cost Recovery System
Restoration at Lease End
Here’s the part of shell space leasing that catches tenants off guard: the restoration clause. Many commercial leases require the tenant to return the space to its original shell condition at lease expiration. That means ripping out every wall, partition, and piece of cabling you installed, demolishing restrooms you built, pulling flooring down to the concrete slab, and handing the landlord back a clean shell.
Demolition and restoration on a heavily customized space can run into six figures. A tenant who spent $150,000 on a build-out can face another $50,000 or more tearing it down. There’s no TI allowance for restoration. Those costs come entirely out of your pocket.
Not every lease requires full restoration. Some landlords prefer to keep the improvements, particularly if they’re generic enough to attract the next tenant, like a standard office layout with conference rooms and open workspace. Others will negotiate partial restoration where you remove specialized equipment but leave standard improvements in place. The time to negotiate this is before you sign, not when you’re planning your exit. If the lease is silent on restoration, the default in most jurisdictions is that fixed improvements become the landlord’s property, but “silent” and “negotiated” are very different levels of protection.