FINISHED VS. SHELL SPACE

Some facilities are ready for use with everything from chemical fume hoods to laboratory benches and thus are considered finished spaces. Others exist as just empty shell space that have all the necessary infrastructure but still need to be built out into laboratory and offices.

Leasing a fully built-out facility will cost less up-front since little construction will be required. However, rent will be higher because the landlord will capitalize on the intrinsic value of the built-out space. Therefore, you could expect to pay twice as much per square foot for finished vs. shell space, which becomes significant over the course of the lease.

Conversely, leasing empty shell space costs much less and allows you to customize the facility to your exact specifications. However, construction costs may be variable and difficult to control. For a 20,000 sf facility, a company may expect to spend as much as $3 million on build-out ($150/sf). For a startup with $20 million in venture capital, committing 15% of its working capital upfront to build-out is onerous. Furthermore, because most leases do not allow the tenant to remove these improvements during or at the end of the lease, the company loses its investment if it ever moves out.

Smaller companies may not be able to afford $150/sf to convert a building into an R&D facility. The landlord may finance the build-out to attract the tenant, but the landlord will then recoup the expense by charging a higher rent. A general rule of thumb is that for every $25/sf of tenant improvements a landlord finances upfront, the tenant will pay an extra $3-5/sf each year over the course of a 10-year lease. If the lease period is shorter, the additional cost/year is higher.