A tenant signs a lease on a warm shell space in a North Texas retail center. Construction starts. Three weeks in, the contractor discovers that the HVAC units are sized for the prior tenant, a small insurance office, not the fitness studio moving in. The landlord says the units were included in the delivery. The tenant says they were told the mechanical was handled. The lease exhibit does not specify capacity. Everybody is right. Nobody is getting what they expected.
This is not an unusual situation. It is the predictable result of three terms, cold shell, warm shell, and second-generation space, that get used constantly in commercial real estate deals and almost never get defined the same way twice.
Cold Shell: You Are Starting From Nothing
Cold shell is the most honest delivery condition because it makes no promises. Four walls, a roof, a concrete slab. The structure is complete. The storefront or building envelope is in place. Everything else, HVAC, electrical distribution, plumbing, ceilings, partitions, and lighting, belongs to the tenant.
For landlords, cold shell delivery keeps upfront construction costs low. For tenants, it means absorbing the full cost of building a functional space from scratch. In DFW, depending on use type and finish level, it can run from $60 to well over $120 per square foot before you get to furniture, fixtures, and equipment. Medical and restaurant uses push considerably higher.
The problem with cold shell deals is not the delivery condition. It is that tenants often do not price it correctly before they sign. A $ 40-per-square-foot tenant improvement allowance for a cold-shell space is not a contribution toward your build-out. It is a rounding error. Getting a commercial GC to price the actual scope before the lease is executed is the only way to know what you are committing to.
Warm Shell: The Term That Means Whatever the Lease Says
In theory, a warm shell means the landlord has installed the core mechanical systems. HVAC is in and sized for the space. Electrical service is at a panel inside the suite. Plumbing rough-ins are complete. Restrooms are finished. Demised walls and the storefront are done. The tenant builds out the interior.
In practice, warm shell means whatever the specific landlord decides it means for that specific property. Some warm shell deliveries include a finished ceiling grid. Others do not. Some include fire suppression drops. Others stop at the main line. Some include lighting circuits. Others deliver a panel with no distribution.
The HVAC capacity issue from the opening of this article is not an edge case. It happens because leases say warm shell without specifying the capacity of the units delivered. A system sized for a 1,200-square-foot office is not suitable for a 1,200-square-foot kitchen or for fitness use. The units are present. They do not work for the new tenant. Who pays for the upgrade is a legal question, and legal questions are expensive.
The fix is a delivery condition attached to the lease. Not a paragraph. An itemized list. What systems are installed, what their capacity ratings are, and what condition they are in. Anything not on that list is fair game for a dispute later.
Second Generation Space: Cheap Until It Is Not
Second-generation space, or second gen, is a previously occupied suite with an existing build-out still in it. The prior tenant left behind walls, ceilings, MEP systems, and sometimes fixtures. For a new tenant whose use aligns with what came before, that existing infrastructure represents real value and a faster path to occupancy.
A dental practice is taking over a former dental office. A physical therapy clinic is absorbing a space that was previously used for another medical purpose. A restaurant moving into a space with an existing commercial kitchen rough-in and grease trap already permitted. In each case, reusing the prior build-out can save significant money and weeks of construction time.
The risk is a condition. Second-gen space is delivered as-is, and as-is is a description, not a guarantee. An HVAC unit installed seven years ago by a prior landlord may be at the end of its life. An electrical panel that passed inspection under a prior permit may not support the load requirements of the new use or current code. Plumbing that worked fine for the last tenant may need reconfiguration to serve the next one. None of this shows up in a showing. All of it shows up in the budget.
The right move before signing a second-gen lease is an existing conditions assessment by a contractor who will actually be doing the work. Not an architect’s observation. Not a broker’s walkthrough. A contractor pricing what the build-out actually requires, given what is already there. That document turns a second-gen opportunity from a guess into a decision.
What This Means for Developers’ Structuring Deals
Shell condition is not a construction detail. It runs through every number in the deal. The tenant improvement allowance, the base rent, the lease term, and the build-out timeline all connect back to what the landlord is delivering and what the tenant is taking on.
Developers in North Texas who deliver warm shell in a market that expects it tend to lease faster and support stronger base rents. Those who deliver cold shell without adjusting the economic terms to reflect the tenant’s higher build-out cost tend to sit on vacancy longer than they planned. That is not a rule. It is a pattern.
Across all three delivery conditions, the projects that close cleanly and build without disputes are the ones where the scope was defined before the lease was signed, not discovered during construction. Bringing a commercial GC into the pre-lease conversation costs nothing relative to what it prevents. In a market moving as fast as DFW, the gap between a well-defined deal and a vaguely worded one has gotten very expensive to close after the fact.
Texas Built Construction is a commercial general contractor serving developers, private investors, and business owners across North Texas, specializing in ground-up developments, tenant improvements, and complex commercial build-outs.
