How Can a Startup More Effectively Lease Space for their Business?
It’s so typical that we find clients in startups or small but growing companies who are seeking out a better way to cost effectively and cost efficiently deal with real estate and facilities issues and challenges. The process of leasing space or managing a portfolio of spaces seems like it only takes common sense to do effectively. But there are customs, conflicts of interest and way too much jargon in the commercial real estate industry. Having a chief executive of a dynamic small business spend lots of time handling these business tasks is really counterproductive. We talked to several startups and heard these questions from them. As part of a larger series we are currently writing, we gave some brief but hopefully valuable answers.
How does a Startup handle the various issues that arise in the real estate and facilities process?
How do you find "shadow space"?
What is the best way to use a broker or tenant rep?
How do shared space alternatives come into play?
How much is a tenant rep paid?
How do you avoid having a term commitment that exceeds how long you need the space for?
Can you lease for a shorter term?
What do you do if you just don't need the space and there's still term left?
There are several steps you can take to avoid the downsides to space leasing. Below are some, but definitely not all of them:
1) Hire a tenant rep to find you spaces, both on the market spaces and shadow spaces that are not on the public market.
2) Pick a tenant rep that is knowledgeable, easy to work with, willing to answer all your questions, and will work hard regardless of how much they make on the transaction.
3) Understand the fee they are making and how much it is split up. For instance in San Francisco if you sign a 5-year lease for 2,000rsf, the tenant rep will make $10,000-14,000. If they split that 50-50 with their firm and split it amongst their 3 agent team, the $10,000 becomes a $1,666 fee to your tenant rep. Try to gain more value from this amount that the landlord pays. Working with an exclusively tenant rep firm and a tenant rep agent/broker helps. Working with agents that are the sole principals of their firm, benefits you. But most importantly shop for the best service provider. And someone you like working with.
4) Work in tandem with your tenant rep to secure on and off market spaces. Create a game plan for discovery of all the on-market spaces via CoStar & LoopNet through the tenant rep. Do a direct contact program in a target market area or target buildings through their landlords, property managers, other tenants and leasing agents. Set up a social marketing communication process using LinkedIn, Craigslist, Twitter, Facebook and an email process to spread the word about your space requirement.
5) Before you go to a direct space/longer lease situation, exhaust the shared space alternatives. Every type from Incubators to Regus and in between. As they will have flexible term lengths.
6) Be steadfast in your need to lease only for the length of term that suits you. Seek a termination right if necessary 2/3of the way through your lease. Have a protective sublease provision. If you still need to leave the space early, create a good subleasing plan.
7) Try as best as possible to limit TI's or lease spaces that don't need any. As that is the biggest reason for why a landlord needs a longer lease.
8) It's really important to hire a real estate attorney to make sure that flexibility is negotiated into your lease, and that the terms and conditions are customary and fair. Most first drafts of a lease are very tenant-unfriendly and can cause many problems for a tenant. A good cost conscious real estate attorney will help you avoid that.
9) Really get a clear cut understanding of your needs and specs before you start the search. Make sure everyone buys in to it, or it will cause you a lot of excess time. Be open and discuss the length of time it takes to successfully find and occupy a space. If you need it sooner, it will impact you in several ways.
10) In the process of finding space, come up with 3 top alternatives. Get to the point where you have at least 2 that are equivalently acceptable for you. Negotiate via an RFP to all 3 alternatives. It really hurts your negotiations when you only have one space to that you are willing to lease.
