Seven Habits of Highly Effective Tenants
Many technology companies here in the LA area see real estate simply as a cost of doing business. After all, it's just a matter of finding the right size office, signing the lease and moving in. Or is it? In fact, it is an integral part of any organization's strategic growth - and it needs to be managed strategically. Simply put, effective real estate strategies and creative leases can be a critical element in a company’s success whether it’s an emerging start-up or an established industry leader.
High-tech companies often function in a world of uncertainty. Will a new round of funding come through? Will we get acquired? Will our product become a killer app? While there’s no way to know the answer to these and other major questions, savvy tech executives can make smart real estate decisions that will allow them to manage their growth and prepare for a range of scenarios. Here are a few basic topics that they should consider as they plan for the future:
1. REPRESENTATION: First and foremost, hire a qualified and dedicated commercial real estate broker. Since most companies will not be doing deals with huge commission dollars, the entrepreneur should leverage his or her VC and board contacts. Make sure that the broker knows the needs and financial limitations of new companies, is personally vested in your success (since he or she isn't getting rich on it!), and knows the local market. The broker should be experienced (10 plus years) but not too big for the job. Once you have found the right guy or gal, sign an exclusive engagement letter that guarantees that if you do something, the broker will get paid and you will get the service in the time period you require. And, as with everything, try to create a long-term relationship.
2. START EARLY: Begin evaluating real estate opportunities sooner than you think you need to. Although companies have a difficult time forecasting future headcount a week ahead - let alone months down the road - we advise our clients to begin evaluating alternatives at least nine months in advance of the current lease expiration or renewal notice. The more time a company has to make a decision, the more options that are available, and therefore the more leverage the company has in its negotiations with landlords.
3. LEASE INSTEAD OF OWN: Contrary to what you might think, it almost always makes sense to conserve capital and maintain flexibility by leasing instead of buying. Only in the recent upturn in the property market has real estate been a relatively liquid asset. Leasing, on the other hand, is a finite liability allowing for expansion or contraction flexibility.
4. TRADE LANDLORD CONCESSIONS FOR A SHORTER TERM: If a company does not have a blueprint for its growth plans, it should search for an office that requires limited capital expenditures. This will allow the landlord to agree to a shorter-term lease in exchange for a lower Tenant Improvement Allowance. Otherwise, the landlord might require a rental premium. The one downside to shorter terms is the exposure to rising rents in a desirable real estate market.
5. STRUCTURE OPTIONS CREATIVELY: Structure the agreement with the landlord creatively to best fit with your business plan and company life cycle. Be prepared to pay a rental premium for flexible terms such as termination options, hold-space options, expansion options, downsize options and renewal options. Despite the costs, the long-term benefits of this approach are usually worth it for companies that may see radical shifts in its real estate needs.
6. LEASE SECURITIZATION: For younger companies that have yet to establish their reputations, landlords will typically request lease securitization in the form of a hefty security deposit, personal guarantee, and/or a letter of credit. For obvious reasons, companies should try to avoid the personal guarantee or the letter of credit, but if they are forced to agree to either they should attempt to achieve a cap on the amount (i.e. tenant improvement costs and commissions) and negotiate a “burn down” schedule.
7. DON’T STOCKPILE OFFICE SPACE: Never commit to paying rent on excess space for anticipated growth that will not occur beyond the immediate future. Companies are not in the landlord business, and paying rent on unused space is a painful scenario for any company. Alternatives to committing to excess space include negotiating for expansion options or hold space options.
Ted Simpson (firstname.lastname@example.org) is executive director and Scott Steuber (email@example.com) is an associate at Cushman & Wakefield in Los Angeles. Cushman & Wakefield, the world’s largest privately held real estate services firm, delivers integrated solutions by actively advising, implementing and managing on behalf of landlords, tenants, and investors through every stage of the real estate process.