10 Steps to Negotiate the Best Office Lease for your Startup
With over 3,000 startups in the Greater Seattle Area, it has becomeessential that young companies develop a comprehensive plan to navigate the big leap in gettingtheir own space, not to mention the right space.
Step 1:Goal Setting: Align to Execute
Whether you are entering the office market out of a co-working space, a local incubator, or even your parent’s garage you need to prepare accordingly. The Seattle market is incredibly intense as we enter the second quarter of 2018 with no sign of relief. You must establish clear goals and real estate objectives early on. It is important you carefully allocate the appropriate funding while taking a closer look at your financials, including but not limited to, planned growth, location, timing, and overall budgets.
Step 2:Expert in Your Corner
A real estate broker who specializes in representing startups and new businesses. Consult with an advisor who exclusively represents tenants without the ability to represent a building owner, often times these dual agents cannot say with 100% certainty that they have a complete fiduciary duty to you. Don’t go at this alone!When an entrepreneur tries to negotiate a lease without expert advice and gets into the weeds, this can prove to be a distraction from conducting regular business and can lead to increased costs, delays and potential problems down the road.
An experienced real estate attorney-
- The very act of hiring a lawyer shows your landlord that you’re serious and can’t be easily pushed around or deceived. Landlords will be less likely to overstep knowing you have a lawyer on hand who can and will initiate legal action at the first sign of wrongdoing.
- (Good) lawyers PAY FOR THEMSELVES. No really, they do. While having a lawyer may initially be an extra expense, he or she has the ability to maximize your return on investment by saving you hundreds or even thousands over the years. Hiring a lawyer (should) cost less than one month’s rent. It’s therefore worth at least seeing if your lawyer can get you a better deal for the length of your lease.
Do not underestimate the need to have representation especially in a market as active and dynamic as Seattle.
Step 3:Where do we want to be?
The old adage location, location, location still holds true… even in today’s market. Ideally, you want to be within a short walk of a dense transit center. Recruiting and retaining top talent will be essential especially for a young startup. Optimally, you want to place yourself nearby other tech behemoths. The amount of Amazon,Facebook, and Google spinoffs increase every quarter. The goal here is to be eating, chatting, and surrounding yourself with engineers at these companies for recruitment purposes.How close will your office space be to your customers, competitors, suppliers, and partners? Again, this will differ from business to business.
Step 4:Amenities are essential
According to the National Real Estate Advisor,the most wanted office amenities for millennials include fast, reliable elevators, healthy food options, outside lounging areas, alternative commuting options, and on-site fitness centers. Companies should proactively foster a sense of connectedness and position themselves in a building with a healthy list of amenities. Landlords are hustling to meet the rising needs of this new age of tech tenants, for example many are rehabbing old office product in surrounding suburbs including Redmond, and Bothell.
Step 5:How much space?
As we dive further into 2018, a company’s culture is becoming more of a deciding factor when determining the right office space. If you want to retain and recruit at a high-level, your office space must be aesthetically pleasing.Your future office is priced by the square foot, so you need two pieces of information to work on the equation: How many employees do you have? And, how much space does each employee need? An average office dictates anywhere between 150-200 square feet per person, again this is merely an industry average. Do you want an open concept or more closed-off work spaces? Different bosses and teams have different preferences. So think about what style would suit your team best and choose an office that lends itself to your preferred layout.
Stay as flexible as you can; as an alternative to looking for direct space, it can be a great option to pick up another tenant’s lease obligation through a sublease. Terms can range from 1-10 years, and usually come at a discounted rate. As a startup you must allow for flexibility in your growth, ideally account for 15-20% more employees than you have now to be on the safe side. Make sure your tenant advisor is actively negotiating a termination option giving you the flexibility to rip up the lease and get out at a certain point before the expiration.
Step 7:Education & Information; Compare Costs
You need to maximize the competition. To put this in perspective, let’s say you are shopping for a new Audi. Wouldn’t it benefit the dynamics of the negotiation to make sure the salesman is aware that you have also looked at Mercedes, BMW, and Lexus? You have to create this perception in the market to help drive home a more advantageous deal. This will ensure Landlord’s are putting together their most competitive proposals. Create leverage by using time. Most leases take months to complete so avoid procrastinating with your office search. Don’t let a lack of time decide the lease terms.
Step 8:Finalize Options
Narrow your options down to two spaces—the cream will rise to the top. Narrow your possibilities. Use a lease comparison sheet to help you compare locations easily. Organize information into a “best fit” model. Make a list of your must-haves in one column and list possible properties in the next few columns to see how they stack up.
Step 9:What is included? A breakdown of the traditional office lease
Gross Lease Rate: Great for businesses who need to know exactly what their monthly payments will be for the term of the lease. While this may seem like an obvious advantage for a small business, sometimes a landlord will inflate the rental rate to cover the variable utility charges. Consequently, you may overpay for some things you don’t need or consume. Be sure to negotiate for annual lease auditing rights, this will ensure your landlord is staying honest.
Triple Net (NNN) Lease Rate: NNN lease rates can be deceivingly attractive to potential renters because of the low monthly payment that goes along with them. The danger, however, lays in the quarterly assessments that tenants have to pay to cover operating expenses of the building. If you have chosen a property that has a NNN lease rate, ask for historic NNN’s (typically for the last 2-3 years) so you can get an idea of what those will be. One approach to remedy increasing (or unknown) NNN’s (pronounced “Nets”) would be to ask the landlord to guarantee the costs for the term (or part of) the term of your lease. Lastly, ask if the property management company returns money to tenants if there was a positive balance at the end of the year, also known as a “pass through.”
Regardless of the pricing model you end up with, know who (landlord or tenant) is responsible to cover the cost of all potential expenses and have a good idea of what those expenses will be.
Pay attention to terms regarding:
- the length of lease (also called the lease term), when it begins and whether there are renewal options
- rent, including allowable increases (also called escalations) and how they will be computed
- whether the rent you pay includes insurance, property taxes, and maintenance costs (called a gross lease); or whether you will be charged for these items separately (called a net lease)
- the security deposit and conditions for its return
- exactly what space you are renting (including common areas such as hallways, rest rooms, and elevators) and how the landlord measures the space (some measurement practices include the thickness of the walls)
- whether there will be improvements, modifications (called build outs when new space is being finished to your specifications), or fixtures added to the space; who will pay for them, and who will own them after the lease ends (generally, the landlord does)
- specifications for signs, including where you may put them
- who will maintain and repair the premises, including the heating and air conditioning systems
- whether the lease may be assigned or subleased to another tenant
- whether there’s an option to renew the lease or expand the space you are renting
- if and how the lease may be terminated, including notice requirements, and whether there are penalties for early termination, and
- whether disputes must be mediated or arbitrated as an alternative to court.
Step 10:Legal Requirements
Before you sign a lease agreement, you should carefully investigate its terms to make sure the lease meets your business’s needs. Again this is where we view having an attorney at your disposal is essential