When Your Startup Is Ready to Rent an Office of Its Own
A new company experiences a growth spurt and suddenly its co-working space is no longer suitable. Locating the right space and then firming up the lease can pose a challenge for a new business owner.
Consider these five elements before beginning the lease process:
1. Get the financial documents in order. When leasing office space, building owners will want to determine if the company can pay the rent and who will be financially responsible if it does not. The owner of the office space will often require a security deposit or a personal guaranty from a financially capable individual. Be prepared to provide financial references, tax returns, bank statements and as much as 12 months’ rent (or access to a bank letter of credit).
An entrepreneur should be careful about providing a personal guaranty of the lease obligations. He or she is putting his personal net worth at stake rather than than of the company. If the company fails, the guarantor will be personally liable and that is risky.
2. Seek expert advice. Before touring any offices, be sure to have the right advisors. A real estate broker who specializes in representing tenants, particularly startups, can be especially helpful. Startups have special needs, and the right broker will not only understand them but will be able to sell the company to property owners.
Tenant brokers can be helpful because they represent and owe loyalty to tenants not owners. Typically, they are paid by owners, so hiring one will cost a company nothing.
Find an architect, engineer and an experienced real estate attorney who handle leasing transactions in the relevant jurisdiction. These professionals can offer valuable guidance, saving a company money, time and aggravation.
When an entrepreneur tries to negotiate a lease alone without expert advice and gets into the weeds, this will be a distraction from conducting regular business and can lead to increased costs, delays and potential problems down the road.
3. Leave room to grow. Office space is expensive. Being aware of the optimal amount and type of space needed to run the business today and in the future is key. Renting adjacent space could pose a real challenge and it may be available only at a premium.
Negotiating up front with an owner for “option space” is important. Try to get a right of first offer on any other space in the building that might become available during the lease's term. Consider renting extra space and subleasing it to another renter on a month-to-month basis. Keep in mind, the original lease will need to provide for this up front.
Having the right to assign the lease entirely or sublease the entire premises, with limited restrictions, is critical to maintaining flexibility.
4. Watch out for all-in costs. Most leases contain clauses providing property owners opportunities to make more money from their tenants, including marking up the cost of electricity and charging for anything from freight-elevator usage and trash removal to construction oversight fees. These extra costs can increase the stated per-square-foot rental value significantly.
Additionally, the company may be entitled to a period of free rent or cash from the building owner toward tenant improvements.
A good broker and attorney can help identify hidden lease costs and understand current market terms for free rent and owner contributions.
5. Firm up special requests. Aside from needing to determine whether the tenant or the owner will build out the office (a major decision), a company may have special requirements for electrical energy, staircases, antennas, air conditioning, backup power, soundproofing and kitchen facilities. Most lease forms will provide for very basic services from the owner. Anything out of the ordinary requires negotiation and documentation in the lease.
The startup may be ready to rent its own space, but the business owner must be ready first. With guidance from the right professionals, the company will be one step closer to becoming a sole occupier and a success.
Related: The Science of Office Design