Startup companies in need of commercial office space have several factors to consider when budgeting for this operating cost: location, quality, rental rate, furniture, size and so on. Since the failure rate for new businesses over a 10-year period is 64.2 percent, according to BusinessWeek, it's no wonder why landlords scrutinize a new company's financials during the underwriting process. Many landlords have been burned in the past by defaulting tenants and do not desire to have this happen again. Therefore, leasing space for new entities can be a challenge if the framework for these projects is not understood or followed. Notwithstanding location, size, or rental rate, the following four topics will make any startup company's hunt for office space much more fluid. Sublease space
While subleasing space may not seem all that glamorous due to the as-is and used condition, it's an economical way to find a home. Most companies trying to dispose of or sublease their space are in loss mitigation mode, and are more motivated to grant economic concessions compared to building owners.
Many times "plug and play" space is available, which can include items such as phone systems and furniture. Also, subleases present a shorter lease term than direct space, which can be very attractive to startups that need flexibility. However, the biggest benefit to subleasing space can be the reduced security deposit. Security deposits for sublease space are typically a fraction of what a direct building owner will require for a startup company. Security deposit
For startups, cash is king. Investing money into R&D, people and marketing is top priority. The last thing companies want to do is tie up thousands of dollars in a security deposit or letter of credit. Unfortunately, companies with little operating history, or companies that show no profitability, will find it almost impossible to alleviate this issue.
Consider the following to help minimize the amount of the deposit: When leasing space directly from a building owner, take the space as-is with no improvements and for a shorter term. This helps minimize the upfront capital a landlord spends and minimizes their risk. Nonetheless, companies who lease direct non-sublease space should budget placing anywhere from four months to 12 months of rent with the landlord in the form of a security deposit or letter of credit. This depends greatly on the amount of tenant improvements the landlord is required to install into the space. Even though money will be tied up in deposits, several methods can be negotiated into the lease that can help ease this pain. Term
Most building owners want a minimum three-year lease term on already improved space and a minimum five-year lease term for brand new or "shell" space. Before hunting for space, map out headcount projections for two, three, four and five years. Match these growth rates with expansion rights in the lease or length of lease term. Also, what does the exit strategy look like? If the plan is to sell the company in three years, don't sign a lease term longer than this period to avoid impacting the valuation of the company. Timeline
The length of time it takes to lease space is a big misconception. Planning, strategizing, locating, negotiating and improving office space typically takes nine to 12 months for smaller size companies. Can it be done in 60-90 days? Yes. However, a shorter time frame limits options and reduces negotiating leverage, which leads to more mishaps during the process.
A comfortable timeline for a startup company looking to quickly acquire space should budget six months from day one until move-in. This will allow enough time to find space, negotiate the lease, install IT infrastructure, and make minor cosmetic alterations. Remember, most commercial real estate is owned by large institutions with multiple layers of people on their leasing team. More people equals more time. Obviously monthly rent, location and size are at the top of the priority list for any company when leasing space. However, startup companies have additional factors to consider when acquiring space such as the security deposit, length of lease term and project timeline. Many unknowns exist for new companies and flexibility is king. Understanding these key issues and knowing how to navigate through the process will make obtaining space much more seamless and in sync with the business plan.
Ginsburg is the executive vice president of Jones Lang LaSalle Americas Inc., specializing in tenant representation.