11 Ways to Detoxify your Commercial Real Estate
April 4, 2007 by jack petrie.
Matthew McCall, Managing Director of DFJ Portage, recently posted an article http://alwayson.goingon.com/permalink/post/12090 on toxic elements of the commercial real estate leasing process for startups and technology firms.
He identifies six (6) core mistakes that many newly-funded entrepreneurs make in securing new or growth space for their enterprises. A tactical interpretation of these concerns:
- Avoid long-term leases, or alternatively, secure the company’s investors (via convertible notes) ahead of the landlord’s security interest,
- Right size the space being leased based on current needs and build in expansion flexibility (the proverbial “nice problem to have”) through increasing density within the existing space (see my article “Tech Firms’ Diminishing Space Standards“),
- Avoid construction projects by leasing an existing installation. If renovations are necessary, have the landlord build the space or slash the construction project budget,
- Use a tenant advisor. (I like this one.) In tight markets, conflicts of interest are real and conflicted brokers tend to “drink the landlord’s koolaid” with regard to market trends and conditions,
- In a landlord’s market (like today’s), avoid long-term leases. Try to play the market by commiting for a shorter lease term and renew for a longer term in a softer market. Historically, market cycles have occurred approximately every seven years or so, so that would be an ideal maximum lease term,
- Select a property offering a tenant improvement allowance. It’s built into the base rent and many landlords in trendy submarkets (Soho, Midtown South) only offer space to lease in “as-is” condition. Even if the existing space is built, improvement allowances are transferable to subtenants.
Additionally, from our experience representing startups and newly-funded technology firms, we can offer some this advice:
- Start early. Real estate leases can take sixty days to document, architectural documentation and permitting can take thirty days, construction itself can last 120 days. For a sublease, many tenants forget once the sublease ink is dry, the landlord can take up to 45 days to officially approve the sublease. By ramping up the learning curve earlier, tenants can be more opportunistic with market alternatives. (We recommend commencing the process 12-18 months ahead of a lease expiration).
- Focus on total costs. Too many tenants focus only on a base rent number. This strategy only serves to play to a landlord’s strengths. A particular building’s $40 rent number will differ from another building’s, based on what is included or excluded, i.e., cleaning, water charges, security guard, overtime air conditioning, etc.
- Create a space program. Every landlord’s definition of space varies, so why eyeball it? With a space program based on actual needs, a tenant creates a template of usable square footage required that can be overlaid onto any floor plan. The space plan will quickly identify space inefficiencies in comparable properties.
- For construction projects, hire a project manager. A PM will act as tenant watchdog and manage to a defined budget and equally important, a finite schedule. A good PM will save much more money than the PM fee.
- Explore municipal incentives. Many govermental grants associated with job creation exist which can help offset lease costs. We see many companies neglect these benefits.
Like visiting the IRS or the oral surgeon, leasing office space can be a painful process. Additionally, most tenants only lease space once every 5-10 years. By starting early and planning appropriately, tenants can insure a more satisfying outcome.