CompStak’s CEO, Michael Mandel, revisits an article he wrote a few years ago while still a broker. This time around he includes important tips he hasn’t thought of until he had to find office space as a startup CEO, and not a broker. Whether you’re a tenant, a landlord, or a broker, read this quick guide to make sure you cover all your bases.
So your startup has gotten too large for WeWork, 500 Startups, TechStars, or wherever you chose to incubate the next Facebook. You love the high tin ceilings, the wood floors, the exposed columns, and working next to other creative and smart people, but it’s time to take off the training wheels and ride out on your own. This article is your definitive quick guide to making it in the big city.
Step 1: Determine what you need.
Most importantly, how much space do you need? Major considerations that impact square footage are employee count, number of private offices and conference rooms, and room for expansion. An architect can help you develop a “space program” that outlines the square footage you will need.
Other things to think about are:
What type of space? Traditional or creative/loft?
What neighborhood? Choices often focus on industry/image, employee commute and public transportation access.
A note on location: Startups tend to prefer neighborhoods where other startups are located. Typically, those containing lots of Class B and C buildings that are close enough to public transportation and can be leased on the cheaper side. In Manhattan, it’s Midtown South; In San Francisco, SoMa. Both have lots of loft buildings, and exude a hip vibe.
Step 2: Identify and explore your options. (And hire a broker!)
You can start your search on a listings site like 42Floors, TheSquare Foot or RealMassive. Ultimately, you should work with a broker. Your broker will create a survey of different spaces that meet your criteria. From this survey, you can pinpoint the spaces you’d like to tour. Many of these spaces you’ll be able to see on sites like VTS or Floored. However, there’s no substitute for an in-person tour. Touring each of these options gives you the opportunity to test your assumptions on neighborhood, type of space, square footage and other needs.
Step 3: Prepare a short list/financial analysis.
Each space will be sized differently and have varying rent and deal terms. A comparative analysis allows you to put all properties on a level playing field.
Step 4: Submit offers and negotiate deal terms.
Your offer outlines the terms at which you are willing to make a deal. If possible, you should submit offers for multiple spaces at the same time. This creates competition among owners and helps achieve the best deal possible. Some deal terms to think about:
- Rental rate (per square foot per year, or in some markets, per square foot per month)
- Rent abatement
- Lease term
- Heating and air conditioning
- Operating expenses
- Landlord’s work or funds for space build-out
- Sublease and assignment rights
- Renewal/termination options
- Security deposit/guarantee
While all of these items are negotiable, there are market standards for each of them. Your broker will help you establish what terms are fair. To do this, your broker will use lease comps (that’s where CompStak comes in).
Step 5: Negotiate your lease.
Hire a lawyer! Landlords are sophisticated, especially in major markets like NYC, SF, Boston and Chicago. Their lawyers draw up leases that benefit them. Your lawyer will work with your broker to advocate on your behalf and ensure the landlord doesn’t take advantage of you. When negotiating a lease, watch for:
- Correct business terms
- Sublease provisions
- Compensation for failure to deliver the space on time
- Relocation clauses
- Subordination, non-disturbance and attornment
- Insurance (check with your insurance agent)
- Accurate description of landlord’s work or drawdown of tenant improvement allowance.
There are a million other items like these, so make sure you have a broker and a lawyer!
Step 6: Build out the space and move-in.
If your lease stipulates that the landlord construct your space, be sure you know the completion date and the finishes/quality of installation. Plan to integrate your IT/telephone wiring at the same time. If you’re overseeing space construction, monitor layout, costs and deadlines! When move-in time arrives, make sure the internet and phone services are functional and you understand the building protocol for move-ins.
A few words on ways to accommodate growth:
Find a sublease. Sublease space typically rents for 20 to 30 percent less than space available directly from landlords. Most also require a shorter time commitment in years than an owner will offer, because you are assuming another company’s remaining term. However, with a sublease you won’t have a direct relationship with the landlord, the landlord can possibly throw you out if the sublandlord defaults, and you’ll likely have to pay for a new build-out out of pocket.
Right of first offer. Depending on the size of your requirement, the landlord may give you the right of first offer on any space that becomes available next to yours, on your floor, or in the building.
Right to terminate. Landlords will often allow you to terminate your lease early provided that you give advance notice and pay a penalty equal to the landlord’s unamortized transaction costs.
Renewal/expansion clause. You may insert an option into your lease to renew or expand at either a pre-determined price or fair market value.
Expansion within portfolio. If you’ve outgrown your space, most landlords will accommodate relocation to a larger space within your building or another in their portfolio and rip up your existing lease. Still, it’s helpful to get this in writing.
These are just a few of the many considerations you’ll need to keep in mind when looking for space and negotiating a lease, so find someone you trust to help understand them. Your broker’s job is to educate you on the market, landlord character, and market-appropriate deal terms, and to walk you through the process.
As I mentioned above, going through the process of finding a space for CompStak made me aware of other important considerations.
People over price
When I was a broker, we would always tell our clients “your office space is a huge decision, it’s your second largest expense after payroll.” This is true, but what I didn’t realize when I was a broker, was just how incredibly small your office space cost is, in comparison to payroll - it’s tiny. Even in a market like New York! With that in mind, do you really want to compromise your employees’ happiness by being in a crummy space or an inconvenient location? Pick a great space that’s easy for your employees to get to and where they’ll enjoy working.
Don’t underestimate the need for growth space.
As a broker, I was always afraid to advise a client to take more space than they needed (probably because I didn’t realize how small the real estate expense was as compared to their payroll). However, even if you negotiate the right terms to get out of your lease early, moving sucks. It’s disruptive your company and it’s expensive! So, my advice if you’re a high growth company - take more space than you need now! Let your employees spread out, sublease some of your space to another startup, or put your extra desks on PivotDesk or Liquidspace. When we leased our latest office for CompStak, we leased a space that was twice as large as we needed, and lined up another startup to take half of the space. It saved us a ton of money, and when our subtenant moved out, we took over the rest of the floor.
Find out if the space you’re looking at is wired.
In New York, you can check out WiredScore for wired certified buildings. If the space/building you’re looking at doesn’t have fiber (0r a similarly fast connection) you can be screwed. The lead time for a fiber build out is LONG and if you don’t arrange for a fiber run with both the provider and your new landlord, you can be screwed. Even if there is a fast connection in the building, there is often a long lead time to get the connection extended and running in your space, and may involve coordination of several carriers as well as your landlord.
Michael Mandel is Co-Founder + CEO of CompStak. Since launching CompStak in early 2012, Michael has helped navigate the company through tremendous growth, with over $10 million raised, 14 major markets launched, and a 45 person team. Before starting CompStak, Michael led the NY metro data center practice for Grubb & Ellis, where he was named National Rookie of the Year and inducted into Real Estate New York’s 30 Under 30. He graduated Babson College in 2005, where he led the Babson Entrepreneurial Exchange and was a member of the world's first live-in business incubator, the e-tower.
CompStak Exchange is a free platform for CRE brokers, appraisers and researchers to exchange verified commercial lease comps anonymously. CompStak Enterprise offers unlimited fee-based access to comp information to CRE landlords, lenders and investors.