Tuesday, April 17, 2012

A Startup's Guide to Leasing Office Space in Raleigh-Durham-Chapel Hill, Part 2

In the first installment of "A Startup’s Guide to Leasing Office Space in Raleigh-Durham-Chapel Hill" we outlined a variety of space options in the Triangle that are designed specifically for startups and entrepreneurs. These options typically work best for startups with a headcount of less than five (5) people. In cases where your company has grown beyond this size, you will likely need to expand your office space search beyond these options and consider more traditional office space solutions. This post will explore how to strategically approach this process.

How can I get office space that’s cool, cheap and flexible?

This is the million dollar question for a startup. The end goal is to have an amazing office space that’s incredibly cool to attract talent and retain valuable employees, while still being affordable enough for a shoe-string budget and also flexible enough to accommodate your insane growth projections. Unfortunately, finding the perfect balance of cool, cheap, and flexible space is rare. Nonetheless, there is still hope as there are many great space options available in Raleigh, Durham, Chapel Hill, Cary, Morrisville and RTP. My goal is to share with you a strategy for how to approach landlords, and to understand the perceived advantages and disadvantages of leasing space to a startup.

Setting the Stage: Understanding How Landlords Operate

Before ever setting foot in a potential property, it’s imperative that you take a moment of pause from your aggressive entrepreneurial mentality to contemplate the perspective of a conservative commercial office landlord. This will allow you to craft your strategy for negotiation, and to foresee areas of potential compromise in order to secure the best space for your growing startup.

A landlord’s obvious goal is to keep his or her building profitable by filling it up with tenants. They prefer tenants who commit to long-term leases (typically 5 years or longer), which in turn reduces the risk of space becoming vacant. Furthermore, landlords are seeking a “credit” tenant (AKA a tenant who has a strong history of financial sustainability) to mitigate risk on their investment.

In the short term, landlords are often most concerned with how much money they will have to spend up front, out of their own pocket to acquire a new tenant and how that will impact their bottom line. These transaction costs principally include the legal fees to generate and negotiate a lease, and the related costs of improvements to the space, which often include new paint, carpet, or structural modifications (moving walls, adding offices, building a kitchen). These monetary costs are in addition to the significant time investment for a landlord to communicate with a prospective tenant, conduct tours of the space, negotiate a lease, and ultimately perform the agreed upon upgrades.

The Conundrum

Obviously, a startup does not have much (if any) history of financial sustainability, nor is a startup interested in signing a long-term lease. So what does a startup have to offer a Landlord?

Startups Do Offer Landlords Value

First and foremost, a startup not only occupies space immediately, but also represents the possibility of a tenant that could grow quickly. The potential for rapid future growth into other empty suites is very desirable to a landlord.

Secondly, a startup is usually flexible with regard to space and time constraints. This can be a huge bargaining chip for a startup willing to be flexible in the configuration and/or condition of the space.

Finally, many local Landlords salivate at the thought of having a “hot” startup take root in their building, potentially attracting other growing companies to the property.

The Pitch

One of the best pieces of advice I share with startups in these situations is to offer to accept the current condition of the space “as is” (or with minor modifications), in exchange for a short-term lease. You can often do minor improvements and space upgrades yourself. This will remove one of the greatest barriers for a Landlord to lease to a startup. Furthermore, you should emphasize your company’s ability to provide energy and momentum to a building by attracting other prospective tenants. Finally, you should emphasize your aggressive growth projections and desire to grow within the building.

Dealing with Expansion

In emphasizing your potential for rapid growth within a building, you can hope to provide a “win-win” situation for both your startup and the landlord as you would retain flexibility with a short-term lease, and the Landlord would have the upside of a growing tenant that could mature into a long-term asset to the building, ideally taking on more space over time. While it will typically be hard for you to get any guaranteed expansion rights right off the bat given your current size and financial strength (or lack thereof), the truth is that most Landlords would want to retain a growing tenant (assuming you can pay) and will typically work with you to figure out a solution (assuming they have more available space).

Closing Thoughts

Now that you are armed with a new understanding of the commercial real estate market and some potential bargaining tools, you can embark upon the search for space. I would recommend you enlist the help of a commercial real estate broker who specializes in tenant representation to help you navigate this complicated process as there are many other layers of complexity that are not covered here.

This post was authored by Blair Graham, a CED Member who writes helpful tips on securing neat office space for entrepreneurs. If you’re interested in more commercial office leasing tips and tricks you will find some other helpful posts here.