Entering into a lease is an important decision for any company; it is generally a long term obligation which accounts for a good portion of a company’s financial resources. Technology companies typically have a unique way of utilizing their space, i.e., open floor layout, exotic tenant improvements, and often have rapid growth expectations. These, along with other relevant concerns, should be carefully considered and evaluated during the leasing process. Below are five simple tips for navigating the leasing process.
1. Understand the Market and Hire a Knowledgeable Team
The real estate market is fluid and susceptible to quick swings depending on supply and demand. Over the past couple of years the office leasing market in the San Francisco Bay Area has been robust due to an increase in demand by technology companies (workforce expansion by Google, Apple, Salesforce, and Facebook) and the lack of new inventory based on the real estate led recession. This robust market has led to a building boom with twenty-six projects currently underway, accounting for over six million square feet of office space in the San Francisco Bay Area. Several experts have hypothesized that this building boom will lead to a softer, more tenant friendly market.
The fluid nature of the real estate market is good reason to hire a knowledgeable team to assist throughout the leasing process. The team should consist of a real estate agent/broker, an attorney, and, depending on the extent of the tenant build out, an architect. An additional benefit that the team will help with is identifying a company’s subjective goals and needs and incorporating that into the space.
2. Plan in Advance: Control your Schedule to Successfully Drive your Negotiations
As a rule of thumb, allow 9-15 months prior to the expiration of the current lease to find, negotiate, design and move into a new space. More often than not, companies are put in the precarious situation of an imminent move out date from their current space without fully vetting or negotiating the lease for the new space. If the landlord gets wind of this situation this can shift leverage in the landlord’s favor during lease negotiations, crippling a company’s chances of getting the best lease terms possible.
3. Maintain Flexibility in the Lease to Accommodate Company Growth Projections
Typically technology companies have rapid growth expectations. Accordingly, the lease should provide for flexibility to accommodate growth in the workforce. Potential ways to achieve this are: 1) to enter into a lease with a shorter lease term (1-3 years) so growth expectations may be better projected and monitored; 2) to have an option to expand or a right of first refusal, which will provide the company with first rights as to other space that becomes available in the building; 3) to have an early termination right in the lease; or 4) to have a sublease provision which allows the company to sublease the space to another company.
4. Keep in Mind: Density Restrictions & Tenant Improvement Costs
Technology companies, given their open floor layouts, cafeteria-style seating and remote working options, often feel they don’t need a large space to meet their needs. It is important to note that cities have density requirements. Density, desired occupants of space per square feet, depends on each particular space and the amount and accessibility of exit points. As an approximate rule of thumb, roughly 125+ square feet should be allocated per person.
Tenant improvements are work done on the interior of the space. Depending on the lease, tenant improvement costs can be paid for by the landlord, tenant, or some combination of both. It is common for the landlord to provide a tenant improvement allowance to cover some of the tenant improvement costs and that the tenant take responsibility for the remainder. It is important to involve an architect to design and price the tenant improvements. Many companies have grand visions of their interior space, but don’t necessarily understand how expensive those build-outs can be. Below are pictures of sample tenant improvements and approximate associated costs.
5. Limit Landlord’s Access to the Space and Ensure Adequate Security and Confidentiality Measures to Preserve Company’s Proprietary and Secret Information
Technology companies typically will want to include security & access and confidentiality provisions in their lease. The access provision will limit the landlord’s entry to the space by providing for advance notice prior to entry, maintaining certain secure areas within the space that the landlord will not have access to, and requiring a company escort for all landlord visits. Normally, emergency situations, janitorial services and routine maintenance visits are excepted from such limitation on landlord’s access. The security provision should enable the company to install card access systems or provide for some other security system or guards. Any confidential information the landlord or its agents do acquire should be covered by a confidentiality provision, which will limit landlord use and dissemination of that information.
If you have any questions about this article or commercial real estate issues, please contact (650) 342-9600.