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Signing a New Lease In a Time of Rapid Growth

Earlier this year, we started working with a tech startup that has about ten employees but is finalizing a fundraise for tens of millions of dollars and will probably hire hundreds of employees in the coming years. Founded during the pandemic, they have been working remotely and they now want an office (a) for the founding team to have a place to collaborate, (b) to host visiting investors, and (c) to host company events. Accordingly, they want it to be nice but they don't want to lease more space than they currently need and they don't want to overspend on building out an office that they will quickly outgrow. What are their options?

  1. Coworking: Even though they are more expensive per square foot than what a tenant would pay directly to the landlord, coworking spaces can often be leased on a monthly basis, offer immediate expansion options, come furnished, and have multiple conference rooms and larger spaces for events that can be leased by the hour. Coworking spaces can be expensive but offer the most flexibility.
  2. Subleasing: The tenant/sublandlord is probably motivated to get the lease "off their books" and will usually mobilize to finish the deal quickly and at favorable terms that are often discounted from what a tenant would pay directly to the landlord. The spaces often come furnished and there is often less term left on the sublease (ex. 6 months, 18 months, etc.) than what a landlord would require the tenant sign on for directly. Modifying subleased spaces, however, complicates these deals and it is often in everyone's best interest for a subtenant to use the space in its as-is condition.
  3. Leasing a space as-is for a shorter term: Most offices spaces are leased with the expectation that the tenant will conduct renovations to customize the space to their specific needs and tastes. This usually requires the tenant to sign on for a 3-, 5-, or 7+ year lease term so that the party paying for the renovations (the landlord or the tenant) can amortize the cost thereof over the term of the lease and make financial sense of the deal. If the goal is to sign a shorter term lease, consider finding a space that does not need a major renovation. Is it usable with new paint and carpet? If so, chances are the landlord will agree to a shorter term so that the company can move on to a new space when their growth requires another move.
  4. Leasing for a shorter term and the tenant pays for renovations: Landlords will sometimes agree to lease for shorter terms if they do not need to make a large investment in renovations. If the image and condition of the space remains of paramount importance to the tenant, the tenant can pay for their own renovations, knowing this will not be a cost to recover before they move to a different space in the near future.
  5. Signing a long-term lease with the expectation of subleasing: To get the financial support of the landlord for renovations, the tenant can sign on for a long-term lease, knowing they will not be staying long, as long as they have the right to sublease. Subleases will probably require the approval of the landlord, so up front lease negotiations should include how quickly the landlord must approve a sublease, what fees the landlord will charge to do so, what requirements the landlord will have for the subtenant to be approved, and to which party profits will go if the sublease value exceeds the master lease value. For this scenario, the tenant is getting into the business of being a landlord and that often comes with new responsibilities.

Ultimately which option is a best fit for your organization is personal. Let REC strategize with you to determine what the best strategy is for your rapidly growing organization.

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Signing a New Lease In a Time of Rapid Growth

Earlier this year, we started working with a tech startup that has about ten employees but is finalizing a fundraise for tens of millions of dollars and will probably hire hundreds of employees in the coming years. Founded during the pandemic, they have been working remotely and they now want an office (a) for the founding team to have a place to collaborate, (b) to host visiting investors, and (c) to host company events. Accordingly, they want it to be nice but they don't want to lease more space than they currently need and they don't want to overspend on building out an office that they will quickly outgrow. What are their options?

  1. Coworking: Even though they are more expensive per square foot than what a tenant would pay directly to the landlord, coworking spaces can often be leased on a monthly basis, offer immediate expansion options, come furnished, and have multiple conference rooms and larger spaces for events that can be leased by the hour. Coworking spaces can be expensive but offer the most flexibility.
  2. Subleasing: The tenant/sublandlord is probably motivated to get the lease "off their books" and will usually mobilize to finish the deal quickly and at favorable terms that are often discounted from what a tenant would pay directly to the landlord. The spaces often come furnished and there is often less term left on the sublease (ex. 6 months, 18 months, etc.) than what a landlord would require the tenant sign on for directly. Modifying subleased spaces, however, complicates these deals and it is often in everyone's best interest for a subtenant to use the space in its as-is condition.
  3. Leasing a space as-is for a shorter term: Most offices spaces are leased with the expectation that the tenant will conduct renovations to customize the space to their specific needs and tastes. This usually requires the tenant to sign on for a 3-, 5-, or 7+ year lease term so that the party paying for the renovations (the landlord or the tenant) can amortize the cost thereof over the term of the lease and make financial sense of the deal. If the goal is to sign a shorter term lease, consider finding a space that does not need a major renovation. Is it usable with new paint and carpet? If so, chances are the landlord will agree to a shorter term so that the company can move on to a new space when their growth requires another move.
  4. Leasing for a shorter term and the tenant pays for renovations: Landlords will sometimes agree to lease for shorter terms if they do not need to make a large investment in renovations. If the image and condition of the space remains of paramount importance to the tenant, the tenant can pay for their own renovations, knowing this will not be a cost to recover before they move to a different space in the near future.
  5. Signing a long-term lease with the expectation of subleasing: To get the financial support of the landlord for renovations, the tenant can sign on for a long-term lease, knowing they will not be staying long, as long as they have the right to sublease. Subleases will probably require the approval of the landlord, so up front lease negotiations should include how quickly the landlord must approve a sublease, what fees the landlord will charge to do so, what requirements the landlord will have for the subtenant to be approved, and to which party profits will go if the sublease value exceeds the master lease value. For this scenario, the tenant is getting into the business of being a landlord and that often comes with new responsibilities.

Ultimately which option is a best fit for your organization is personal. Let REC strategize with you to determine what the best strategy is for your rapidly growing organization.

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