By: Andy Effler, Senior Associate at JLL
You’ve launched your startup, and so far, you’ve enjoyed the advantages of not necessarily needing a formal office space: cost savings, convenience, and no commute. But, growth is a milestone worth celebrating, and with that comes the need for a space for your business to thrive.
If your startup is fortunate to experience growth, the move to an office space can provide significant benefits. As your startup graduates from a garage or co-working space to that first office space, the move can also be a bit complex.
Researching, finding and finalizing contracts for an office lease can seem like a daunting task. To simplify the process, we created this list of five questions you should be asking when securing that first office space.
1. How long will the process actually take?
Startups often underestimate the time it takes to ultimately move into an office space for the first time. Keep in mind that several steps can take varying amounts of time, including:
- Search process
- Lease documentation
- Space planning
- Acquiring permits
To simplify, break the process into three phases:
- Build Your Move Strategy: Develop a document based on wants and needs relevant to your business goals and cultural vision. Build the appropriate team to help with this need. Set meaningful objectives and requirements. It’s also important to develop a custom timeline for your business and determine a preliminary project budget with your real estate professional.
- Selection: Compare potential markets, while taking into account the budget. After narrowing it down, don’t be afraid to negotiate. Conduct in-depth market research and determine your best available space options to begin touring properties. Shortlist and start negotiating on proposals that outline major business terms and economics. If construction is necessary, engage architects and general contractors to uncover costs associated with your tenant-specific improvements.
- Execution: Select the building that best meets your occupancy desires. Finalize a Letter of Intent and enter into the final lease negotiations with the landlord. Pending construction needs, allow for an appropriate amount of time within permitting approvals and construction.
Ultimately, the timeline depends heavily on many factors such as market conditions, availability, your startup’s size and your desired schedule. Your startup should allow a buffer between search time and move-in date.
2. What are the hidden costs?
Budgets should be determined during the planning phase, and kept front-of-mind during selection. Beyond monthly rent, build a budget without blind spots. Maximize upfront capital with a financial strategy that considers square footage, out-of-pocket expenses and more.
Hidden costs may include:
- Maintenance fees
- Tenant improvement cost above allowance
- Phone and data cabling costs
- Security deposits
- Operating expense increases
- Property taxes
- Additional costs, like moving expenses, parking, furniture, signage and attorney fees
The key to handling these costs proactively is to create a transparent dialogue and negotiate with your prospective landlord.
As an example, operating expense increases are common for each year for buildings. During negotiation, discuss the anticipated cost tenants will incur to prevent being blindsided. Negotiating for a cap on the increase of controllable operating expenses will help limit your companies’ exposure. Operating expense exclusions are also important to negotiate within the lease document.
To put your business in the best situation, do not be afraid to negotiate and question everything until you understand it.
3. How do we secure the best possible lease?
Know that almost everything is negotiable. Thorough negotiations can help save you money, prevent unexpected costs and establish a more transparent relationship with your landlord.
Before you sign, consider a few factors that can make-or-break the agreement.
Overall, ensure the lease agreement is specific and avoids vague language. Consider which costs you are responsible for and which costs fall on the building owners. Costs such as capital expenditures (structural repairs), buildout expenses and utilities must be explained. If any of these are unspecified, you won’t be able to accurately budget.
Additionally, make sure you have control of certain lease agreements, such as renewal. If your plan is to grow within the space, sign a lease that provides you with the option to renew. A long-term agreement isn’t necessary, but there must be an established renewal timeline and fair market rental rate language negotiated to ensure your company for a fair deal when a renewal opportunity arises.
In short, be diligent to ensure all potential costs are accounted for.
4. How can we design for growth?
Make the office space exactly what you want. Landlords may not be familiar with the creative layout you’re interested in, so be vigilant to ensure the space you desire is the one your landlord provides. It’s also important to consult with your commercial real estate broker to discuss the design, construction and intricate details you desire in a space. Remember, the landlord uses term length to justify the allowance provided for tenant-specific improvements. Your representative will help you manage expectations. Ideally, the right project development team will help you find a space that incorporates these details all while managing costs from beginning to end.
The next step is to choose a space that offers expansion options. How responsibility for improvements is divvied up should be included in the lease. If your startup expands, landlords should see the value in taking on some of the costs to build out the space for a growing tenant.
Consider the physical restraints of the building, but strongly review the lease agreement and landlord to see if the office provides opportunities for growth.
5. How is an office built to last?
Smart tenants are just as concerned with the future as with the day-to-day. Planning ahead should be a part of the leasing process. Take the time to research where the market is going and the types of spaces built for the future.
After researching market and design trends, find a construction partner that knows how to include the latest technology, utilities and more. Starting in the best position to cultivate your culture and attract talent stimulates long-term growth.
The physical attributes of a building, such as the location, amenities and expansion opportunities are important, but the right landlord who is straightforward and willing to negotiate can determine the lifetime effectiveness of the deal.
Focus on the details and don’t rush the process.
Overnight successes in business are unheard of. Success is bred from persistence and attention to detail. Ensure your startup will benefit from the move to an office space by taking the time to plan, focus on the details and negotiate.
An office that is built for the long haul is one that attracts talent, enables growth and offers a mutually beneficial relationship between the landlord and the tenant.
About the Author
Andrew (Andy) Effler is a Senior Associate with the JLL Columbus, Ohio office. Mr. Effler specializes in tenant representation, agency leasing, and real estate advisory for office tenants and investors within Ohio. Follow Andy on Twitter or connect with him on LinkedIn.