This is a guest post by Michael Mandel, a commercial real estate advisor at Grubb & Ellis in New York City. He specializes in tech startups and data center transactions. His recent clients include eBay, Facebook, The Limited Stores, adap.tv, Verizon, Webair and Guardian Life.
So your startup has gotten too large for General Assembly, Dogpatch Labs, WeWork Labs, Betaworks, TechStars, or wherever you choose to incubate the next Facebook. You love the high tin ceilings, the wood floors, the exposed columns, and the proximity to the Ace Hotel, but it’s time to take off the training wheels and ride out on your own. This article is your definitive 900-words-or-less 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 subway access.
A note on location: We brokers divide Manhattan into three major markets: Midtown, Midtown South and Downtown. Each market has many submarkets (neighborhoods), but on the whole, Midtown is the most expensive, followed by Midtown South and Downtown. Most startups end up in Midtown South, as it is a location of choice for peers, has lots of loft buildings, and exudes a hip vibe. The largest concentration of startups is in Gramercy/Flatiron, followed by SoHo/NoHo.
Step 2: Identify and explore your options.
A broker can create a survey of different spaces that meet your criteria. From this survey, you can pinpoint the spaces you’d like to 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)
- 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.
Step 5: Negotiate your lease.
Hire a lawyer! New York City landlords are sophisticated. 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.