In prior posts we’ve summarized your commercial real estate options. Here we’re going to break down the process for securing a traditional office lease. In a future post, we will outline the nuances of subleasing.

Buckle up and let’s dive in…

You’re wrapping up your first fundraising round, your team is asking about your workplace strategy, or you’ve been yearning to bring your team together IRL on a regular basis after WFH the past few years… and you decide it is now time to get an office. Should be an exciting and fun process right?

Reflecting on your experience leasing an apartment, you decide you’ll need about 30 days to find a spot, sign a lease, and collect the keys. You run a search in Google, Craigslist, Zillow… and you scratch your head thinking “is this all that’s out there?”

You text a founder friend who recently signed an office and inquire how they secured theirs. Your friend shares they worked with a commercial real estate broker, a licensed agent who is paid a commission from the transaction to manage your space search and lease negotiation, and they are happy to provide an intro.

You set up a phone call with the broker, they’ll ask you questions to understand your needs and explain the process step by step (if they’re good). You quickly learn the timeline, stakeholders involved, cost, set up, and reality for getting an office is much farther out of reach than expected. Our cofounder addressed the drastic differences between the expectation and reality of The office real estate dilemma via real life office search stories in his personal blog.

The Search

You’ve been reading the headlines and hearing all the anecdotes about lack of demand and high vacancies, you expect San Francisco to be frothy with good options. Your broker sends you a list “survey” of a couple dozen options. You review on your end and align on a 2-4 hour block to tour the first set. You like a few of the options but none check all your boxes. The available supply of options is bleak, from outdated finishes to lack of meeting rooms, bathrooms, and natural light, you question whether your employees will be motivated to leave the comfort of their home for this. Your broker agrees to monitor the market and send you new opportunities as they surface.

A few weeks (and often months) pass by, you tour a few more, and after the sunk cost of valuable time and energy, you decide to move forward on your best option. Your broker aligns with you on target terms (monthly rent, term length, improvements) and drafts a Letter of Intent for your review.

An LOI is a 2-3 page term sheet proposal with boilerplate language to engage the landlord in a negotiation, an LOI is not legally binding or exclusive.

Pro Tip: you (and the Landlord) can negotiate multiple LOIs at the same time, negotiating at least two LOIs at a time allows for more data points and leverage.

The Negotiation

Your broker submits the LOI to the landlord’s broker and you await their response.

You learn the minimum lease required is 12 months, and often 3 years for many landlords. This is a difficult pill to swallow when your next 6-12+ months contains many unknowns, the unpredictable nature that is intrinsic to an early stage company.

In an effort to get in front of next steps and keep the process moving, your broker prepares for the financial review which is a required step in the leasing process to (1) validate your company’s ability to pay the rental obligation required in the lease commitment, and (2) agree on the security deposit.

At this point, you’re negotiating the LOI and learning what certain terms, you’ve never heard of (or expected), will entail from a financial perspective:

• Rent - the asking price is marketed in $/sf on an annual basis in San Francisco (industrial and other markets will structure on a monthly basis), which accounts for the predictable and majority share of your monthly expenses
• Additional Expenses — the rental rate will be structured as Full Service, Industrial Gross, Modified Gross, or Triple Net which dictates how utilities and janitorial will be charged
• Operating Expenses — what often comes as a surprise to first-time commercial real estate tenants, the structure of the rent (IG, MG, FS, NNN) will also dictate how Landlords will passthrough costs for maintaining and operating the building (Common Area Maintenance, Property Taxes, Property Insurance, etc.). These costs are typically calculated in relation to the Base Year of the lease.
  • Pro tip: request historical records from the Landlord for OpEx to estimate future exposure
• Base Year — the first year of the lease (typically the year the tenant signs the lease), depending on the rent structure (as outlined below) the Base Year will be used to determine the basis for the Operating Expenses that will be passed through to the tenant
• Deposit - over the history of startups and commercial real estate, the nature of the startup growth lifecycle (fundraise, burn, fundraise, burn…) has directly contradicted a landlord’s goal to collect stable rent over extended and predictable periods of time. Just as 1-2 months is the standard for residential leases, most Landlord set the starting bar at 3 months rent for “good credit”. Often with minimal proof of concept and capital in the bank, Landlords will push for 6+ month deposits which can be crippling to an early stage company focused on minimizing burn and extending runway.
• Financial review — this process entails sharing financials on your company under NDA (either your form or the Landlord’s). Typically audited financials are requested, but those are not readily available at the early stages of a company. Providing 3 recent bank statements, latest balance sheet, and P&L can often paint enough of a picture of financial health and runway.

Pro Tip: The more you can provide to get the Landlord comfortable, the better the chances you have at driving the required deposit down.

	Additional Expenses	Operating Expenses
FS	Janitorial and utilities are included	Tenant has a Base Year. OpEx passthroughs in Year 2 onward are limited to tenant’s proportionate share of any increases over the OpEx amounts in Year 1.
IG/MG	Janitorial and utilities are not included	Tenant has a Base Year. OpEx passthroughs in Year 2 onward are limited to tenant’s proportionate share of any increases over the OpEx amounts in Year 1.
NNN	Janitorial and utilities are not included	No Base Year. OpEx passthroughs are not limited to increases over a Base Year. Tenant is responsible for their proportionate share of all passthroughs starting in Year 1.

The Legal

One week, and more often multiple weeks, accrue and you “come to terms” with the Landlord and are in agreement on the negotiated items. You sign the LOI and are ready to wrap this up. However, your broker reminds you a signed LOI is not legally binding, and rather representative of a “handshake” that both parties will work exclusively going forward to negotiate and sign a lease agreement in good faith. Once a lease is signed, it will operates as a legally binding contract.

The responsibility and industry standard practice for drafting the Lease agreement is held by the Landlord. Depending on the Landlord’s attorney and form, this will typically take at minimum 5 business days and often more. Although this seems nice and a cost savings, unless you are dealing with a “tenant-friendly landlord”, the form agreement produced is typically heavily landlord favoring and filled with onerous legalese that reads like a different language.

Pro Tip: send the first version of your lease agreement to your insurance broker so they can review and provide policy options in advance. Insurance brokers typically need a few business days to secure quotes. Often times tenants will wait until the lease is signed which will delay move-in.

Given the all-in investment and liability exposure of an office lease, your broker (if they’re looking out) will encourage you to engage a real estate attorney who is familiar with the nuances of a real estate transactions and the local market.

You are now tasked with a whole new round of negotiations, this time with a hefty per hour price tag and often more lengthier conversations to understand your attorney’s translation of the lease language. Not mentioning, the “business decisions” you will be forced to make when the Landlord decides not to budge much on their form language.

Multiple weeks pass as you flip the redlined lease between attorneys. You calculate the risk, as well as the time, energy, and money you’ve invested in this process, and entrust your attorney to do what they need to do to get this lease across the finish line.

The Move-In and Set Up

Multiple weeks (often months) have passed since you first decided to start this process, typically more than the 30 days you expected and often closer to 3-6 months for larger deals. Prior to receiving keys, the landlord will require you to:

1. Sign the lease agreement
2. Provide a Certificate of Insurance (COI) per the terms of the lease agreement (remember when you sent this to your insurance broker weeks back?)
3. Submit first month’s rent and security deposit (some landlord’s will accept a wire confirmation, others will want to see the funds in their bank)

Hallelujah you have the keys to your new office!

Depending on your timeline, your broker likely negotiated 2 weeks early access prior to the lease commencement for setting up the space so it is operational.

Now comes the heavy lifting…

• Purchase/install furniture and equipment
• Set up Internet
• Set up security system and access controls

Beyond the above tactical, you are now tasked with creating and enforcing a workplace strategy to ensure your team leaves their home work setup and utilizes this office…

If you are operating under a hybrid model, we touch upon some tips on How to build a better hybrid work routine. Whatever your office search process or workplace journey looks like, we care about your time, energy, business and we’re always here to help at Tandem - even if it isn’t with us.