Real Estate Advice For Orange County Startups | Part 2 of 3

Thanks to OCSC Bronze Sponsor Savills for this valuable information about Commercial Real Estate:

Securing Real Estate For Orange County Start-Ups Requires Careful Planning And Good Timing | Part 2 of 3

By Jeff Manley, Senior Managing Director & Board Member

Attracting and Retaining Top Talent (and the Associated Cost)

The common wisdom is that the “cool” factor makes all the difference in building a talented team of young, disruptive, smart, and creative people. The conundrum is that it costs money to create innovative environments, and new start-up companies don’t have the money to spend. You will need to understand and manage the gap between the average tenant improvement allowance in your lease average cost of a creative build-out, including hard and soft surfaces, furniture and technology.

Managing Cash and Maintaining Flexibility through Effective Negotiation

The “cool factor” is a consideration, but you will need to spend more time addressing your company’s more pragmatic issues. Principal among these is negotiating and securing a real estate opportunity that is as economically favorable and organizationally flexible as possible. The ultimate goal is to avoid/prevent unwanted surprises. This is particularly true for new and growing companies that must be able to adapt to unpredictably changing circumstances.

1. Negotiating option rights to make your lease and lease terms more fluid, e.g., by implementing meaningful expansion, contraction and extension rights, help mitigate organizational uncertainty.
2. Manage cash through effective space negotiations that is appropriate to your company’s cash position.
3. Approach your prospective landlord in the most persuasive way possible, including validating how you will meet your lease obligation. Establishing financial intelligence and demonstrating why an owner should take the risk of leasing to a young company may mitigate having to pay an overly burdensome security deposit.
4. Defer some cost by agreeing to “must-take” space, which is an option for a predetermined space for expansion that you will exercise at some agreed-on point in the lease term.
5. Postpone part of your payment by negotiating a deferred rent concession where you make fewer or lower payments at the beginning of your lease, with the understanding that additional rent to compensate for the deferral will be due in future periods of the lease; or
6. For securitization, use a letter of credit (LC) to preserve cash. The landlord may prefer an LC to cash, which is subject to bankruptcy protection, to have the ability to draw on the LC.
7. Reduce your security deposit amount by, outlining the schedule that your company will receive subsequent rounds of funding; willingness to share your profitability metrics; and showing expected inflows from impending product, software, or service releases.
8. Consider sublease opportunities where capital has already been spent and avoid the negative cash burn required by the construction of tenant improvements. Due to the rapid growth and need for frequent moves in the technology industry, more companies are subletting their leased office spaces, providing an opportunity to make shorter-term commitments and take advantage of fully built-out and furnished workspace. Sometimes piggybacking on second-generation space is the smart move.

Savills is a leader in analyzing space needs for businesses to help set goals and expectations, create solutions, and smartly manage and deploy resources in securing office, R&D, and industrial spaces. Jeff Manley based in OC can be reached at jmanley@savills.us or 949-706-6617.

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