Don’t sign that lease yet!

December 23, 2008

 Office

One of my biggest pet peeves is signing that check each month for our office lease. I might be ticking off my landlord and my commercial real estate agent, but talk about something that I perceive is a high fixed expense that doesn’t generate revenue each month. As an investor, nothing drives me more nuts than hearing about an early stage startup signing a long-term lease in a Class A building. After payroll and benefits, often times leases are the next most expensive line-item.  In this market, you are the buyer and you should expect significant concessions before signing any leases.

Here are some tips that I have to keep that lease as inexpensive as possible:

 

1) Get it free.  Start it in your garage.  Go virtual.  If that doesn’t work, sublease from a friend that has some extra space for free.  In exchange, you’ll give him some equity in your company and a promise to pay starting in 6-12 months if you start hitting revenues.  You’d be pleasantly surprised how easy it is to get free space. 

2) Sublease.  A lot of companies are downsizing and what that means is that there will be more space available.  For many, having a startup means some extra cash and in some cases, it also helps keep positive mojo or energy in the office after a layoff.  Having a startup is a benefit you shouldn’t hesitate bringing up as a plus for a company that is a sublessor.  Here’s another kicker - a lot of times, you can also piggyback their Internet connection for more savings!  Look to pay no more than 15-30% of market value - trust me, these deals are out there. 

3) Negotiate HARD.  Price and terms.  Learn about market rents, hire a commercial real estate agent to help you understand the market.  Then push hard.  Short-term is best, why lock in for 5 years?  It makes no sense, many will argue you want to lock in your prices especially if they are low, but you can always negotiate options into your contract.  Why pay market?  Who are the local players?  They are more likely to wheel and deal.  Try signing 1 year deals and don’t pay for tenant upgrades, just live with what they have and if you need to buy furniture - buy Craigslist or IKEA.  Be sure to read my negotiating strategies.

Try negotiating even if you are in a lease, let the landlord know you need a discount now and you’ll remember her when you have to renew the lease.  You have leverage now.  Don’t spend more $$ on that lease, it sucks to pay rent especially when you could be using those dollars for that additional engineer or salesperson that will bring in real revenues.  

What do you think?  Do you have any successful lease stories to share?

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35 Comments »

Comment by Glenn Kelman
2009-01-05 22:57:54

Great post Andy. It’s also worth noting that commercial brokers are paid more when the rate is higher and the lease is longer. They will usually suggest a longer lease, when it is really in your interests to keep it as short as possible. Like a year. Don’t be embarrassed. Just say you have no idea if you’ll be in business next year. It’s very liberating.

If you are just starting out, I also recommend looking on Craigslist for sublease space, rather than just relying on your agent.

All that said, the best agent in town has to be Clay Nielsen. He is very good at getting deals for his clients. Redfin uses him, and so does WetPaint.

PS anyone who needs space; Redfin is subleasing. Contact glenn (at) redfin (dot) com.

 
Comment by Andy
2009-01-05 23:44:50

Thanks Glenn! I’m also a big fan of Washington Partners and Mark To. They’ve been very good to us.

 
Comment by Mike Koss
2009-01-06 12:45:47

If you don’t mind a plug for StartPad - we don’t require long term leases, so companies can get started here month-to-month for $300/person and no long term commitment.

And you get to hang out with other Seattle startup companies like RescueTime and Right Sized Media.

http://startpad.org/software-coworking-office-seattle

- Mike

Comment by Andy
2009-01-06 20:39:06

Mike - sure thing. That is a great option for small companies.

 
 
Comment by Merrick
2009-01-06 14:10:13

Awesome to see you blogging Andy.

In our short 6 year history as a company we have signed 4 leases and what I have found is to be upfront on what terms you want both time and price and security deposit. Often times the agent / property manager that is more accommodating will also be easier to deal with throughout the lease. It’s no coincidence that in the two leases where we were allowed to move in weeks before the official lease start date, we also negotiated the best price/sq ft.

GigaOM had a great post on hacking your office lease:
http://gigaom.com/2008/11/02/8-ways-to-hack-your-office-lease-for-cash/

Comment by Andy
2009-01-06 22:59:02

merrick - dude, great to see you here, thanks for taking the time!
I totally agree with you, our landlord is a local guy and is not a huge national office company. Working with them has been great from the get-go and it’s proved itself over time as well. thanks for the link as well!

 
 
Comment by Don Draper
2009-01-06 14:53:28

It’s funny how many startups perceive that leasing Class A space is a sign they’ve arrived, while large enterprises are trying to figure out ways to get employees to work at home.

Having done both in both environments, I’d much rather work at home.

Comment by Andy
2009-01-06 22:56:08

Home sweet home.

 
 
Comment by ej-web-development
2009-01-06 17:01:39

At the last firm I worked at we subleased from a plumbing supply company. It worked out incredibly well, and kept our costs low for those crucial first few months.

I’d recommend it for any new startup that doesn’t want to hemorrhage cash.

Comment by Andy
2009-01-06 23:00:00

funny, my first lease was with at a sunglass shop (upstairs), it worked great and we even had “free” music pumping in the background.

 
 
Comment by Rick Whittington
2009-01-06 18:52:21

I agree that Class A office space is a waste of money and a superficial boost to the ego. Last June, I and a few entrepreneurs I know got together and signed a lease on a 1,250 sq. ft. office that we all share. It’s a one year lease, and we all have a private office and a shared space as we typically collaborate. I can spend money on more important things as my huge office overlooking Main Street in our city is only $150 per month.

Comment by Andy
2009-01-06 23:00:52

Love these stories… you don’t have to give in to the man, a little creativity goes a long way.

 
 
Comment by AJ Kumar
2009-01-06 20:11:00

Andy,

I’ve started my business just recently and am obviously in stage 1, my room. We’ll I can’t say its too bad, at least I’m not in the garage. However, something like this gives me the motivation because some of the best companies in the world started off from their home. We all gotta start somewhere right.

How did it take you before you made it big?

Comment by Andy
2009-01-06 23:05:00

home sweet home, why spend more dollars when you can use your dollars for development or marketing and not rent? good stuff AJ! not sure how to answer the other question though, if it’s about timing, the last biz from start to finish took 5 years of blood, sweat, and tears.

 
 
Comment by Franki Nguyen
2009-01-06 23:48:13

Home can be great at the begining, but after a year, I found it extremley difficult to keep focus and motivation due to the lack of human contact.

ATM, I’ve got an excellent arrangement with a company in the CBD where my expertise is exchanged for a corner space and full amenities. It’s a perfect win-win for both of us. We’re in our 3 rd years together.

Comment by Andy
2009-01-07 23:32:57

Franki - that’s a good point. If your home isn’t a place where you can focus, you’ve got find a place where you can whether that is a small office elsewhere or converting your garage into a quiet office away from the TV.

 
 
Comment by jtGraphic
2009-01-07 00:20:10

I ONLY sign yearly leases, because a new location may arrive at any time. Also: when your lease is ending, if your landlord is flaky, try not to mention signing the new one. Then you’re month to month for as long as you want!

 
Comment by Adam T. Subscribed to comments via email
2009-01-07 00:59:01

Where was this post 2.5 years ago Andy? =0)

Well, we are 2.5 years into a 4 year lease and in retrospect wish that I had only signed a one or two year lease. Nice building, Nice office (I did negotiate a great price though!) but I have my staff at the office, I rarely go to the office eventhough its a 5 minute drive as I LOVE working from my home office. We would do just fine with a smaller executive office which is what I would like to do. The landlords are quite crabby these days as many of the tenants have run into cashflow problems and either slow paying or shutdown. I don’t suppose they would be too excited to re-negotiate with one of their on-time paying tenants?
Any creative ideas? I’m all ears!

Comment by Andy
2009-01-07 23:34:56

would you be open to subleasing yourself? not sure if that’s an option with your lease, but several of my friends who are running into cash flow problems are finding tenants to help pay the lease and the side benefit is that the office is humming again:)

 
 
Comment by Custom T-Shirts Guy
2009-01-07 11:30:01

The business that I work for actually subleases half of our building to make irrigation Pivot piping. However I think once they get finished we are going to add more equipment in that spot to make more custom apparel in house to be more in control of quality.

 
Comment by Adam T. Subscribed to comments via email
2009-01-07 23:52:59

Yes, I have considered sub-leasing some of the space to some fellow Entrepreneurs. Something I will look into doing when I come across the right candidate.
Cheers!

 
Comment by Vik Dulat
2009-01-08 22:49:01

People rush into signing leases and once they do, they are stuck. This has happened to my friend personally and he ended up paying $7000 more than he needed.

 
Comment by gps
2009-01-13 15:31:28

You’ve hit the nail(s) on the head. In this commercial real estate environment, tenants are in the drivers seat. Be sure to also play a bunch of different potential buildings/landlords off of each other. The competition will get the landlords to play ball.

 
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2009-01-26 00:21:01

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Comment by Harnish
2009-01-26 16:27:10

I would have never imagined that I could have had free rent but given the times and the strategy of equity exchange it could make sense to a landlord.

 
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