Real Estate Negotiation for Startup Office Space

Whether your startup office space lease is soon up for renewal or you’re looking for a new space to accommodate a rise in face-to-face work, there are a few things to keep in mind to ensure due diligence when evaluating real estate commitments.

I’ll share a few guidelines here based on what I’ve learned through negotiating real estate agreements for many of the companies I’ve helped through this process. 

But first, let’s talk agendas.  

Commercial real estate agents vs. tenant representatives

Commercial real estate agents – many of whom are friendly, fun-loving people – work for landlords. They’ll take you to sporting events and out to dinner to better understand your needs in taking on a new space. It’s okay to develop these relationships as long as you remember they’re in the business of renting space for landlords. Some commercial real estate companies you might recognize are C.B. Richard Ellis and Colliers. 

To protect your interests in those scenarios, we typically recommend working with a tenant representative. Unlike commercial real estate agents, tenant reps work for you and try to get the best deal based on your needs. They make a commission based on the lease you accept, ultimately benefiting from helping you negotiate the right terms for your business. Hughes Marino is our go-to for tenant representation, though there are others popular among early stage companies. 

Tempering emotion for sake of flexibility

It’s easy to fall in love with real estate quickly, whether residential or commercial. Founders see a space and can quickly envision what it will look like after they build it out to match the culture of their companies. Inspired by emotion, we at times see founders sign leases that are too long or don’t have flexibility in terms of adding or reducing square footage over time. 

If you’re seeking more flexibility and don’t want to be locked into that type of commitment because, perhaps, you anticipate changes in the size or scope of your team, consider subleases. With some subleases, you can get 60-70% discounts to market rent by being willing to take over space that’s already been built out and developed because a landlord is eager to get someone to take over the space. 

How cost is calculated

Different parts of the country talk about commercial real estate rent in different ways. In California, we talk about cost per foot per month ($10 a foot per month). But in some parts of the country, it’s cost per foot per year ($120 a foot per year). Commercial rent can get as low as 3-5$ a foot per month, which is of course much cheaper than California, New York, and so forth. 

Board sign-off

Lease transactions will typically require board approval and may also require shareholder consent depending on the size of the transaction. Socialize any real estate plans with your board early since you’re likely to need consent. It’s relatively routine and lawyers will handle this smoothly, but you want to avoid surprises. Boards will want to understand the duration of the lease and how much the cost is going to be over time. 

Renegotiation of leases 

Since the real estate market has been so dynamic over the past few years – and there are a lot of vacancies in the commercial market in particular – there’s an opportunity to work with tenant representatives to renegotiate your lease and reduce your rent. 

Overall as you look for office space or seek to adjust your lease, pick a minimum term, work with a tenant rep, and try to boil the emotion out of this experience so you can do your best to preserve cash flow. You can still have that dream office space but on terms that work for you and the forecast of your business. 

Jim Stewart is COO and Partner at True. Prior to joining our team in 2012, he held numerous operating and CFO positions in a variety of industries, leading four companies through their IPO processes. He counsels founders in the True Portfolio on financial and operational matters. Meet the whole team.