Most startup founders work on their pitch deck and business model for months and then skim their first office lease before signing it in seconds. Something is wrong.
Given that this is your largest fixed expense for the next few years (and you rarely cancel fixed expenses when times are tough), you should be far more cautious about signing a lease than canceling an insurance policy or vendor agreement.
Luckily, landlords expect negotiation. They’ve built in wiggle room to their initial offers, knowing that successful tenants will counter-offer. Where first-time founders fall short is that they don’t realize just how much is negotiable, and it extends beyond just the monthly rate.
What Matters in Your First Lease
While every founder can agree that the monthly rental rate is essential, it’s only part of the equation. A lease with $500 more rent but better terms will save a company tens of thousands down the line in a “cheaper” space with hidden fees and inflexible terms.
The first step is understanding what exactly is on the table for commitment. Most commercial leases last three to five years, and breaking them costs you quickly. Thus, you’ll want to know what’s included in your base rent (likely less than you think) and what will amount to additional charges.
Increased availability of startup-friendly spaces means that landlords are open to flexible terms. Plus, cross-referencing other options helps founders get a sense of market averages. When searching for commercial spaces, established listings for office rent provide a practical range of what various areas and building types cost, and using this as leverage greatly bolsters negotiating power.
Next, the fit-out period is more important than most founders think. This is the rent-free period to set up the space before they owe a dime. Standard offers start at two to four weeks; however, two or three months are common depending on the state of the offer and the market conditions. This is real money saved from practical expenses like desk-building, cable running and installations.
Give Me Your Best!
Rent escalation clauses dictate how much the rent will go up each year. The typical offer ranges from 3%-5% annual escalation, but everything is negotiable. 3%-5% as a cumulative percentage for a three-year lease yields thousands of dollars of difference and some founders can negotiate sets of fixed rent for the term; it’s easier to negotiate this with landlords looking to fill vacancies instead of those with many active prospects.
The break clause is an option for exit – 14-month or 24-month break clauses give companies that pivot, fail or need to downsize their space quicker than anticipated a way out without paying for empty office space for years. Landlords do not love this option; however, they’re often willing to concede it to stable tenants looking to provide something in return.
Security deposits typically come out to two- or three-months rent, but tying up cash may be difficult for startups. Some landlords will entertain bank guarantees or negotiable agreements that include lower deposits if the lease extension is extended past six months or if fewer tenant improvements are offered at their expense.
Maintenance vs repair responsibilities must be well defined – you do not want to be responsible for an air conditioning problem 18 months into your lease that was broken before you moved in because you didn’t get a statement saying it was an existing issue. Get clarification about what’s managed through building management and what’s your responsibility.
Real Negotiation Tactics (Not Almost Killing the Deal)
Timing matters. Is this space vacant due to ownership change for months? Is it an enterprise-level building with a franchisee landlord looking to negotiate with no other interested tenants? Or are you competing against two other tenants? Ask them how long it’s been vacant and if others are interested – you’ll get a sense of your leverage quickly.
Research gives you concrete expectations – knowing your area’s comparable spaces’ rental amounts, other tenants’ in-building terms (if possible, speak with them), and what matters most to your operation will give you tenable results. If you go in blind, you’re only going to settle for anything someone offers because you won’t know any better.
Don’t negotiate everything at once. Focus on three issues most important to you and get that settled first. Maybe it’s a fit-out period, a break clause at two years, and lower increases annually. Get those first sorted, then look at secondary concerns which might make you look difficult from the start.
Walk away if you have no choice – but do not bluff about it. If you have clear options about other units you’re considering, then that’s good leverage against another landlord. However, if you’re bluffing for leverage without any substance and they call it – kiss goodbye your relationship with them for any future negotiations.
Mistakes That Cost More Later
A common issue founders face is focusing only on what they think is important – the monthly rate – and forgetting everything else. They negotiate themselves down $500 less than they expected, then two months later realize they’re paying for utilities, common area maintenance and property taxes out of pocket instead. This “discount” quickly evaporates.
Expansion rights can cost you money if you’re not careful; if your startup expands too quickly, can you secure additional space in the same building at predetermined rates? If it’s not written in, you’ll either need to move or pay whatever fee/time constraint landlords place on you when you’re desperate.
One final note is personal guarantees – landlords often want startups to personally guarantee the lease because the company does not have enough operating history. This puts your assets on the line should your business fail. You can negotiate caps on guarantees or waiver conditions assuming ample revenue stability occurs over 12-18 months.
Assignment and subletting determine whether you can either transfer your lease to another company or sublet space not currently being used. Startups change quickly – you’re likely down-the-line going to have to require downsizing, relocation or merging efforts with another company – and limiting assignment clauses will anchor you to paying costs for square footage in which you’re unable to sell or lease otherwise.
Presenting Your Case With The Landlord
Landlords want responsible tenants who will pay their bills on time and take care of the property. As a startup, you want to prove that you’re a good risk – even if limited operational history exists – by maintaining a business plan expected feasibility, showing funding/revenue evidence or establishing third-party credentials, references with credibility can help.
Offering something instead of asking for lower terms blindly is helpful – sure, you’ll offer a concession of an extended lease term instead of lowered rent with a break clause – but also agree to handle tenant improvements in exchange for higher fit-out allowance. Finding trades beneficial to both sides offers more solutions than pitted negotiations based exclusively on confrontation.
Sometimes paying for professional help pays off in spades – a commercial real estate lawyer can review your negotiated terms before signing to find flaws that could have cost you enormous amounts at some point down the line – the few hundred bucks you’ll spend upfront pale in comparison to being stuck in a horrible lease for three years.
Getting It All Done
You may never have everything covered by your first office lease as “perfect,” but you should recognize conditions that protect your requirements while allowing flexibility as your startup grows/changes through offering negotiated contacts capable of protecting your investment.
Landlords expect negotiations – especially if they respect tenants who advocate professionally on their own behalf – and the worst thing you could possibly do is sign what’s in front of you because you’re uncomfortable with the process.
Give yourself time; educate yourself before understanding how long everything’s negotiable before you’ve signed away your rights/responsibilities. Ultimately, the terms you’ll set yourself in stone will make or break great aspects of your business for years down the road from what could have been easily avoidable.
