The advent of modern co-working has transformed the way individuals and companies think about their work environments. Since 2009, New York City has seen a 767% growth in office space occupied by co-working companies. Many of those seats are being filled by ‘TAMI’ tenants, an acronym used in real estate circles, to describe the creative class of Technology, Advertising Media and Information companies.
If you are a ‘TAMI’ firm of under a dozen people, unclear where your next round of funding will come from or do not know if headcount will double or quadruple in the next 12 months – than co-working is likely a sound economic alternative to a traditional office lease.
But that time will come when your MVP resonates, user acquisition spikes and that 7-figure commitment finally comes through.
And before you go looking for office space, here are six important things to consider:
1. Culture is King
You built your product, your team is growing but you’re finding it challenging to build a culture of your own in a shared space that is the love child of a CB2 catalog and an Urban Outfitters-inspired-dorm room.
For many founders, the main motivation, besides headcount growth, for exiting co-working is culture. This is about more than hanging up your logo and having your own door. They want to build and foster an environment that inspires teams (i.e. natural light, location, whimsical art work) and reflects the values of the company (i.e. Lego sets to encourage play, comfort rooms for new moms). If the itch to foster culture is there, it is time to get out.
2. Timing is Everything
I know, I know your investors are pushing you to find a space yesterday and you’re worried you won’t be able to attract top talent until you move into your new digs.
It’s the rushing that gets companies into trouble and why it is so important to begin the process as early as possible. If you know you are 3-6 months out from money hitting your bank and continued growth is in your future, you need to begin educating yourself on the market. Otherwise, you’ll lose leverage, and money, negotiating a deal in a hurry. And let me tell you, patience pays off: because every item from the price per square foot to term length is negotiable.
The second part of this – is that everything takes longer than expected. Having a realistic, if not overly cautious timeline, will set you up for a successful transaction.
Anticipate that space tours with principals will take two months, term sheet negotiations will take equally as long and, depending on the complexity, attorney lease negotiations can take 90 days. While many of these items will take place simultaneously, this serves as a basic frame of reference.
Oh, and this just accounts for built space. If you want to start swinging hammers add 2-4 months for a ‘standard’ build.
3. Size Matters How Much Space Do I Need?
This is always a loaded question. Calculations for how many square feet you need per person generally range from 125-250 SF. So for a team of 25 you will need an office sized between 3,125 – 6,250 RSF.
1. How will your team work? If you plan to be office intensive you’ll be looking at more square footage. If employees will be sitting in open seating, sans cubicles, you can get away with less.
2. You have 25 people now but you are planning to scale to 60 in the next 18 months.. How much growth space you’ll need, or whether you take any at all, depends on your situation. But if you plan to sublease that portion of your office until your growth spurt make sure your lease allows you to do so and be aware that there are risks, and headaches, associated with subletting a portion of your office.
3. Don’t bother taking out a ruler. The number you are being quoted is the ‘rentable’ number not the ‘usable’ number of square feet in your space. Depending on the market you are in, you can expect usable space to be between 15-35% less than the rentable number you are paying for.Another factor here is efficiency. Two spaces may be the exact same size, but one may lay out better for your company’s requirements. Before choosing a space, ask to see a ‘test-fit’ floor plan to get a better sense of how furniture, and your employees will fit.
4. The Green Stuff
What are all those items on my bill?
When you rent an apartment you generally know what it is going to cost: $2,000 per month is $2,000 per month. When it comes to a commercial lease, and its subsequent bills, the myriad of line items can be overwhelming. Each one adds a significant cost to your monthly spend. When a client asks how much their monthly overhead will be, the answer is often, “Well, it depends.”
Before you even consider looking at spaces, make sure your advisor has explained the very real costs associated with items such as taxes, operating costs, and if there are any ancillary charges you should be aware of. An advisor should proforma costs for you throughout the process. If not, you might be left with some expensive surprises.
I’m Looking For Some Security
You found the space and you start trading paper. After the second or third round, the Landlord is going to ask you to show them the money. If your funds are not sufficient and you’ve been in business only a handful of years, expect them to request items such as P&L statements, and proof of signed contracts and commitments. The landlord’s comfort level with your financing, the health of your industry and whether or not they are putting money into your space will depend on how much security they ask for.
If they ask for a Good Guy Guarantee, make sure whoever signs it is fully aware of their personal financial liability.
Commitment is tough. It’s even tougher when you do not know where your company will be in 5 years, let alone 18 months. In many situations, landlords are looking for a minimum 5-year lease. Subleasing a space from an existing tenant often provides you with a shorter, more flexible term (i.e. 2 years) and at a discounted price. Often, subleases will come furnished and wired for phones, cable, and internet, which can result in big up-front cost savings. Like anything, there are risks involved with subletting, and you will need to vet that the Sublandlord has good credit and is current with its bills.
6. The Hired Help
All brokers are not created equal. Find a trusted, licensed commercial broker to guide you through the process. There is a reason it is called brokerage, after all. A broker will work on your behalf to get you the best economic deals and inform you of things such as off the market availabilities and subleases. They should be knowledgeable of things like eligibility for tax breaks and incentives and be focused on ‘right sizing’ your requirement so that you take the correct amount of space.
When it comes to leasing documents hire an attorney who specializes in commercial leases. It might cost a bit more than using your day-to-day business attorney but for such a large financial transaction, your peace of mind as a business owner is worth it.
Alyssa Zahler is based in New York City where she focuses on commercial tenant representation, including relocation, expansion, disposition and lease renegotiation. Ms. Zahler is a member of a team that provides national real estate advisory services to start-ups and Fortune 500 companies alike. In a previous life, she was a digital and TV business news producer and writer for CNN, Bloomberg and Businessweek. She can be reached on Twitter @azahler or by email firstname.lastname@example.org