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When leasing office space one of the biggest challenges new business owners and startup companies face is having enough financial strength to satisfy landlords and buildings owners.
- Landlords want to make sure you can pay the rent and want to know who will be financially responsible if you can’t.
- As a startup company you want to have the strongest financial position possible as that makes landlords want your tenancy, and gives you leverage to help you negotiate better lease terms, concessions, and minimize your out of pocket expense at lease signing (e.g. security deposit).
What Landlord’s Want to Secure an Office Lease
To secure a lease landlords typically require a security deposit, letter of credit (LOC), or a personal guarantee from a financially sound individual. The amount depends on a number of factors such as whether or not you’re a startup or existing business, lease concessions given (e.g. tenant improvement costs, rent abatement), lease term, commissions, etc.
Existing Businesses with Strong Financials
If you are an existing business with a good track record and strong financials you can typically satisfy the landlords financial needs by showing your companies financial statements (e.g. cash flows, profit/loss statements, balance sheets, etc.). If the Landlord thinks your credit looks good they may only require you to write a check equal to one months rent for the security deposit.
Startups with Little or No Financial History
As a startup with little or no financial history most landlords are going to want to see your personal tax returns, bank statements, asset and liability sheet, credit application, business plan, and other personal financial references. More than likely they will probably require you to guarantee payment of the landlord’s deal costs (tenant improvements, commission, rent abatement, etc.) in the event you go out of business. This can be in the form of a larger security deposit, letter of credit or personal guarantee. If a personal guarantee is required be careful with this as your putting your personal net worth at stake rather than the companies. If you agree to a personal guarantee try to limit the guarantee to only the unamortized deal costs (e.g. tenant improvements, commissions, etc.). If you negotiate well you can typically get the landlord to agree to burn off a percentage of this amount after each year of lease term.
I see too many new business owners and startups wait until the last minute to get their financials in order. This causes delays, minimizes any leverage you may have, and makes getting lease concessions difficult. Landlord’s are in the business to make money on their real estate. If you want them to take you seriously as a future office tenant and feel comfortable in giving you tenant improvements and other lease concessions you have to prove that you can afford the rent payments and have the means to pay them back in the event your business goes South. If you figure out a way to strengthen your financial position BEFORE you start looking for office space you will have a much better and rewarding experience.
