Your First Office Lease: What Founders Should Know

Most founders have signed a residential lease, and it is natural to assume a commercial one works the same way. It does not. Residential tenants are protected by consumer laws and sign short, largely fixed forms. Commercial tenants are treated as businesses able to look after themselves. The lease is a long document written by the landlord's attorney, and the starting draft favors the landlord on nearly every point.

That sounds discouraging, but it has a useful consequence, which is the first thing to know.

• 1. Nearly everything is negotiable. The asking rent is an opening position. So are the length of the term, the amount of free rent, the landlord's contribution to construction, the deposit, and most of the clauses about what you may do with the space later. How much moves depends on the market, the building and how attractive you are as a tenant.
• 2. The landlord already has a broker. The person who shows you the space and answers your questions is usually the listing broker, hired by the owner to lease the building on the best terms for the owner. They can be helpful and professional, and they do not represent you.
• 3. You can have your own broker, and in a standard lease the landlord typically pays the commission. A tenant representative works for you. Because the fee is normally built into the landlord's leasing budget, going without one rarely lowers your rent. Ask any broker how they are paid before you start.

Avoid giving a listing broker your budget, your timeline or your level of interest in the space before you have representation. All three are useful to the other side of the negotiation.

• 4. The term is long. Landlords generally want a multi-year commitment, particularly when they are paying for construction, because they recover that investment through your rent over time. A shorter term is often possible, usually in exchange for fewer concessions. A sublease or a landlord-built spec suite can also shorten the commitment.
• 5. You owe the rent for the whole term. If the company shrinks, pivots or outgrows the space, the obligation continues unless the lease gives you a way out. The rights to sublease, assign or terminate early are what create that flexibility, and they are negotiated before signing, not after.
• 6. The security deposit will be larger than you expect. A young company without a long financial history looks risky to a landlord, and the deposit is how that risk is covered. It may be requested as cash or as a letter of credit from your bank, and it is reasonable to ask for it to reduce over time as you make payments.
• 7. You may be asked for a personal guarantee. This is a promise by a founder to pay if the company cannot. Many venture-backed companies decline, and landlords often accept a larger deposit or another form of security in its place. Do not sign one without your attorney explaining exactly what you are promising.

Our guide to security deposits, letters of credit and guarantees covers the alternatives a landlord may accept.

• 8. Space rarely comes ready to use. Unless you take a furnished sublease or a spec suite, some construction is usually needed, even if it is only paint, carpet and a few walls. Landlords often contribute through a tenant improvement allowance. Whether that allowance covers the work is a separate question, and any shortfall is yours.
• 9. The rent is not the whole cost. Depending on how the lease is structured, you may also pay a share of the building's operating expenses and real estate taxes, your own electricity, after-hours heating and cooling, internet, furniture, cabling, insurance, moving and the cost of restoring the space when you leave. Ask for an estimate of each before comparing buildings.

The size you are quoted may also be larger than the space you can actually use, because office rent is usually charged on rentable square feet, which includes a share of common areas. Two suites with the same quoted size can hold different numbers of people.

• 10. The timeline is driven by things you do not control. Searching and touring is the quick part. Negotiating the business terms, then the lease itself, then designing, permitting and building the space all take time, and each depends on other people. Founders who start when they are already out of room end up choosing from whatever can be delivered fastest.

The practical lesson is to begin before you feel ready. Starting early costs nothing. Starting late costs choices and bargaining position, because a landlord who knows you must move quickly has little reason to improve an offer.

First-time tenants often tour spaces first and sort out everything else afterward. The reverse order works better.

1. Decide what the space needs to do, how many people it must hold now and later, and how long you can commit.
2. Set a budget for total occupancy cost, not only rent, and confirm it with whoever manages your finances.
3. Engage a tenant representative and a real estate attorney before contacting landlords.
4. Gather the financial information a landlord will ask for, such as recent statements, cash position and investor backing.
5. Tour a shortlist and ask more than one building for a written proposal, so that landlords are competing.
6. Negotiate the main terms in a letter of intent, then have your attorney review the full lease before you sign.
7. Plan the build-out, furniture, internet and move with enough margin for delays.

TAG represents tenants and buyers, not landlords, and a large part of our work with first-time tenants is explaining this process as it unfolds and keeping more than one option alive until the lease is signed.

• ✓Who does the broker showing me this space represent?
• ✓What is the total monthly cost, including expenses, taxes and utilities?
• ✓How is the square footage measured, and how much of it is usable?
• ✓What security is the landlord asking for, and can it reduce over time?
• ✓Who pays for construction, and what happens if it costs more than the allowance?
• ✓If we outgrow or no longer need the space, what are our options?
• ✓Has our attorney reviewed the full lease, not only the summary of terms?