Posts filed under 'First Office'
February 21st, 2008
In earlier interviews Frank Bailey and Ed Correia each recommended using a broker as the most effective approach to finding an office. So I called Arwen Funk, a commercial and residential broker, to get some background. Arwen pointed out some potential land mines in leasing contracts such as property tax protection, methods of pass-throughs, and options to grow or adjust their office space. The Q&A that follows is an edited transcript of our call.
Q: Why do firms hire a commercial real estate broker?
There are a number of pitfalls in the leasing process; renting an office is not a cut-and-dry process. There is a lot of paperwork, sometimes with land mines you can run into from a leasing perspective. It can really help to someone who understands the process and helps you to prepare, explaining issues as you go and often alerting you to the implications of a situation. You should keep in mind, more often than not, it’s the landlord who pays the commission: so finding yourself a representative is normally effectively free. But even when you pay the commission, the up-front expense is normally worth it relative to how much an experienced broker can save you in unexpected costs. When you do it yourself, the three areas you can often get caught on are: property tax protection, reimbursements of operating expenses, and planning for their future.
Q: How are property taxes a risk area?
In the state of California, any property–commercial or residential–is assessed property taxes by its county government. When Proposition 13 passed in 1978, it limited California property taxes to no more than 1% of the assessed value at the time it was purchased, with increases no more than 2% annually. The assessed value is not necessarily the purchase price: people sometimes overpay or underpay, so each county has the authority to reassess for tax purposes if it believes that market value was not paid. In addition to the base property tax of 1% of assessed value, there are usually several bonds and assessments that are also on a property tax bill. These additional fees fund school districts, street work, sewer systems and other local public items. They all add a little bit to your property taxes, but it’s very rare for someone’s total property tax to be more than about 1.25%, normally it’s around 1.15%. As long as the same owner owns the property, the property tax can only go up by a maximum of 2% every year.
If you are a tenant in a building that is sold to a new landlord, however; property taxes get adjusted to a new baseline and this higher cost is passed through to all tenants in the form of expense reimbursements. Assume your landlord bought the property twenty years ago and has only had a 2% increase ever year since. The property taxes are low but the property’s value may have quadrupled in that time. When you started to rent, your property tax expense reimbursement was quite small. It’s a proportional share of the landlord’s total tax bill based on how much of the total property you actually occupy. When the property sells for four times what the original landlord paid for it, this resets the assessed value and the new owner’s property taxes, and therefore your proportional share, will increase significantly.
A broker can help negotiate “Prop 13 protection” for you as a tenant. This protection allows you to set your property tax amount so that you only have to reimburse the landlord at a certain base level, usually the price when you first leased the space. This way no matter how many times the property is sold or how much people paid for it, you will never pay more than the negotiated baseline, plus the 2% increase every year, for the term of your original lease. If the property is sold, the new owner absorbs the expense of those new property taxes. Thus, new tenants that sign after the property sells will probably pay more in property taxes whereas you will be locked in at the contract rate.
Q: Can you explain about reimbursement of operating expenses?
Normally when you need an office you will look at a variety of different spaces on the market that might fit your size requirements. These spaces will be offered for varying lease rates and the rates quoted will either have a letter “G” after the amount, or they will have an “N” or sometimes three N’s. The “G” is for gross and the “N” is for net. Three N’s stands for triple net, but it’s really a net lease, just a finer distinction. In a gross lease, the rate quoted is the gross amount, which means it is the base rent plus the reimbursements (also known as pass-throughs) for all the expenses the tenants owe to the landlord such as electricity, water, property taxes, insurance, common area maintenance, and more. You will not get other bills for other things from your landlord under a gross lease. A net lease, conversely, has these expense items invoiced separately. The rate quoted in a net lease will be the base rent amount only then the tenants will receive a separate bill for all of the expense reimbursements. A broker can help you understand what you are agreeing to as a tenant and get the best deal possible.
Another aspect of expense reimbursement is understanding the pro rata calculation (the portion the tenant leases in relation to the total building space). For example, assume your office is in a 5,000 square foot building, and you’re a tenant using 1,000 square feet. Therefore you use 20% of the pro rata square footage of the building. Subsequently, you will probably be asked to reimburse the landlord for 20% of the electrical that’s used for common areas. Depending on how a property is setup, the tenant might contract with PG&E directly. The important thing to remember is that nothing is free.
Q: What should I look out for in terms of planning for the future?
If you’re in a startup with three people you may only need a small space, say 500 square feet. It is wise to build in some kind of growth pattern for at least the next lease term. For example, you lease a space for $1.00 per square foot, and you lease it for two years. Right next door to you is suite that would be a perfect configuration if you needed to grow and add one or two people – you could simply knock out a wall and add it to your suite. When you negotiate your lease, request if that space next door becomes available during your current lease term, you want to lease it for the same rate that you pay on our current space. More so, you could negotiate for an option to extend the lease on both spaces when those two years come up.
Other ways to protect your costs for future could be to negotiate lease extensions with fixed lease rates (rather than risking paying the higher market rate when the time comes). Or to negotiate for the Right of First Refusal to Lease on other spaces that come available in the same building. Some tenants who plan for big success even negotiate options to purchase a property if the landlord ever wants to sell. Obviously, these options are all key to the future success of small businesses to allow them to plan appropriately for growth.
Q: So a tenant can negotiate to keep future costs down over certain period of time?
Absolutely! As in any industry, a layperson doesn’t know all of the possibilities – that’s why whole industries of “experts” are born! In real estate, a non-real estate person doesn’t often know to ask for protections in the form of future options. If you own and operate a startup, you’re probably more concerned about operating your business than spending time learning real estate 101. Your worries more likely include funding, market timing, delivery, fulfillment, employees, customers, etc. You assume the business will take off, need ramping up, and ultimately be successful. Well, what do you do if you have signed a five-year lease, but you’ve only got a thousand sq ft, and suddenly you are busting at the seams? Now you need more space, but rents have gone up so much that now you are competing with every other tenant in the world who comes up for that space just next door to you in your multi-tenant building. You are stuck and with leasing rates rising (theoretically) you won’t be able to grow without a large increase in your overhead which may stunt your growth. Now is when you’ll wish you’d had a broker who had negotiated some options for you to grow, move, etc. There are a lot of ways to anticipate and negotiate for future needs, the important thing to remember is that almost anything that you can imagine doing in leasing has been done at some point and a skilled representative will help you be prepared.
A good agent will know how to write options for extensions, refusals, expansions, and Prop 13 protection in your original lease.
Q: Founders are often starved for time, how much time would you normally would save a first time tenant?
Hiring a commercial real estate broker will save a newcomer dozens of hours–and headaches–depending on the situation. But I believe that the hours are not the main savings. Hiring an expert in any field is not just about the actual hours that are required to do the job, it’s also the years of experience that allow an expert to do it properly!
When hiring an expert it can be hard to understand what to ask for and what to expect. One way to mitigate the risk is to meet with the person and make sure they have a very clear understanding of what you need. A good broker will go out and do most of the leg work for you. All you need to do is look at a couple of spaces that your broker will have selected for you based on your needs and see which one you think is going to work best. Then listen to your representative’s assessments. They should be able to assess the type of owner of a particular building; is the landlord someone you could work with? Your agent can speak with other tenants on your behalf for feedback or aid you in those interviews. How are they in the negotiations; are they cutthroat or are they pretty easy to work with? Most properties have different people negotiate the leases and manage the property.
February 11th, 2008
Today Sean and I sat down with Frank Bailey, VP of Sales from Runtime Design Automation. RTDA offers automation tools that manage all design resources such as licenses and CPU’s in order to streamline workflow. RTDA products track all licenses in your network, capture all jobs in your project, and automatically dispatch the jobs in the farm, all with one-click simplicity.
Q: I understand that you have had to change offices three times. Can you share a little about your first experience in finding an office?
Well, when Andrea and I first started the business, we were each working out of our homes. Andrea lived in the east bay and I lived in Mountain View. I cannot speak for Andrea, but I did not find this effective because of the distractions from television, the telephone, and the ability to run errands at will.
You could say that our first office kind of found us. One of our early customers, Exemplar Logic, was nice enough to give us space in their facility. Located in Alameda, we utilized the free space for eight months until they were acquired by Mentor Graphics. After the acquisition, we were forced to move out. It was not until this point that we actually had to find a place.
Q: What were your three primary concerns in finding the right first office?
- We wanted to be close to our customers and prospects. We spend a significant amount of time on the customers premises.
- We wanted something that had conference rooms. By this time we had hired a couple of employees. Not all conversations should be heard, so we wanted something with private meeting rooms.
- Finally, we wanted something that was near places where you could get a quick bite to eat. We basically lived at the office so being able to get something that tastes good, but not unhealthy was an issue.
Q: How did you get started when you began searching for an office?
I pulled out a map and drew a perimeter from San Jose to Mountain View and tried to find a place that was central to our customers, accessible from various directions, and easy to find from the street. We found a place on Apollo Way in Sunnyvale. This was a great location because it intersected Central Expressway and Lawrence. It was also close to 101. In 1995 this was the heart of the Valley.
We were there for about three years before the property was acquired by another company. The acquiring company raised the rent, so we moved to a place in Fremont which was about half the price. What we at first anticipated was a bargain on space turned out to be a disaster. Our office building was right next to a probation office building who we shared the same parking lot. It seemed like there were always questionable people hanging around the lot. Often, strange people would walk in and out of our building in search for the probation building. We only had a few theft incidents, but there were several vandalized cars. This office did not have conference rooms so it made meetings with visitors difficult. I observed that our visitors were hesitant to speak out, since they were not sure who was listening. Another problem of being in Fremont was dealing with heavy traffic on 880. It took at least an hour to get to San Jose to visit a customer and an hour back to return to the office.
Q: How did you measure or asses the quality of the office?
We compared a lot of offices before we settled on one. We basically looked at the image of the facility compared to the price. By image, I am referring to the neighborhood, the condition of the building, the common areas, and the amount of outside noise.
Q: Do you have any words of advice or things to look out for that people might over look?
Be careful of who your neighbors are and what types of businesses they are in. One of the businesses in the complex was a delivery service. They took up about a dozen parking spaces with their delivery vans. I would also stay away from sub leasing. We had an issue where we were sub leasing from a guy for six months. Turned out that this guy disappeared and never paid the property manager the entire time of our lease. We were not held liable, but the paper hassles and police reports were time consuming.
Make sure you have a separate machine room. Servers are extremely noisy and radiate a lot of heat. You want a separate room where you can set up a cooling system and keep all the noise regulated. I also recommend a place for miscellaneous stuff. Otherwise your office will look messy and cluttered.
I would recommend using a broker. I found a broker who I used for the next two office relocations. I much rather let an expert deal with all the fine line paperwork. This lets me concentrate on business objectives instead of worrying about none strategic busy work. A good broker will catch liability insurances, and other contract requirements that fluctuate from place to place. I recommend Jeff Rogers from Colliers International.
How much was the cost of the move? How long did it take for you to become operational?
There were five people in the company in Silicon Valley: with furniture, setting up the IT infrastructure, and paying movers, the total cost was $10,000. I would say we were fully operational in about four to six weeks.
Where did you buy your furniture?
I went to Repo Depo. People think they save money by purchasing the low end stuff at Office Depot. However, I think even though that furniture may be brand new, it can break down before the well built high end items you can get second hand.
January 18th, 2008
For my third post in the “First office” series, I wanted to learn about alternative office options to incubators. Earlier this month I sat down with Ed Correia, founder of Sagacent Technologies, to learn about his experience in finding the right first office.
Sagacent Technologies specializes in business technology management services. Clients benefit from highly skilled professional service resources utilizing a proven methodology for assessing challenging IT environments or implementing complex technical solutions. Sagacent Solutions are carefully tailored to meet the specific business needs with strategic and farsighted planning. Below are the question and answers from our conversation.
Q: What were your three biggest concerns in finding the right office?
Location was the most important concern in finding the right office. We wanted something that was central to our current client base and close to our target market. One of the things that differentiates us from some other IT management firms is that we not only do remote monitoring but our staff spends most of the time in the field at different customer locations. Driving time for my employees and heavy traffic hours was definitely an issue. We are not a store, so being close to the road or in a strip mall was irrelevant. The look of the building and the surrounding location was the second biggest concern. I did not want to be in a run down building or in a questionable neighborhood. We wanted something that was aesthetically appealing and in a professional office space so that we didn’t undercut our credibility. I would say our third biggest concern was security.
Q: In terms of getting started, when you made the decision to move, what was the first thing you did?
I called a broker from California Properties and then developed a map of Silicon Valley. The broker and I figured out where our current customers were located and then determined where our target prospects are located. Then we outlined a tight circle of locations that would suit our needs. We looked at 20 properties before I decided on the ideal office place and location.
Q: How did you measure or assess the quality of the office?
I looked at the facility to see how well it was maintained. Then I spoke with some of the other tenants to understand their impressions of the place. Finally, did I like the building manager? Was this someone I could work with?
Q: How long did the whole process take from making th first call to moving in and being functional?
It took about a month and a half to see all the properties and then another month in a half to move the essentials over to become fully operational. However, the place was a mess and was not presentable to visitors. It took a total of 6 months to paint, gather furniture, and organize everything before we invited people to our headquarters.
Q: How big an expense was furniture for you? Did you find a store or other source for good used furniture?
We put the word and were surprised at the number of people who had a surplus chairs, tables, or desks they were happy to part with if we would do the hauling. We spent hardly any money on furniture as a result.
Q: Was this a frustrating search? At one point you thought you had found a good location but the deal fell through.
We knew it was a big decision for us so I wouldn’t say that it was frustrating. At one point we had signed a contract and I thought we were done. I took a few days off for vacation with my wife to celebrate and when I came back our prospective landlord had left a message that they had gotten a better offer and were rescinding our deal. So at that point I realized I wasn’t just picking an office, I needed to take a harder look at the landlord. I had been looking at a lot of “objective measures” of the office, but that experience made me realize that leasing an office is the start of multi-year relationship with your landlord. And you want to select one who will be a good business partner whatever happens to your business.
Q: Even with a surplus of office space you were surprised that a number of landlords didn’t want your business?
Yes, I was shocked that IT firms have a bad reputation among landlords. I don’t know if it’s lingering fallout from the dotcom crash but several times they would immediately lose interest in working with us when I described the basics of our business.
Q: What were the three biggest surprises you discovered in your search or after you moved in?
The biggest surprise was the amount of paper work involved in negotiating the lease. There are all kinds of hidden fees and tenant responsibilities in the contract. I recommend that you have your attorney read over the contract for you. The next surprise was the poor quality of building’s DSL line. We ended up having to install our own T1 line. The third surprise was being able to rent more space. Our business doubled less than a year after the move. We are already looking to rent an additional 1000 sq ft. Our property manager has been great in helping us plan for the expansion.
Q: What has the impact of the office been on your business?
I have been pleased at how our getting an office has allowed us to communicate our professional approach. We have always been committed to our customers in the way that we do assessments, in our thorough proposals, and our contracts. But for many prospects who have visited us in the office, it’s been another proof point in their minds that we are committed to the business and are growing. We have also done a number of open house events that have made new prospects aware of our services and let our current customers come by and give us informal feedback.
January 7th, 2008
Following up on my “Silicon Vally Incubators” post in the “First Office” series I wanted to get a tenant’s perspective on the the advantages and drawbacks of locating in a business incubator.
Symphony Consulting is a manufacturing outsourcing, procurement, and supply chain consulting firm that helps original equipment manufacturers and their supply chain partners in three key areas: revenue, assets, profitability. I talked with John Holton, co founder of Symphony Consulting, about his experience of finding his first office. Below are the questions and answers from our short discussion.
Q: What were your three biggest concerns in finding the right office?
A: Our three biggest concerns were location, IT infrastructure, and professional appearance. We wanted something that was easily accessible by major highways and close to our clients (technology companies). IT infrastructure is expensive, so the incubator system was an attractive proposition. We also wanted a place that looked professional. Plug and Play has a professional appearance from the outside and great facilities inside.
Q: What were three things that surprised you after choosing your office space?
A: There are about a hundred companies in this incubator so I appreciate the amount of energy from other entrepreneurs in the building. However, I must admit, the noise from the other people can sometimes be distracting. I knew I would be more productive in a regular office setting but I was surprised by how much more I can focus on tasks important to my business.
Q: What specific benefits does your office leaser offer as a part of their service?
A: Plug and Play Tech Center has really nice conference rooms, cafeteria with good food, and 24 hour coffee. The administrative assistants and staff are helpful. The cubicles come furnished with desks and chairs. Finally, there is plenty of parking.
Q: How do you measure or assess the quality of the facilities you looked at?
A: Basically, we just judged the place by the location, the appearance of the building and its interior, and the amenities it offered.
Q: Is there anything else you would like to comment on or make suggestions to others looking for their first office?
A: I think it was a good investment. It makes the business seem more professional and credible. I also think it makes me more disciplined and productive.
October 10th, 2007
This is the first in a series of blog posts on where a start-up team might look for their first office. One of the first types of office space to consider would be space in a business incubator.
A business incubator is comprised of multiple businesses operating independently within one location or under a membership group. The objective of the incubator is to help its businesses get started and grow. Incubators offer services that can help entrepreneurs overcome a wide range of obstacles by reducing startup costs with a shared system of support and resources. Most incubators offer shared office space, utilities, and services that create a unique environment for new businesses to grow. Incubators are known for helping startups lower overhead costs, create networking opportunities, and increase the chances of survival.
Tenants in business incubators share overhead costs such as utilities, office equipment, IT support, conference rooms, laboratories, and receptionist services. Additionally, basic rent costs are usually below the normal market value for the area. Often, incubator managers and staff members provide insightful advice on a broad spectrum of issues including, business development, market research, strategy, and fund-raising. Jim Robbins, Director of the Environmental Business Cluster believes, “founders are surprised to learn that they can get startup services for no more than the cost of space, furnished units, strategic planning advice, and free common areas like conference rooms.”
With the desire to create an entrepreneurial environment, some incubators host a variety of events that cater to both their internal members and external community. Plug and Play Tech Center, one Silicon Valleys largest incubators, is well known for hosting conferences and entrepreneurial events. Some of their past conferences and events include the TechDirt Greenhouse, ANZA Technology Conference, Web 2.0 Expo, and monthly workshops like the SVASE Startup-U and VC pitch sessions. As a frequent attendee of these conferences, I appreciate the opportunities to meet other entrepreneurs, keep in tune with new technologies, and learn from distinguished guest speakers.
There are many factors involved in transforming an idea into a marketable product. Besides the significant technological challenges, building and operating a business is very complicated. The Small Business Administration reports that over 80 percent of businesses fail in their first five years. However, the National Business Incubation Association claims that 87 percent of businesses that graduate from an incubator program are still in business after five years. Since access to other startups, management professionals, executive mentors, and expert consultants are so readily available, it makes it easier for incubator tenants to fill gaps in their business.
If you are considering a business incubator you should make sure that your firm’s focus is aligned with the incubator’s mission and then schedule an appointment with the director. Most incubators have initial requirements before incubation consideration. Some incubators are industry focused and only cater to certain segments like Biotech, Cleantech, Software, and Semiconductor. Like investors–and remember many of these organizations will ask for equity–directors want to meet with the entire management team and see several written plans like marketing, financial, and product roadmap. Evan Epstein, Chief Operating Officer (Silicon Valley) for the Girvan Institute of Technology says, “It helps to be referenced in from someone within our network.”