Rofo moved to its 5th office space in our 2 year history last week. Those office spaces include a free conference room at a nearby university, an incubator space (kind of) that was occupied by about six other tech companies, a furnished rent by the cube month to month sublease space in San Francisco’s Soma neighborhood, a shared office space in the Bayview and now a direct lease in downtown San Francisco through Hines.

This latest move was significantly different than the previous moves on many levels. I’m certain that our experience is not unique but, nonetheless, worth describing in detail. Hopefully this can serve as a rough guide for other businesses on the move or considering a move.

Our lease situation prior to the move:

Up until the move we were occupying shared space (the other company was the actual tenant and was on the lease). We were well aware that our sublandlord was considering a future move and they had been in the market looking at office spaces for about 6 months with a tenant rep broker. They eventually settled on a space, made an offer, negotiated business terms and received a lease. The plan all along was to move to this new location in Soma and continue to reap the benefits of sharing someone’s space, furniture, services and equipment. However, at the time that the lease was being negotiated and the space layout and tenant improvements were being planned, we all came to the sudden realization that Rofo was not going to fit in the new space (based on some of our recent headcount). Our issue now was that we had already given notice to the landlord of our current space which meant we only had about 4 weeks to solve our own office space requirements.

Our search process:

Sometimes I think it was actually a blessing in disguise to only have 4 weeks to move. The commercial real estate market in the Bay Area (like every other market in the US) is soft. Meaning the available office space alternatives far exceed the demand. Because of this there are many spaces to consider. Fortunately for us, our entire staff was in agreement on location and amenity requirements. We wanted to be near public transit (buses and trains), parking was not important, and we wanted to be close to food and coffee shops (our prior space had none of that). Based on those criteria we knew, generally, where we wanted to be.

Landlords and commercial leasing agents typically want tenants to sign long-term leases. This type of lease, which may extend over many years, guarantees the landlord a reliable stream of rental income and allows them to avoid the hassle and expense of re-leasing the space. But if your business is growing, the last thing you want to do is lock into a five- or 10-year lease that limits your options.  A better alternative is a short-term lease with renewal options.

A renewal clause in a real estate lease allows a tenant to decide whether or not to extend the lease once the initial lease term expires.  For example, you could negotiate a two-year lease with four two-year renewal options, rather than a fixed 10-year lease.

Be aware that when you renew the lease after a lease term ends the landlord will try to raise the rent.  So make sure discuss this with the landlord and attempt to negotiate a series of predetermined rent increases for each renewal term. Renewal options that allow a landlord to raise rents based on fair-market rates can result in large rent increases — especially if your business operates in a booming area where commercial space is in demand.

Some landlords are reluctant to grant renewal options because it limits their flexibility to market the space to prospective tenants. Others, however, see renewal clauses as a good way to keep a tenant without having to re-negotiate their lease after the original term expires.

Orginally posted by David Vivero of RentJuice.com.  This is a great article on search for and finding the right office space for your company.

We’re at an exciting inflection point for RentJuice, and part of our transition requires us to upgrade our office space in the next couple months to accommodate some new employees in the next year. (By the way, if you know someone who is looking for a great inside sales role at a growing SaaS company, please email me!)

Financial forecasting is a huge part of getting your company started and funded. In order to know how much money to raise from outside investors, you should have a clear idea of your cash need, and forecasting the costs of your future decisions lets you know how much cash you need today. One particularly opaque aspect of forecasting is the expense associated with your office space, and here are a few thoughts that might help a new entrepreneur think about their office need the right way.

Forecasting your office space need

In general, try to model out your office space need based on the number of employees you plan on hiring over the course of the lease you’re about to sign. Note that while your home lease may typically be a one-year lease, commercial office space often requires a 2-3 year lease to get a good rate. Given the length of these leases, getting involved with an office space can be a very risky endeavor — a long commitment for anyone starting a brand new company!

You have to think about your hiring rate over the period of the lease to understand your real need. My method is as follows: for every person you’re going to hire by the end of the lease, allocate about 100-150 square feet, which means everyone gets their 10×10 share of your office. That may seem like a lot, but keep in mind that you’ll need walking space, some storage space, and perhaps a conference room.

Once you’ve made that calculation, it’s pretty straightforward: going rates for office space are typically expressed in dollars/square foot. For example, right now we’re seeing rates in San Francisco of about $18-24/square foot. This is an annual rate, so divide that number by 12 to get a monthly rate. If you’re going to hire 10 people over the period, then you probably need 1,000 square feet, which represents about $18,000-$24,000/year in lease expense, or about $1,500-$2,000 per month.

Tricks to keep your costs down

Hopefully your company is growing quite fast, which makes the optimal answer to the above calculation a complex, moving target. There are a few ways to keep your costs down when you’re getting your company off the ground. Here are some of my favorites, many of which we’ve employed while getting our current company its space:

• Work from home at first. If you’re a sole founder or working with one partner, it may make sense to work out of your living room or home office. Some entrepreneurs I know have been able to get their businesses up and running by living together in the same space as their workspace. This is the cheapest option for a new company, but my personal experience is that this can quickly become unhealthy for you because you’re never away from work. Try this out for a while until you need to compartmentalize your day into work time and home time: it will be better for your health and the health of your personal relationships as well.
• Sublet desks from incubation spaces or other companies. The next step for us at RentJuice was subletting a small office within a great company founded by a friend of ours. Going rates for these spaces are often $250-$500/month depending on the amenities provided, and the flexibility of the lease. When it’s just a handful of people at your company, this is often the best option because it eliminates the feeling of isolation you may be experiencing by working quietly in your home office or living room. There are also spaces dedicated to this kind of work environment: some west coast options include Dogpatch Labs and Plug-and-Play Tech Centers, while in Boston, you have a great option in Betahouse run by a friend of mine. For a complete list, eVenues is a great place to start.
• Find a month-to-month sublease for an enclosed section of an existing space. At some point, you may be building your own culture at your firm, and having a dedicated office space is a subtle contribution to that goal. Dedicated office space lets you control your office layout, express your values, and hold loud “all-hands” meetings that include the entire space. In this case, you may still be able to work out sublease arrangements with existing companies that include a separation wall or its own enclosed area. In my view, as soon as you see momentum in hiring, you will want out of a shared co-working space so that you can focus attention on your company’s mission and culture.
• Sublet part of your space while your headcount catches up to your office space. Once you’ve reached a point where you have predictable hiring needs and are signing a longer-term lease, you can be the one providing the sublease. Try to sublease only to engineers and very early-stage companies, because your culture should be the dominant one in the office. Providing a part of your office to a company that will be making noise on countless sales calls or meetings will be distracting to your company in the space you’re paying for.

How do I find great office space?

Office space can be found using a number of resources. For small spaces, rentable desks, and sub-$2000 office sublets, Craigslist is a great resource. As with any search on Craigslist, it may be a bit cumbersome and difficult to navigate, but the low-end inventory is definitely there.

There is also a broad use of brokerage houses in the commercial office space market. In San Francisco, almost all direct leases and many subleases are available through brokerages, and landlords are typically responsible for paying their fees, making them free for an entrepreneur like you. Some brokerages specialize in specific areas of the city, but they all tend to have access to the same database of availabilities. Find a broker that has worked on behalf of startups in the past, and reach out to them with your specific needs.

One other resource worth mentioning is Rofo.com, an emerging search engine for commercial office space founded by Garrett Krueger, a friend who has been building that business for a couple years now. They’ve invested substantially in a usable interface and a good selection.

Characteristics of good office space

When I’m selecting office space, I generally keep the following attributes in mind:

• Access to public transit. In order to recruit employees from a broader geography, it’s helpful to be near a public transit station. That may be the T in Boston or BART in the Bay Area. Try to select space that is “generically convenient,” not necessarily convenient for the small sample that is your existing headcount. You’ll be thankful you did this when you win your first commuting employee, and the commute is a part of the conversation.
• Access to convenient food, gyms, and parking. Our third office space at RentJuice was convenient to reach for our staff, but lacked affordable and light food. When your startup is paying startup wages, you need to have burritos, sandwiches, salads and other take-away food nearby. Take a walk around the neighborhood and ask current tenants about the best lunch spots in the area. The same goes for parking and proximity to a popular chain of gyms.
• Availability of natural light, with high ceilings. If, like my team, you’re staring at a computer screen for most of the day, you want to avoid cramped and dark spaces as much as possible. Energy levels are higher when employees are working in a bright office, with a connection to the outside world. Balance this against the possible glare that may exist in a space that is too bright, and try to make sure there are window shades to adjust the amount of light penetrating your space. Spaces with high ceilings and natural light are often called “creative space” by those in the industry, and that might help as you read those ads on craigslist.
• Internet connectivity. Some older spaces, and many new ones, aren’t wired for Internet startups or modern companies who may choose to use VoIP phones rather than traditional ones. In our third office, the entire team shared a residential DSL connection which dropped constantly, especially when we were streaming music and working on intense front-end development (maps). Make sure to ask the landlord what Internet options are available and be sure to contact the utility companies directly to ensure that the space you are evaluating is connected to their service. They’ll often do a free assessment, and will charge the landlord if a new installation is required. It’s always best to know your options before you sign a lease so you can include that improvement in the lease if it is required.
• A like-minded community. There are few things better than having a great relationship with the businesses around you, if you have a technical challenge you’re struggling with or want to get members of the community together for happy hour drinks. We shared our second office space with a portfolio company of one of our investors, and they were generous with their common space and threw parties that we felt comfortable joining. Being able to concentrate on your own business while being a door away from an industry colleague is fantastic.
• Security. People love stealing laptops and monitors. It goes without saying that you should evaluate your next office space based on the level of security provided to you by the landlord and the quality of the neighborhood. Even if you’re in a high-rise, make sure to ask if there’s an alarm and who typically has access to the office suites. Ask if there have been any cases of intrusion or theft in the space.

In general, just keep in mind that office space for a startup should not be extravagant or a mismatch for the values you want to express to your employees. Your choice of location, amenities, layout, and price express to your investors, employees, and customers what kind of firm you are creating. Match your office space to your specific need and the goals you want to achieve.

1. What is the credit of the company I am signing a lease with?
   Most landlords have loans in place and at times a lender will ask to approve a lease before it is signed as they technically are part owners. If a landlord wants to refinance a building, a large part of the valuation of the building will depend on the buildings rental stream and likelihood of this rental stream continuing (ie your financial picture and credit history). Some landlords will not be comfortable leasing spaces to start up companies because of this credit risk.
2. How much do I have to spend to get them to start paying rent?
   The issue here is concessions that a landlord gives to a tenant. These included custom tenant improvement build outs, free rent, and commissions paid to brokers involved in the transaction. The more a landlord must pay to start your rental stream, the more scrutiny they will use in analyzing your company as a potential tenant.
3. What security do I have if this company defaults?
   Most likely the security that a landlord has the most access to is your security deposit. Theoretically they can get in the line and be one of the debtors attempting to collect some of your business during its liquidation, but this time investment is rarely made by a landlord. If you are unlucky enough to personally guarantee the lease, the landlord might pursue you personally to cover the remaining lease obligation or at least the marketing time and cost for procuring a new tenant.
4. How long do I have to wait for another tenant to come along?
   During the negotiation process or when you are potentially behind on your rent, the landlord will consider this argument. If the market is doing well and there is lots of demand for space, your ability to negotiate will be decreased because the landlord will have a rough idea of how long it will take to find a higher quality tenant. If the market is weak (like right now), the tenant will have a lot more leeway to negotiate and can use this argument as part of the negotiation process.
5. What is their use and how will that affect the building?
   If a company is cramming 15 people into 1,000 square feet, these people are having an adverse effect on the buildings systems and building community. For example, a school that leases space will have a few hundred students using the lobby, parking lots, and bathrooms when a normal office user might have 30 full time users affecting the building. A landlord will think carefully about your use, your clientele, the type of consumer who comes to visit and how that will affect other tenants in the building and the buildings value.

Last year, Rofo helped Causes sublease some extra office space and they were kind enough to sit down and talk with us about the process.  Due to the economic situation, many other companies are finding themselves in a similar situation with some extra office space, so it’s great to have such timely insight into subleasing.  Thanks again to Sydney from Causes for sitting down with us.  Check them out at Causes.com and at Facebook.com/Causes.

Causes, founded, by Joe Green and Sean Parker (founder of Napster), grew out of the “belief that in a healthy society, anyone can participate in change by informing and inspiring others.” Causes helps non-profits and other charitable organizations harness the connectedness of social networks to raise awareness and funds for their “Cause”.   With Causes anyone can create a “Cause” and then build up the group around it by interacting with members and the community.  They have about 25 million active users on Facebook, pretty impressive.

Besides claiming that you are a young, growing, and cash strapped business that the landlord should help out of the goodness of his heart, I always found a few methods helpful.

1. The first one was to discuss the other spaces you are looking at using the real financial terms with the broker and or the landlord. Once they realize you might go elsewhere, they usually will attempt to cut to the chase and put their best foot forward.
2. The next technique is to attempt to phase your growth into the space. For example if the space is 2,500 square feet, you begin with the justification that you need 1,500 square feet now, but will need the 2,500 square feet a year from now. If you are signing a 3-5 year lease, the landlord should be willing to let you pay as you go which will strongly help the economics of what you are trying to accomplish.
3. Negotiate the rent as far as the landlord will move and then move on to concessions like free rent or tenant improvements.

I’m sure most people are already using something like Google Reader to track their favorite blog feeds.  If you’re not the I suggest you give it a try, especially if you read a few blogs.  We’re hoping that the Rofo Space Need Feed gives you one more reason to start tracking feeds.

When businesses are searching for commercial space they come to Rofo and post exactly what kind of commercial space they are looking for.  Then landlords and brokers make proposals and the tenant accepts what they like. The Rofo Space Need Feed tracks all these space needs and allows you to subscribe to feeds in different areas.  After subscribing, your reader will show an update every time a new Space Need is posted.

The Space Need Feeds cover the main regions in California where Rofo receives a substantial amount of space needs.  We will be rolling out feeds in new cities when we start to see more getting posted.  Here is a list of the feeds we have rolled out:

San Diego Area Commercial Space Needs

Los Angeles Area Commercial Space Needs

South Bay Commercial Space Needs (San Jose, Santa Clara, Cupertino, Sunnyvale etc.)

Sacramento Area Commercial Space Needs

Peninsula Commercial Space Needs (Palo Alto, San Mateo, Redwood City etc.)

Orange County Commercial Space Needs

North Bay Commercial Space Needs (Santa Rosa, Petaluma, San Rafael etc.)

East Bay Commercial Space Needs (Oakland, Berkeley, Walnut Creek, Fremont etc.)

So subscribe today and easily stay up to date with the market.  We’ll be rolling out new feeds in the future if your area isn’t up there yet.

Rent Types

1. NNN: Tenant is responsible for Property Tax, Insurance, Common Area, Maintenance, Utilities, and Janitorial
2. Industrial Gross: Tenant pays Utilities and Janitorial
3. Modified Gross: Tenant pays for Janitorial
4. Full Service: Tenant is only responsible for increases over the Base Year Expenses

Rent and Build out Issues

1. Escalations: The amount of your rent increases year to year. The most common increase types of CPI (Consumer Price Index) or a percentage (3-5%).
2. Tenant Improvements (TI’s): The interior improvements within the space that is spent prior to your occupancy, less Fixtures, Furniture, and Equipment.
3. Amortization: Any costs that a landlord pays for and then passes through to the tenant over the period of the lease. For example, a business might need 3 extra office constructed at a cost of $15,000. The landlord might offer to amortize the cost of these improvements into the rental payments a company make each month.
4. Plug and Play: The space will come furnished and wired.
5. Turnkey: Referring to an owner making a property ready for a tenant to begin business by having the tenant furnish only furniture, phone and inventory, if any. Turnkey tenant improvements are provided at the landlord’s expense according to plans and specifications previously agreed upon by the parties.
6. Work Letter: Specifications for tenant improvements usually attached to a lease and/or letter of intent. The work letter provides the basis for working drawings and contractor pricing and may allocate costs between the parties.

Space Issues

1. Load Factor: Load factor measures the common areas of your building that are built into your rent including the lobby, elevators, supply areas etc. For example, if the load factor is 10% and you are leasing 2,000 square feet space, your usable square footage is actually 1800 square feet.
2. Common Area: The common area is the area of the building that is allocated to each tenant but is not directly controlled by any one tenant. Some examples include the lobby, elevator, bathrooms, supply closets, and mechanical rooms.
3. Usable Square Footage: The amount of square feet measured within the confines of the tenant’s space, without a load factor.
4. Rentable Square Footage: The square footage that is advertised and listed in your lease. The Rentable Square Footage Includes a load factor or your percentage share of all building common areas.

Expenses

1. Common Area Maintenance: Amounts charged to tenants for expenses to maintain hallways, restrooms, parking lots, and other areas.
2. Base Year Expenses: A lease condition whereby the landlord agrees to pay an expense amount based on the expense for a base year (typically the first year) of the lease, and the tenant pays the increase in expense for subsequent years. For example, if the total building expenses are $100,000 in your Base Year, and the following year expenses are $105,000, the tenant would be responsible for their % share of that $5,000 expense.
3. Holdover: This is the situation where a tenant remains in the space after the lease term expires. Most holdover provision will be somewhere between 150-200% of the current monthly rent.
4. Sublease: Used to convey some or all of the property rights that a tenant has under a commercial lease to a third party for a portion of the tenant’s remaining term of the original lease.
5. Assignment: This is the concept of assigning your lease to a 3rd party with the landlord’s approval and removing the lease liability from your organization.
6. Nondisturbance: So long as lease is not in default, its rights to occupancy under the lease will not be disturbed by the lessor or its successors or assignees.
7. Right of First Offer or First Opportunity: A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. Unlike under a Right of First Refusal, the owner is not required to have a legitimate offer which the tenant can then match or refuse. If the tenant refuses to make an offer or if the parties cannot agree on terms, the property can then be sold or leased to a third party.
8. Right of First Refusal: A right, usually given by an owner to a tenant, which gives the tenant a first chance to buy the property or lease a portion of the property if the owner decides to sell or lease. The owner must have a legitimate offer which the tenant can match or refuse. If the tenant refuses, the property can then be sold or leased to the offeror.
9. Renewal Option: The right of a tenant to renew (extend the term of) a lease for a stated period of time at a rent to be determined (i.e. 9.5% of “fair market rent”).
10. Relocation Clause: Any clause in the lease giving the landlord the right to move the tenant during the lease period.
11. Pro-Rata Share: Percentage of building occupied by the tenant, which is usually based on the rentable or leasable square footage measurement of your space compared to the rentable or leasable square footage of the building.

Bill from LazarsEarlyMusic.com, one of the largest dealers of Baroque era musical instruments, sits down with Rofo to talk about his quest for the perfect San Jose and Santa Clara area office space. He eventually found it with the help of Rofo and commercial real estate broker, Jana Gluckman, from Ritchie Commercial. Bill also gives some great tips about looking for office space and finding the right broker. He also chose to buy his new commercial space instead of leasing and talks about that decision. Bill’s been operating Lazar’s Early Music for 15 years after leaving the bio tech sector.