Pre-revenue startups without the right insights often overpay landlords who would have accepted tenant-friendly terms. What to do: Use of a dependable metric won’t expose prospective financial trauma. An age-old litmus test for tenants’ ability to weather its office lease rent is pretty simple: Don’t commit greater than 8-10% of your gross revenue to rent during the entire lease term. Makes sense. And companies, including if not especially service providers (law firms, etc.) which push these limits generally aren’t around any longer, unless their businesses are high-margin. Tried and true, folks. The venture capital community tells us that 90% of all startups fail. At least 60% of San Francisco’s leasing activity during the past several years was comprised of startup/tech demand for space. Closer to 90% of WeWork’s demand arose from startups. Young pre-revenue startups, while VC-backed, plunge ahead into leveraged office leases on the strength of their cash, confidence and business plans. But if/when tech companies don’t make their rev-projections and face down-rounds and/or flat growth, watch out below. As tenant-rep brokers, we advise some of these companies and we’re concerned for more than the obvious reasons. These are the very companies, sometimes a bit green in real estate matters, driving up rental rates in the City. We are alarmed at the high levels of rent being paid – and the poor quality of planning and negotiating driving those deals. Startups’ lack of experience is frequently reinforced by the brokers handling their deals: landlord brokers (JLL, CBRE, C&W, Colliers, Newmark among others), whose job it is to drive rental rates UP. Young companies: Surround yourselves with the proper experts: Objective, unconflicted and able to drive lease negotiations to ensure your stability and growth plans during the entire lease term.
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