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I’ve read a lot here about how to hack a funding term sheet, or how to navigate the confusing terms and conditions in the legal contracts startup founders must sign. But what about rent? It’s probably one of your biggest operating costs, and in the current […]

I’ve read a lot here about how to hack a funding term sheet, or how to navigate the confusing terms and conditions in the legal contracts startup founders must sign. But what about rent? It’s probably one of your biggest operating costs, and in the current spirit of cost-cutting, there are several ways to squeeze cash out of your commercial real estate agreement, too. I started Rofo to help entrepreneurs do this, but I’ve shared my top “lease agreement hacks” here. They will save you plenty of headaches and money — and possibly even help you generate new revenue streams for your startup.1. Don’t pay for space you can’t use. All square feet are not created equal. Have the landlord pay for a “space plan” to determine your “load factor.” (Also sometimes referred to as a “loss factor.”) This is the ratio between the non-usable and usable square feet that your rent will cover. Examples of non-usable square feet would be building common areas, such as corridors, or a lobby. Typically, office space load factors are in the range of 20 percent to 30 percent, meaning for 1,000 square feet of usable office space, you might pay for 1,200 square feet. Landlords like high load factors because they pad the bottom line. In a market like this, however, they need to secure tenants, so you have more leverage than normal. Negotiate the load factor down to at least 15 percent.

2. Beware of free rent. Structure the rent so that you phase into the space. Pay for half the space during the first six months of the lease, the full space at seven months. If you get “three months free,” be sure the landlord has not extended your lease term on the back end, to 39 months from 36, a common tactic.

3. Avoid standard improvement allowances.
If the rental rate being offered includes a standard improvement allowance and you do not want or need to make improvements, then amortize this allowance out of your rent.

4. Cap operating expenses.
In most office buildings, operating expenses are included in your rent. They increase yearly, but you can put a cap on operating expense increases. A 5 percent cap is reasonable. It protects you from spikes in utility costs or increased property taxes if the building is reassessed. Also, retain the right to audit operating expenses.

5. Negotiate your renewal option in advance.
Landlords like to include a commitment to renew up to one year before your lease is up. This forces you to address your real estate needs long before you’re ready. Negotiate the renewal down to six months by agreeing to a renewal rate equal to fair market value. Renewal rates are re-negotiated at re-signing anyway. The important thing is to move back the option deadline.

6. Negotiate holdover rent penalty in advance.
Holdover rent occurs after your lease term has expired and, for whatever reason, you’re unable to vacate the space on time (usually when your pending move is delayed). Landlords will want double rent as a holdover. Negotiate this down to 125 percent of current rent.

7. Consider a buildout.
If a landlord offers an allowance to build out a space to your specs, take the time to get a construction bid. Make the landlord pay for the estimate. Be sure the allowance can be used for architects, construction management, your moving expenses and data wiring. Most landlords draw the line at furniture and fixtures, but ask for it.

8. Demand right to sublease.
Get it in the term sheet that you can sublease your space to anyone you wish for any amount of rent, subject to an approved use. Also, be certain that the landlord cannot impose any fees to your sublease. A common fee to avoid is a “document review fee” to cover the landlord’s attorney bill. Also, insist that the landlord turnaround sublease approvals quickly, within three to five business days. The last thing you want is to lose a subtenant to administrative delays.

Alan Bernier is Co-Founder and CEO of www.Rofo.com, a real estate resource for startups.

By Alan Bernier

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  1. Fabulous article. Another tip you might offer is the use of a tenant representative. We’ve used a tenant representative on several lease negotiations, with excellent results. The tenant representative typically takes a percentage of the value of the lease as payment, so the service is free to the tenant.

    For us, when we only negotiate a lease every 3/5 years, we’re not up-to-date on the latest trends and contract changes, while our tenant rep was.

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  2. [...] financial commitment  in your lease agreement.  I recently had the opportunity to contribute an article to Gigaom highlighting 8 of them.  It ranges from capping operating expenses to obtaining flexible [...]

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  3. Regarding #2 Beware of free rent, there’s also another negotiation tactic that, during normal times, landlords will rarely agree to, but during tougher economic times it may prove to be a good negotiating point. Instead of 3 months of free rent, ask for that discount to be amortized throughout the monthly payments. Then when the lease is up, you’ve got a lower base to negotiate from.

    Another tactic is to request more months of free rent if the landlord will not agree to the above.

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