At Stock Legal, we advise clients through the various stages of business growth. While proper corporate structure is the key component to this growth, real estate needs are also important. This blog post discusses the ways in which real estate needs evolve with an emerging company.
At the formation of a company, one or more founders are likely “moonlighting” and running the company while maintaining a day job. During this time, a home office is generally sufficient and when it is not, hourly co-working spaces can supplement the need for a physical location. The arrangement with the operator/landlord of a co-working space is generally pretty relaxed but you might sign a standard user agreement that is not subject to negotiation.
As the company initially grows, the founders may shift to full-time status or hire employees, at which point some dedicated space may be needed. At this stage, the amount of space needed is often smaller than what traditional commercial landlords offer. In addition, rather than entering into a lease with a several year term and operating cost obligations, it may make more sense to utilize dedicated space at a co-working location, which provides monthly memberships. The benefit of this arrangement is certainty of cost and ability to terminate while also having access to amenities. Similar to the hourly co-working space, the arrangement with the operator/landlord is pretty relaxed and will require a standard user agreement.
While the company continues to grow and needs more space for operations, it will make sense at some point for the company to seek its own separate space in a traditional commercial building. This can look very different depending on the type of building the space is in, the number of tenants in the building, whether the space is directly accessible from the exterior of the building or requires use of hallways and elevators, whether there is just a building or a building and exterior areas such as parking lots, and whether all of the areas to be utilized, such as restrooms and break rooms, are contained in the space that is leased. Many landlords will use a standard form of lease for all of their properties and the lease may not properly address the differences in the facilities, which is important for the tenant. Generally, at this stage, the company is looking for a lower rental rate and the landlord will not need to do significant work to prepare the space – maybe replacing some flooring and repainting walls. The company is probably not going to enter into a long-term lease unless there are expansion rights. Even without a long, complex lease or significant landlord work, there is still room for tenant to negotiate some key liability-creating provisions that we see routinely in landlord-friendly leases. At the very least, a review of these key provisions (an outline of which is coming in a future blog post) should be done by a real estate attorney.
About 3-6 months prior to the expiration of the initial lease term for the company’s first space, the company should analyze whether it wants to stay in the existing location, if there is room to expand the existing space, or if the company wants to move. If the company needs significantly more space, it will probably end up moving and entering into a longer-term lease in a space that has a higher rental rate. The company may be leasing a large portion of the building and asking the landlord to complete substantial improvements. While it was important to utilize a real estate attorney for the initial lease, it is even more important now and the company should use an attorney who has substantial leasing experience. Not only will the same landlord-friendly provisions of the initial lease be in the landlord’s standard lease form, the lease will likely include other provisions that are common in long-term leases for larger spaces and you will want to ensure the improvements the landlord is making are properly addressed so that you aren’t taking unknown cost risks.
At some point, the company may decide to acquire an existing building or construct a new building rather than lease space. Acquisition and construction of real estate create a separate set of legal issues that will be addressed in a future blog post!
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