This guest post is by Nathan Smith, a commercial real estate advisor and owner of Austin Tenant Advisors. He specializes in helping startups find, lease and/or purchase office space in Austin, Tx. From site selection to negotiation to occupancy he advises them on the best locations, new lease and lease renewal negotiations, relocations and expansions, etc. Outside the office Nathan enjoys spending time with his wife and two children in Bee Cave, Tx and in running, biking, and racing in local triathlons and running events.
One of the biggest mistakes startups make when looking to lease office space is not being financially prepared. Just like a bank, Landlords want to be reassured that you qualify financially before leasing you office space, especially in hot markets like Austin, Tx. Gathering this info and positioning your company to look financially strong takes more time than you think so make sure you do this well in advance of beginning the office space search process. By doing this you will not only gain the Landlord’s confidence but you will also increase your chances of getting office lease concessions (tenant improvements, rent abatements, etc.)
Landlords will be making an upfront investment in your tenancy in the form of time, resources, tenant improvements and other lease concessions so it’s important for you to prove to them that you have the financial ability & stability to occupy and pay rent on your future office space.
Proving that your startup company is financially qualified takes more than a great credit score, 401k, expensive house, or great business idea.
- If you are a startup that has been in business for a few years Landlords like to see current profit/loss statements, positive cash flows, balance sheets, and other sources of financing/funding. The landlord’s perception of these financial documents will dictate what form(s) of lease securitization they will need (e.g. security deposit, letter of credit (LOC), guaranty, etc). The amount of the securitization will depend on your financial strength, the length of lease term, lease rate, tenant improvement costs, lease commissions, etc.)
- If you are a newer entity with no track record or you’re an existing startup with weak financials Landlord’s will want to see 2-3 years of personal tax returns or a personal financial statement from the person signing the lease. Depending on the Landlord’s perception of those tax returns they may require that you personally guarantee the lease, provide a larger security deposit, or provide a letter of credit (LOC) that covers the landlords up front out of pocket costs to do the deal (e.g. tenant improvement costs, lease commissions, re-leasing penalty, etc.).
Before you begin looking at potential office spaces make sure your financials are in order and have them readily available to show Landlords. It would be wise to have your business plan and pro-forma showing current and future financial projections readily available as well.
Be prepared to be required to sign a personal guarantee, provide a larger security deposit, or set up a letter of credit (LOC), otherwise the Landlord’s may not be willing to lease you space.
You only get one chance to make an impression! The more prepared you are the better your chances of proving your ability to pay rent, and in getting those much needed lease concessions.