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Voice of Denver: Three Ways to Avoid the Pitfalls of Office Leasing for Startups


Whitney Hake, a commerical broker with Cassidy Turley, offers some advice for startups looking for office space in Denver's heady real-estate market.
Just as an entrepreneur's goal is to attract investors, my business is to help entrepreneurs find office space. The coworking community in Denver is undeniably growing in popularity, but it is a big jump from having 15 employees at Galvanize, to signing a five-year Lease at a "brick and timber" LoDo building. For starters, office buildings in LoDo are 94 percent leased (tied with Boulder) -- which is the highest occupancy level in metro Denver, creating a landlord's market. In a landlord's market, Tenants can expect limited space options, ridiculous rents ($40 per square foot), less bargaining power, and eventually, new construction.

For a growing startup that is passionate about their ideas and their people, a landlord's market seems like a hassle -- like using a Moleskin for idea storage instead of Trello -- but there is a silver lining to every cloud. A strong commercial real estate market is a key indicator of a robust business economy, and Denver is one of the top 10 strongest office markets in the U.S. in terms of demand for office space, with 576,000 square feet of net absorption in the first quarter of 2013, and rent growth, according to Cassidy Turley Chief Economist Kevin Thorpe. Remember also that Colorado is also one of the top 10 regions to attract venture capital funding in 2013 (PricewaterhouseCoopers MoneyTree Report). These correlations are not coincidence; hence, entrepreneurs and commercial real estate brokers are batting for the same team.
 
No one likes to be behind the eight ball in a business negotiation, so what else do startups need to consider before signing a lease? First and foremost, a tenant's broker is paid by the procuring landlord for their time and expertise. In layman's terms, it does not cost a startup anything to hire a broker to help them through the process of finding and procuring office space. Of course I am partial, but brokers do save entrepreneurs time and money, and brokers have many resources including edgy architects and funky furniture dealers, both critical elements of providing a hip place to work. Besides hiring a commercial real estate broker in a landlord's market, there are three more ways to avoid the pitfalls of office leasing for startups: 
 
1. Understand the inverse relationship between tenant improvements and term
 
Creating a hip place to work costs tenant improvement (TI) dollars, unless you are the luckiest entrepreneur on Earth, and stumble upon the perfect office space "as-is." Landlords are willing to change a space per a tenant's needs up to a certain threshold, because landlords amortize TI over the length of the Term. A standard office space costs $25 to $30 per square foot to build out. Startups seeking exposed ceilings, wide-plank wood floors, and natural touches (like DaVita's indoor gardens) typically design office spaces that cost $50 to $90 per square foot to build out. How can entrepreneurs bridge the gap, and not get stuck holding the bag? Tenants can negotiate a termination option or get independent financing for TI from a third party, like a local bank.
 
2. Verify the technological capacity of older buildings
 
I do not pretend to comprehend bandwidth speed, T1 lines, lit fiber, remote servers, and the like, but I do know that most buildings in LoDo were built between 1880 and 1900. The ballpoint pen was invented in 1888 by John Loud -- enough said.
 
3. Specify your right to assignment and sublease
 
Business is unpredictable, and sometimes ideas go bust. Landlords can restrict the types of companies Tenants can sublease to by creditworthiness, use, or anything else that rubs them the wrong way. The key is to fight for impartial sublease language in a Lease negotiation. On the other hand, if a startup is acquired because their ideas were gold, reserving the right to transfer the Lease obligation to a related entity is equally important.
 
"Tenant improvements, and CAT 5E wires, and subleasing -- oh my!" Denver's office market is rebounding, and now startups need to sign leases and plan for the future with eyes wide open. After all, Denver is the new San Fran, and Boulder is the new Brooklyn.

Whitney Hake joined Cassidy Turley in 2010. Whitney helps companies find office space in Denver by leveraging her relationships with landlords and with her colleagues. Her complete approach to tenant representation includes brokerage services and in-depth market knowledge. Tenants enjoy working with Whitney because of her positive attitude, keen negotiation skills, and attention to detail. She was recognized by DMCAR as the Top Young Broker in Denver in 2012.

Voice of Denver is a biweekly featured post from Denver's entrepreneurs, experts and raconteurs. Contact us if you'd like to stand on our soapbox.
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