The Chinese have a saying: an old horse knows the route. I thought about that last week when a good friend and colleague of mine (let’s call her Jane) asked if I would work with her to sublease her office so her company could relocate. While this sounds like it could be the story of any one of our clients, in her case, unfortunately, it was a deal gone bad that necessitated the move.
Jane’s story goes back a few years, when her small start-up began looking for office space. The company hired a large publicly traded real estate brokerage firm to handle the transaction. They followed the popular belief that a big-name real estate agency is the “safer” route to go. Soon after the exclusive was secured and the papers signed, the task of handling Jane’s lease was handed off to a junior broker.
As time went on, Jane and I continued to talk about how the deal was going. At first, she insisted that she and her company were quite satisfied with the work this broker was doing for them. However, as we kept in touch, Jane began questioning the decision.
A couple of issues kept coming up every time Jane discussed the terms of her lease: the amount of space and the length of the lease. Turns out, they signed a lease for enough space for two technology companies, and the length of the lease was longer than the life span of most technology start-ups.
I explained to her that an inexperienced broker tells the client to lock-in as much space as they think they will need at the lowest rent possible. While this may have been good advice in the past, today’s market changes much faster, especially for technology companies.
The lease Jane signed was for twice as much space as she actually needed. Furthermore, the cancellation clause was basically worthless, since the company cannot opt out until the year before their lease expires. Yes, I explained, she did get a short period of free rent, but that would not make up for the extra she would spend over the course of the lease.
I shared with her that for a technology start-up like hers, flexibility was just as important as the rental rate. Being unsure of what the company’s space requirements would actually be and getting tied down to a very large amount of space could make all the difference in its success.
Fast forward to today, and while Jane’s company has become very successful, it needs less than half the office space it occupies, and still has almost 3 years until the cancellation clause comes into effect. Jane now sees that the deal her young broker made has gone south – way south. Thanks to experience, I could have predicted that long before it was signed.
Jane has retained us to sublease her current office and relocate the company to an amount of space that makes more sense for its needs and her checkbook. The lesson learned? Trust the old horse. Hedge your risks by seeking out expertise when securing your office lease, rather than leaving it to chance.
