Emerging Technology Advisory Group
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LEASE SECURITIZATION FOR A “START-UP” Technology companiesoftenexperience rapidgrowth through investmentbutmay nothave the longstandingbalance sheet a landlord is accustomed tounderwriting with aFortune500 company. How to securitize a lease is especially importantwhen the landlord is spending tensof thousands, ifnothundredsof thousands,ofdollars tobuild your company’snewdream space.As a result, landlords expect somefinancialprotections from the tenant as security.Securitization can come in severaldifferent forms, including a cash securitydeposit, a letter of credit, and apersonalguaranty.
What’sNew inLease Securitization?
LEASE SECURITIZATION FOR A “START-UP” Technology companies often experience rapid growth through investment but may not have the long-standing balance sheet a landlord is accustomed to underwriting with a Fortune 500 company. This will guide you through your Security Deposit options.
WHAT ISSECURITI? A suretybondused tomeet security deposit requirements in a commercial lease, replacing theneed for cashor a letterof credit.Securiti acts like amore traditional insurance vehicle for tenants,but functions like a letterof credit forLandlords.
CashSecurityDeposit This is themost common formof securitization in a lease.A ‘best-case’ securitydeposit is typically equal toone monthof rent and ispaidupfront atLeaseExecution.The landlordholds the securitydeposit throughout the lease term and returns itback to the tenant shortly after expiration,provided the tenant adheres to itsobligations in the lease.The sizeof the securitydepositmay increasedependingon the amountofmoney a landlord invests onTenant Improvements and a tenant’sown creditworthiness. In some cases, a landlordwill ask forup to6 to 12 monthsof rent (ormore) as a securitydeposit.This is challenging for any company, especially a startup,whomay be strapped for cash. For larger securitydeposits,bothCash andother formatsnotedbelow, aBurnDownmaybenegotiatedwhich allows thedeposit amount tobe reducedover time.Provided you remain ingood standing, and arenot in lease default,BurnDownsmaybenegotiated againstmilestones such as:TimeElapsed,ClosingofFutureFunding Rounds,Profitabilityorothermeasures. LetterofCredit Provided theLandlord is amendable, some companiesmayopt to secure aLetterofCredit (LOC), in lieuof cash. In some instances, aLandlordmay require aLetterofCredit. Typically, aLetterofCredit isbest secured from thebankwhere the companydoes themajorityof itsbankingbusiness.AnLOC is typically cash collateralized, meaning that the companywillnotbe able to access the equivalent cash fundswhile theLOC is active.With anLOC, the tenant typicallypays thebank a fee, fees varybybank. While this can varyby legal jurisdiction, an LOCmaybeperceived asprovidingbetterbankruptcyprotection to a landlordbecause a cash securitydeposit is typically consideredpropertyof thedebtor’sbankruptcy estate andmaybe subject toother claimsmade against the estate.
HOWDOES ITWORK?
Pay aSmallAnnualPremium Rates aredeterminedby the resultsof Securiti’sunderwriting
ReplacesYourSecurityDeposit Your landlord is issued a suretybond backedbyChubb Insurance andother A-rated carriers KeepYourCash
Spend yourmoney theway youwant
POTENTIALADVANTAGES Securiti allows you to keep your cash&maximize operationalflexibility • No collateral required • Offbalance sheetfinancingwithno impacton leveragemetrics • No impacton credit capacity so yourbusiness canborrow asneeded
PersonalGuaranty APersonalGuaranty is amoreuncommon solution though itmay come intoplay for early stagebusinesses. Essentially, theownerof a companyputsup theirpersonal assets as collateral should therebe a leasedefault. This is typically a ‘PlanC’option, andnot adesirableposition ifother security vehicles canbe achieved. If signing aPersonalGuaranty,negotiating aBurnDown schedulewillbe especially important.
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Real Estate Business Case
Market
ProjectType
Oakland, CA
REAL ESTATE BUSINESS CASE Gaining consensus and approvals for multi- year projects can be a challenge for rapidly growing businesses. Our intuitive Business Case Approval forms illustrate the thoughtful process we undertake on behalf of clients from inception to execution, providing transparency into local trends and comps, labor markets and financial impacts that speak to executives.
NewLease
Purchase
Renewal
Sublease
ProjectDrivers (HighlightAllThatApply)
MarketExpansion
ExitorDownsizing
NewMarket
Consolidation
KeyObjectives (SelectTopThree)
ReduceOperatingCosts inMarket UpgradeWorkplaceCulture SupportBusinessUnitGrowth ImproveOperationalEfficiencies
AttractandRetainTopTalent
✔
✔
ReduceUnderutilized/SurplusSpace CreateLongTermStability inMarket
✔
✔
✔
✔
OfficeProximitytoCustomers
✔
✔
Notes/Other: TextGoesHere
HeadCountForecasting&SpacePlanning
DesignStandards: X RSF PerEmployee Est.RSFNeed: X to X RSF
50 2018
50 2019
50 2020
50 2021
50 2022
50 Beyond
Notes: TextGoesHere
ExistingObligations AcrossMetroArea Address
Lease Expiry 1/1/18 0/0/00
RSF
Head Count
Seat Count
CurrentAnnual BaseRent
55512 th Street,Oakland,CA 12345Street,City,State
10,000
30 00 00
20 00 00
$1.1M
00 00
00 00
12345Street,City,State
0/0/00
Whileeachmarket anddeal isunique,most commercial realestate leases fall intoone of the formatsnotedbelow. It is critical to understandhow your rent is structured to avoid hidden feeswhenbudgeting for your total annual realestateobligation.
OPERATING EXPENSES: What’s Included inYour BaseRent?
TypicalRentStructures
OPERATING EXPENSES: WHAT’S INCLUDED IN YOUR BASE RENT? While each market is unique, most commercial real estate leases fall into one of four typical rent structures. It is critical to understand how your rent is structured to avoid hidden fees when budgeting for your total annual real estate obligation.
FullServiceGross
IndustrialGross
ModifiedGross
TripleNet
Most common structure forU.S.office leases.Base rent includes tax, insurance, utilities, in-suite janitorial,
Base rent excludesutilities and in-suite janitorial. While this variesby market,$0.40/SFper month is a reasonable estimate to convert IG leases to aFSG equivalent.
Structure can varybut typically excludesutilities, in-suite janitorial, andCAM.
Base rentonly; tenant responsible for tax, insurance,utilities, in-suite janitorial, andCAM.
andCommonArea Maintenance (CAM).
Internet/Phone and related cabling are typically a tenantexpense andexcluded in rent structures,with the exceptionofmost co-working facilities andexecutive suites.
OperatingExpenses&BaseYearExplained FullServiceLease
BaseYear: • Established infirst yearofoccupancy • No additionalOperatingExpense (OpEx)/ additionalRentdue
Example: Tenant is responsible for costdelta from current yearoverBaseYear. TotalBuildingOpEx inBase Year $1M
YEAR 1
TotalBuildingOpEx in CurrentYear
$1.1M
YearTwo: • Tenant assumespro-rata shareof totalbuilding OpEx increaseoverBaseYear • Ownerprotected from excessive annualOpEx increases • No additionalOpEx rentdue in the eventof second yearOpEx reduction
YEAR 2
Delta fromCurrentYearover BaseYear
$100K
YourPro-rataShareofBuilding OpEx (PremisesSF/BuildingRSF)
3.55%
YourAdditionalRent inCurrent Year:$3,550 annuallyor$296/mo
$3,550
AnnualBaseRentEscalation
Your rentwill likelyescalateeach year. How itescalates shouldbenegotiated and then specified in your lease.
3% InmanyU.S.markets, office rents increaseby
per yearor are CPI-based.
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