Emerging Technology Advisory Group

We put industry-leading tools with real-life application in the hands of our emerging tech clients.

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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Copyright© 2019Cushman&Wakefield.All rights reserved.Nowarrantyor representation, expressor implied, ismade to the accuracyor completenessof the information about the services containedherein, asCushman&Wakefielddoesnotown these services.

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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