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LEASE SECURITIZATION FOR A “START-UP” Technology companies often experience rapid growth through investment but may not have the longstanding balance sheet a landlord is accustomed to underwriting with a Fortune 500 company. How to securitize a lease is especially important when the landlord is spending tens of thousands, if not hundreds of thousands, of dollars to build your company’s new dream space. As a result, landlords expect some financial protections from the tenant as security. Securitization can come in several different forms, including a cash security deposit, a letter of credit, and a personal guaranty.

What’s New in Lease 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 IS SECURITI? A surety bond used to meet security deposit requirements in a commercial lease, replacing the need for cash or a letter of credit. Securiti acts like a more traditional insurance vehicle for tenants, but functions like a letter of credit for Landlords.

Cash Security Deposit This is the most common form of securitization in a lease. A ‘best-case’ security deposit is typically equal to one month of rent and is paid upfront at Lease Execution. The landlord holds the security deposit throughout the lease term and returns it back to the tenant shortly after expiration, provided the tenant adheres to its obligations in the lease. The size of the security deposit may increase depending on the amount of money a landlord invests on Tenant Improvements and a tenant’s own credit worthiness. In some cases, a landlord will ask for up to 6 to 12 months of rent (or more) as a security deposit. This is challenging for any company, especially a startup, who may be strapped for cash. For larger security deposits, both Cash and other formats noted below, a Burn Down may be negotiated which allows the deposit amount to be reduced over time. Provided you remain in good standing, and are not in lease default, Burn Downs may be negotiated against milestones such as: Time Elapsed, Closing of Future Funding Rounds, Profitability or other measures. Letter of Credit Provided the Landlord is amendable, some companies may opt to secure a Letter of Credit (LOC), in lieu of cash. In some instances, a Landlord may require a Letter of Credit. Typically, a Letter of Credit is best secured from the bank where the company does the majority of its banking business. An LOC is typically cash collateralized, meaning that the company will not be able to access the equivalent cash funds while the LOC is active. With an LOC, the tenant typically pays the bank a fee, fees vary by bank. While this can vary by legal jurisdiction, an LOC may be perceived as providing better bankruptcy protection to a landlord because a cash security deposit is typically considered property of the debtor’s bankruptcy estate and may be subject to other claims made against the estate.

HOW DOES IT WORK?

Pay a Small Annual Premium Rates are determined by the results of Securiti’s underwriting

Replaces Your Security Deposit Your landlord is issued a surety bond backed by Chubb Insurance and other A-rated carriers Keep Your Cash

Spend your money the way you want

POTENTIAL ADVANTAGES Securiti allows you to keep your cash & maximize operational flexibility • No collateral required • Off balance sheet financing with no impact on leverage metrics • No impact on credit capacity so your business can borrow as needed

Personal Guaranty A Personal Guaranty is a more uncommon solution though it may come into play for early stage businesses. Essentially, the owner of a company puts up their personal assets as collateral should there be a lease default. This is typically a ‘Plan C’ option, and not a desirable position if other security vehicles can be achieved. If signing a Personal Guaranty, negotiating a Burn Down schedule will be especially important.

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Copyright © 2019 Cushman & Wakefield. All rights reserved. No warranty or representation, express or implied, is made to the accuracy or completeness of the information about the services contained herein, as Cushman & Wakefield does not own these services.

Real Estate Business Case

Market

Project Type

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.

New Lease

Purchase

Renewal

Sublease

Project Drivers (Highlight All That Apply)

Market Expansion

Exit or Downsizing

New Market

Consolidation

Key Objectives (Select Top Three)

Reduce Operating Costs in Market Upgrade Workplace Culture Support Business Unit Growth Improve Operational Efficiencies

Attract and Retain Top Talent

✔

✔

Reduce Underutilized/Surplus Space Create Long Term Stability in Market

✔

✔

✔

✔

Office Proximity to Customers

✔

✔

Notes/Other: Text Goes Here

Head Count Forecasting & Space Planning

Design Standards: X RSF Per Employee Est. RSF Need: X to X RSF

50 2018

50 2019

50 2020

50 2021

50 2022

50 Beyond

Notes: Text Goes Here

Existing Obligations Across Metro Area Address

Lease Expiry 1/1/18 0/0/00

RSF

Head Count

Seat Count

Current Annual Base Rent

555 12 th Street, Oakland, CA 12345 Street, City, State

10,000

30 00 00

20 00 00

$1.1M

00 00

00 00

12345 Street, City, State

0/0/00

While each market and deal is unique, most commercial real estate leases fall into one of the formats noted below. It is critical to understand how your rent is structured to avoid hidden fees when budgeting for your total annual real estate obligation.

OPERATING EXPENSES: What’s Included in Your Base Rent?

Typical Rent Structures

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.

Full Service Gross

Industrial Gross

Modified Gross

Triple Net

Most common structure for U.S. office leases. Base rent includes tax, insurance, utilities, in-suite janitorial,

Base rent excludes utilities and in-suite janitorial. While this varies by market, $0.40/SF per month is a reasonable estimate to convert IG leases to a FSG equivalent.

Structure can vary but typically excludes utilities, in-suite janitorial, and CAM.

Base rent only; tenant responsible for tax, insurance, utilities, in-suite janitorial, and CAM.

and Common Area Maintenance (CAM).

Internet/Phone and related cabling are typically a tenant expense and excluded in rent structures, with the exception of most co-working facilities and executive suites.

Operating Expenses & Base Year Explained Full Service Lease

Base Year: • Established in first year of occupancy • No additional Operating Expense (OpEx)/ additional Rent due

Example: Tenant is responsible for cost delta from current year over Base Year. Total Building OpEx in Base Year $1M

YEAR 1

Total Building OpEx in Current Year

$1.1M

Year Two: • Tenant assumes pro-rata share of total building OpEx increase over Base Year • Owner protected from excessive annual OpEx increases • No additional OpEx rent due in the event of second year OpEx reduction

YEAR 2

Delta from Current Year over Base Year

$100K

Your Pro-rata Share of Building OpEx (Premises SF/Building RSF)

3.55%

Your Additional Rent in Current Year: $3,550 annually or $296/mo

$3,550

Annual Base Rent Escalation

Your rent will likely escalate each year. How it escalates should be negotiated and then specified in your lease.

3% In many U.S. markets, office rents increase by

per year or are CPI-based.

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