Startups Sharing Space in a Traditional Office Lease
Our startup technology clients often suggest to us that they could share space with another tenant they know or partner with. Sounds like a great idea. There must be some economy of scale in that. Plus, if the partnership serves one specific client, but the two companies remain separate entities, being contiguous to each other sounds like a positive.
It’s never fun talking a client out of an idea they have. But it’s important to share the challenges with that concept and how few times it’s actually accomplished. In a collaborative and disruptive startup scenario, you would think this idea should be accomplished easily.
In a shared space, be it an incubator, accelerator or executive suite, this action is in fact accomplished quite easily. The accelerator or executive suite business assumes the risks of tenants sharing space and of the financial downsides of the sharing tenants. However, in a traditional lease space, one of the two parties needs to assume all those liabilities and issues. That’s where the awkwardness arises.
And if this is about 2 neighboring tenants about to go look for space, there can be other challenges that arise. It can happen successfully. But here are a few challenges to think about before you invest time in this idea:
- If you are 2,000rsf and your neighboring tenant is 2,000rsf, there is no discount in your rate because you combine to 4,000rsf vs. 2,000rsf. A landlord is just looking for someone to fill the space properly. Quantity leveraging and therefore discounting has a bigger effect when you are talking about a sizeable portion of a landlord’s building vacancy.
- So you and your neighbor are about to embark on a search together. You have separate space needs, separate tenant improvement buildout needs and therefore TI costs. Separate decision makers, timing, and maybe separate tenant rep service providers. All of this separateness will add confusion, disagreement, conflicting needs. The two CEO’s might come in at the end of the selection process and cause everyone’s time to be wasted when one CEO says, “I don’t like this space or the deal”.
- Except for cartoons, nobody has ever slipped on a banana peel. But if you have a good real estate attorney representing you, they will be aware of all the liabilities that the 2 parties will assume when they share the space. And putting up a wall to split the 2,000rsf is a cost that wouldn’t have been in the transaction if you both found separate and demised 2,000rsf spaces. TI’s equal larger security deposits, longer terms and so forth.
- The landlord might allow this. But they will either have both parties on the hook for the lease or one of the two. In the latter situation, the one on the lease will sublease to the other tenant. Suppose the lease is for $50/rsf/year, and a three year lease is signed. Suppose one of the tenants has financial problems after 12 months. $50 x 2 year’s x 2,000rsf. The signing party now has a $200K problem.
Now a determined and driven CEO of a young company might say, “We can work around all those things”. But if they think about it they might also say, “Yeah, but why should we bother?”
There are other positives and negatives about neighboring with an allied or neighboring company. But in our experience, most companies pass on this idea. Picking a space, going through an efficient process to lease it, and making sure you aren’t picking up costs and liabilities are some of reasons most companies end up passing on this idea. Inevitably both trying to be in their own space in the same building or in a nearby building is what might be a better idea. Or move to an incubator or shared space where the space vendor takes on the liability and issues.
