Market Analysis for a Startup's Office Lease: The Tenant's Version, Not the Investor's

The investor's analysis and the tenant's, side by side

• What it values. Investor: a building. Tenant: the cost of occupying part of one.
• What it measures. Investor: income, occupancy and resale. Tenant: effective rent after concessions, the number of real choices at one size, and the time left to decide.
• What it produces. Investor: a price to pay for the asset. Tenant: a range to negotiate within, and a term to commit to.

Both read one market report from opposite sides of the table. If the guide in front of you talks about returns, it was written for the other side.

The total commitment, added up

A lease is rent times area times term, and the product is larger than the monthly figure suggests. As a worked example, say 8,000 square feet at $70 a foot on a five-year term: $560,000 a year and $2.8 million across the term, before anything else.

Then add what comes with it: electricity at roughly $2 to $4 per square foot per year, escalations of roughly 2.5 to 3 percent a year on the rent, and the security deposit or letter of credit, which ties up cash for the term. That total, not the rent per square foot, is what belongs in the model your board sees.

The stress test: the round slips, or hiring stalls

Run the lease against two bad cases. In the first, the next round arrives six months late. In the second, hiring stops at the present headcount. In each, ask how many months of rent the company can carry and what it could do with the space.

Three protections answer that, and each has a price to weigh while there is still time to negotiate.

• The right to sublet or assign, so an unused floor can be passed on. Subleasing recovers part of the rent; it does not end your obligation.
• A termination option, which lets you leave at a set point for a set payment.
• A shorter term, which costs more per square foot and limits the exposure.

These are lease clauses, so have your attorney confirm what each one actually allows. How to leave a lease early compares every exit.

Sizing for the midpoint between this round and the next

An office sized for the present team is usually too small within a year. One sized for the whole hiring plan sits half empty while you pay for all of it. Aim between the two. A team of 25 with 65 in its plan sizes for about 45, which at 175 square feet a person is 7,875 square feet, and negotiates expansion rights for the remainder.

The block below shows floors for a team of about 45. From Series A to Series B covers the terms that go with that size.

When a startup should rerun the analysis

A tenant's analysis has a shelf life. Rerun it before each option date and well before a renewal window opens, because the readings that set your leverage change by the quarter. The current ones are on the market report, each with its date.