Advising Technology Companies in Office Leasing
By Grace S. Yang and Michael C. Polentz at law firm Manatt, Phelps & Phillips, LLP
Indoor slides, freshly made meals and bowling alleys are just a few innovative and personalized tenant improvements technology companies install to woo new employees. These creative tech environments combined with specialized technology and security concerns create unique challenges when negotiating office leases for technology companies.
Notwithstanding the increasingly tight office rental market in major metropolitan areas like San Francisco, Seattle, Boston, New York, and Silicon Valley, tech-oriented companies are competing for space against traditional office tenants and winning. The high-tech sector, now more than ever, has leverage to push for landlord concessions during lease negotiations, which tend to be on a short fuse to meet the fast-paced demands of the tenants.
Below are five critical factors that tech-oriented companies should consider when negotiating new space:
1. Transit Oriented Development
Easy access to transportation and amenities are critical to satisfy the desire of the technology industry’s young workforce to live, work and play in the same general vicinity. The ability to walk and bike to work accompanied by bike lockers and showers at the office is a common ask for employees. If that’s not possible, tenants may insist on shuttle services provided by the Landlord with wireless internet.
2. Creative, Non-Conventional Space
The competition for talent is enormous throughout the United States, and technology companies are going to great lengths to create fun and innovative work environments in order to attract and retain their skilled workforce. This is particularly important for employees who will be spending a considerable amount of time in the office. Tenants look for big windows, high ceilings, concrete floors and lots of open space. An office space layout conducive to collaboration and creativity is a top priority for technology tenants. Large tenants are often willing to pay a higher allocation (or foot the bill entirely) for unique amenities in order to build out the space inclusive of some of those non-traditional improvements that are not typical of office space (such as the indoor slide at a prominent Silicon Valley tech company’s corporate office). Negotiating restoration terms upon expiration of the lease, however, can often be contentious because such improvements may not be desired by future office tenants and expensive to remove.
3. State of the Art Fiber and Telecommunications Infrastructure
Finding a space that is compatible with its telecommunication needs is crucial to a technology company. A tenant may need a certain number of fibers connecting directly to the premises, use of riser space to run telecommunication lines or cables, use of the roof for satellite dishes and/or a backup power generator. The technology tenant will want to assure that adequate bandwidth is available at the premises at all times. The landlord must ensure that the base building systems have the proper connections and at times be willing to allow tech tenants to install private and secure data lines throughout a building.
4. Security and Access
Safeguarding intellectual property and proprietary information is a top priority for all technology companies. Tech tenants expect (and will demand) sophisticated security systems that allow 24/7 access to the premises, limited or restricted landlord access and strict confidentiality provisions in their leases. Any entry by the landlord (other than in emergency situations) will likely require advance notice, and the tenant will want the landlord’s representative to be accompanied by a tenant representative at all times. In most instances, any third party accessing the space with the landlord will also be subject to a separate confidentiality agreement. Many technology companies also require “secured areas” that may only be accessed with a separate card access system and will be inaccessible to the landlord except in the case of an emergency. Landlords must develop proper security and access plans to ensure that a tenant’s security needs are met throughout the term of the lease.
Rapid growth is always a concern for any technology tenant today. A more established tech tenant will expect and require as critical deal points: liberal expansion rights, lengthy option terms, lease termination provisions and rights of first refusal that provide the tenant with first access to other space that becomes available in the current building or any other building in the same geographic vicinity owned by the landlord. A large technology tenant will also demand maximum flexibility to assign and sublease its space due to the rapid pace of growth and/or mergers and acquisitions.
This is truly an exciting period for landlords and technology tenants given the explosive growth of the tech-sector. Technology tenants are changing how office space is designed, constructed and used. In order to attract these highly coveted tenants, landlords will need to learn to adapt in the same way their tenants do.
Grace S. Yang is a Senior Associate in the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips, LLP, located in the San Francisco office and Michael C. Polentz is Co-Chair of the Real Estate & Land Use Practice Group at Manatt, Phelps & Phillips, LLP, located in the Palo Alto office.
Photo courtesy of Chad Ziemendorf