Southern California property owners interested in obtaining more tech tenants will notice that there are some major differences between the tech tenant and the traditional office tenant. In fact, even the most experienced property owner will find that a lot of traditional leasing issues take on a new light when dealing with the tech tenant.
With the exception of the mature tech tenant, one major focus is credit enhancement. This is usually in the form of a letter of credit. The startup tenant usually offer letters of credit equaling 12-18 months of rent and emerging tenants usually offer letters of credit equaling 7-8 months of rent. To determine the amount of the letter of credit for emerging tech tenants, consider numerous factors: how close they are to an IPO, a recent completion of an IPO, market capitalization, profit history, length of time in business, etc.
As the size of the letters of credit from tech tenants is often substantial, landlords/property owners should consider requiring that the letter of credit be issued from a short list of specific (and financially stable) banks: Wells Fargo, Bank of America, Chase, etc. Attempt to avoid letters of credit from the investment banking or internet banking divisions. Instead request letters of credit from the main, publicly traded (and rated) entities.
The specific amount of the letter of credit should be listed in the tenant lease. The actual number should be tied to the landlord’s out of pocket costs. As such, reductions should occur at regular (and specified) intervals throughout the lease term as these out of pocket expenses are amortized through the stream of rent revenue. Although, in addition, the letter of credit secures the owners’ financial risk when working with tech tenants so the reductions should occur only when the tenant meets specified financial thresholds that reflect minimal expectations. For instance, positive operating cash flow for a specified number of quarters or a minimum market capitalization rate after IPO.
For additional information on handling similar issues in connection with emerging and mature tech tenants, please get in touch with the experienced business and real estate lawyers at The The Law Office of Retz & Aldover LLP. We can assist you in negotiating a lease that is desirable to your tech tenants and beneficial to your bottom line.