Make sure your office space comes with no painful future costs.
Photo courtesy of Christopher Michel.
I recently visited with Gabe Chao, Managing Director of Cornish and Carey Newmark. Gabe is former 13-year real estate attorney who represented some of the largest companies in the world, nowadays he specializes in working with startups on their real estate needs. Prior to Burkland Associates when I worked at Autodesk, the company’s real estate needs were part of my role, so Gabe and I discovered we had many shared experiences when it comes to helping startups with strategic advice.
A year or so ago, Gabe wrote an insightful article giving sound advice to startups when it comes to real estate decisions. Many times, these decisions feel as minor decisions with no long-term implications, when in fact, sometimes they can profoundly affect future choices for your business. I found his article useful and relevant for the type of startups with whom Burkland Associates works.
Specifically, Gabe focuses on five things to consider when management teams make decisions about office space: exit strategy, alterations, operating expense passthroughs, real estate taxes and flexibility.
Here are these five issues expanded. I hope you find this strategic real estate advice from Gabe useful.
Arguably the most important issue for a startup to address is the exit strategy (most often through a sale of the company). During my legal career, of the thousands of term sheets that came across my desk, not once was this issue adequately addressed. Typically, the issue gets glossed over or left out of the term sheet entirely. This (i) results in many leases not including adequate protections for the tenant, (ii) ends up costing the tenant more in legal fees (even if the attorney understands how to negotiate for these protections, and I have run across many that don’t), and (iii) could result in a landlord holding up a multi-million (or billion) dollar deal).
This is the proverbial tail wagging the dog. I would estimate that 99% of tenants and their representatives don’t consider this issue, and simply having language to throw into a proposal doesn’t solve the problem. Understanding how to request the adequate protection in the term sheet (and ultimately the lease) is most important. In my personal experience, sophisticated owners (especially institutional owners) have never refused this request once they understand the business and legal reasoning.
One way that landlords like to “handcuff” tenants to limit tenant leverage during lease renewal negotiations is to include onerous provisions in their leases requiring the tenant to restore their space to a specified condition. Landlords know that if their lease agreements make it extremely cost prohibitive for a tenant to move, even if lower rent alternatives exist, then the tenant’s threat of leaving (the tenant’s only real leverage) is diminished. By understanding how to navigate this issue, I was recently able to help a client save over $1.5 Million immediately by having the landlord agree to remove the tenant’s restoration obligations out of an existing lease during lease renewal negotiations. This was not a potential savings, but quantifiable immediate savings.
Operating Expense Passthroughs
Tenants typically focus on the base rent figures because those figures are easy to compare against other options. However, tenants have additional payment obligations other than simply the base rent, and landlords know how to manipulate those obligations in their form leases. The parties typically wait for lease negotiations to address these issues because (i) brokers typically don’t understand how to deconstruct the standard lease provisions to address these protections for the tenant, and (ii) it takes more time to push for these during the term sheet phase (when brokers simply want to close and move on after identifying the space).
However, by waiting until the lease document phase rather than negotiating during the term sheet phase, the tenant loses leverage and it also will cost the tenant much more for the attorneys to negotiate rather than addressing these issues in the term sheet phase. For any sizable transaction, I negotiate these tenant protections directly into the term sheet to maximize leverage and save the client thousands in legal fees; but most importantly, achieving the OpEx protections ultimately can save a company hundreds of thousands of dollars over the term of the lease.
Real Estate Taxes
In a typical “full service” office lease with a base tax year, landlords can achieve a windfall and “double dip” from the tenant if the landlord successfully appeals real estate taxes during the base tax year. Landlord enjoys the tax reimbursement, but with a lower tax base year (and tenant paying the increase in taxes above the base tax year amount), it would be the tenant who ends up paying significantly more over the term of the lease. Most brokers don’t know how to address this issue in the term sheet.
I have seen some attempt to address this issue, but when pressed for an explanation from the landlord during negotiations, cannot articulate the rationale and end up looking silly trying to ask for this (and end up not getting it for the tenant). I not only understand how to address this issue, but have even had a client’s real estate attorney (a partner at one of the largest law firms in the world) ask me to actually draft the protective language during lease negotiations because she felt I had a better understanding.
A main concern for a startup is business uncertainty. The company does not know where it will be in 6 years, let alone 6 months, but landlords are trying to lock in tenants for a longer term while the market experiences historically high rental rates. Brokers rarely try to push for a shorter term or consider other alternatives because brokers get compensated more for longer terms and more square footage. Sadly, this is a pervasive practice in the industry. I help clients exhaust efforts for more flexible lease terms, even if it means lower compensation in the short term. For example, in one recent transaction, my client’s previous broker advised that anything shorter than a 5-year term would be nearly impossible in the current real estate climate. However, I was able to help my tenant client negotiate a short term lease, and also a “rent phase-in” so that the tenant paid rent calculated based on a lower rentable area during the first 18 months of the lease term, which would only later increase and be calculated based on the actual larger square footage to allow the tenant to grow into the space. This allowed the company to free up valuable capital during its growth phase, rather than having it tied up in rent.
“There’s nothing to fear but fear itself.” – Franklin D. Roosevelt
Photo courtesy of Christopher Michel.
Recently, our team read a fantastic book – Getting Naked, by Patrick Lencioni – that explores the journey from superficiality to deep empathy that amazing human relationships usually take. Amazing consulting relationships, being just one kind of human relationships, also follow this journey, starting as professional engagements and becoming meaningful relationships of loyalty and trust. The book explores why.
It turns out that consulting relationships that stay superficial in the name of looking “professional,” never move a consultant from a vendor to a trusted partner. This is a book that goes deep into the simple but powerful insight that growing a relationship – any relationship – is about becoming vulnerable. For a consultant, this openness results in a better understanding of the “whole,” enabling us to understand their business better by understanding their motivations, their strengths, their weaknesses, in short, their true needs. It is about a humble approach to consulting where you open up completely and show your human side. It is in this zone of humility and openness that loyal and sticky relationships can develop. The book is a call to open up by facing three fears that prevent us from building deep relationships.
The concept is surprisingly unsurprising: professional relationships are human relationships. There is no way around it. Like all lasting human relationships, professional ones also move from the superficial to the deep, as those involved open up to fearlessly expose their humanity with all the good and the bad that comes with it. It is this fearlessness that is the basis for the insight of this great little book.
Lencioni brings home this need for fearlessness that turns into trust and loyalty on both sides by exploring the three specific fears that prevent consultants from becoming trusted partners of their clients.
Like in dating, if you’re afraid of losing your partner, you will behave in a way that actually gets you there. Your relationship will stay superficial because you will avoid the “difficult” conversations that make a relationship more intimate. In regards to consulting relationships, Lencioni puts it brilliantly: “ironically, though, this fear of losing the business actually hurts our ability to keep and increase the business, because it causes us to avoid dealing with the difficult things that engender greater loyalty and trust with the people we’re trying to serve.” This happens, he explains, because clients can “smell” that fear of losing their business makes us put our interest in keeping it before their interest in being helped.
This year marks the 50th anniversary of one of the most acclaimed movies of all time: 2001: A Space Odyssey. In it, pride causes HAL, an AI-enabled computer, to assume it is infallible, pushing it to eliminate all but one of the crew members, derailing the mission it was trying to maintain intact. It is pride, Lencioni writes, that keeps consultants from asking questions that may make them look ignorant or stupid. This leads to the second fatal fear in his book: the fear of being embarrassed. Nobody can look smart 24/7 in a deep relationship, vulnerability, which builds empathy, needs to go through the trial and error of making mistakes, sharing stupid ideas, and facing errors. In my experience, it is how one reacts to errors that shows a client what one is made of. A client will fire a consultant who tries to save face before firing one who owns their mistakes and problem-solves to correct them. As in personal relationships, wanting to be seen as smart is a turnoff. Smart people don’t yearn to be seen as so.
This final fear that prevents consulting relationships from taking their journey to loyalty and trust is also based on pride, but on a different kind. Lencioni writes that the “fear of feeling inferior is not about our intellectual pride, but rather about preserving our sense of importance and social standing relative to a client.” Interestingly, he reminds us that the word “service” comes from the same root as “servant,” and outstanding consultants who build loyal relationships overcome their need to feel important by serving, or in the author’s words, doing “whatever a client needs them to do to help them improve, even if that calls for the service provider to be overlooked or temporary looked down on.”
At the end of his insightful book about loyal relationships, Lencioni provides a practical list of actions that outstanding consultants can take to overcome the three fears and build a deeper relationship that grows roots. These practical actions are the following:
To fight your Fear of Losing the Business:
To fight your Fear of Being Embarrassed:
To fight your Fear of Feeling Inferior
At the end of the day, Lencioni reminds us “we all have weaknesses, and if we try to cover them up, we’ll probably put ourselves in a situation of having to do more and more of what we aren’t good at.” Nurturing trust and loyalty in a consulting relationship requires us to put down our egos so that we become vulnerable by showing – not hiding – our weaknesses, by showing our humanity to ultimately generate the empathy we need for our relationship to go deep.
Become fearlessly human in your professional life! Realize that you can’t conveniently put your humanity in a drawer in the name of a “professional” relationship, because at the end of the day, all relationships are human.
Increase your odds of winning by setting smart goals for the new year.
KPIs, MBOs, OKRs. You’ve probably heard of these and several more ways to set your company’s objectives. With so many options to get to the same goal, it is no wonder why by the middle of the year, objectives, as originally set, often go the same way as New Year’s resolutions. The problem often lies on the goal development: sometimes goals are crafted at the leadership level and not effectively shared and refined with the rest of the organization. Also, there’s a tendency to focus on numbers without regards to the operational goals that drive these numbers, for example, growing revenue by x% (a key business goal) may require sales restructuring (an operational goal).
OKR: a framework that may work for you
Although there is no magic formula for setting goals and sticking to them, I’ve found that the framework provided by OKRs (Objectives and Key Results) can set teams on the right track when it comes to goal setting. Before going into details, diving into the Wikipedia definition of OKR can be useful:
“[OKR’s] main goal is to define company and team “objectives” along with the measurable “key results” that define achievement of each objective. One OKR book defines OKR as “a critical thinking framework and ongoing discipline that seeks to ensure employees work together, focusing their efforts to make measurable contributions.”
The key term to focus on is “to ensure employees work together.” The OKR framework is good at steering top management to align their goals with those actually in charge of driving the business towards them throughout the year. This means that as you think of OKRs, you need to make sure you’re delivering on the key initiatives the company needs to get done to get to where it needs to be. I find it useful to think of a “value chain” that will support the OKRs with specific initiatives from your team.
Some guidelines about setting objectives and key results
Setting goals and key results together – which is basically what OKRs are all about – can help you create the discipline to have the right internal conversations initially and throughout the year to ensure the team stays focused.
Here are three easy ways to get you going:
The benefits of using a framework like OKRs go beyond just ensuring you develop objectives and meet them. Crafting objectives and key results together disciplines thinking at all levels, communicates the company’s vision accurately, establishes a measurement culture, focuses the effort of your team and enables employee engagement.
Are you ready for OKRs?
Goal setting using OKRs is valuable regardless of your size. As stated before, creating a culture around setting measurable objectives is always a good thing. Think in terms of developing OKRs around functional or product teams in addition to the executive team.
No matter your size, aligning goals with the specific results needed to get there will only result in an organization where everyone – from the CEO to the most recent hire – point their efforts in the same direction.
Your CFO: A co-pilot you often need to rely on for handling a healthy HR process.
Photo courtesy of Christopher Michel.
Sometimes in a startup, your CFO will need to step up to handle non-financial duties and act as an informal COO. The reasons can range from fast growth to a key VP leaving to the need to establish processes, or even to simply not having the team/bandwidth to complete the needed work. Because of his or her familiarity with the daily pulse of the company, the CFO is often in the best position to assist, especially in matters regarding HR.
Several of us at Burkland Associates have been required to take over the HR processes of our clients for some periods of time. This can look like a trial by fire for a CFO, so we created a framework that helps us evaluate the company’s HR options and choose the best path. Limited resources are usually the norm, and the priorities often start with ensuring you can secure payroll and benefits, closely followed by the need to find an HR partner who can handle the recurring process of compensation and give you strategic HR cover.
There’s no quick fix for a function as central to success as HR, which touches everybody in your company. However, you need to find a balance between the urgent and the important so that the path takes you to a well-functioning HR practice. Here are some guidelines you may find useful as you evaluate partners, whether it be your part-time CFO, a 3rd party resource, or a combination of both, who can help you run HR without a glitch in the short and long run.
The ability to set and run compensation & benefits must be at the top of the list when you are evaluating an HR partner/service provider. The five things we look for are: a) does the partner have an employee help desk for all HR/benefits/payroll questions & issues? b) Can they create employee communication materials? c) Will they help you set compensation levels and stock option programs with relevant benchmark data? d) Can they support you regarding compensation and benefits compliance? and d) As you grow, do they have the capacity to organize, coordinate, and run open enrollment meetings and health fairs for your people?
A solid HR partner needs to help you establish written HR policies and procedures that can accommodate your startup’s team growth and help you attract the right talent. In addition, their HR policies and procedures capabilities must include a sound and clear process for hiring, on-boarding and also one for termination. Finally, make sure their policies and procedures include compliance with regulations in your market.
HR is one of the areas where technology has made a huge difference for companies of all sizes over the last few years. A partner needs to have a good Human Resource Management System (HRIS) with integrated HR, benefits and payroll functionality, and benefits enrollment software. It also helps if the system has an employee on boarding self-services portal, and gives you the ability to easily implement and manage payroll.
As you grow, you need a partner who can provide expert guidance on recruiting strategy, not just short-term tactics and practices. This strategy often includes a hiring plan and a pipeline of the positions you need to fill over time. Ideally, they will manage this hiring plan and the recruiting pipeline for you. Expert guidance also includes giving you access and helping you make sense of compensation benchmark data that is relevant to your industry and to the stage of your company.
Finally, an important but not urgent task for a good HR partner includes an initial strategic HR audit and a review of the big picture with you and your executives. As time goes by, your partner should be able to provide guidance on the strategic HR road map they help you develop, while giving you sound advice and expert guidance with setting the crucial cultural tone for the business that reflects the unique essence of who you are, often, this essence is found through interviews with management and well-designed employee surveys.
These five elements are by no means exhaustive. HR is a complex task. However, evaluating HR help using these five areas as a guide provides the cover you need to have a well-run, healthy HR function that accommodates growth and supports recruitment and retention. Most importantly, solid HR practices designed early on can ensure you nurture and maintain your culture through time, no matter your size.