How I cracked the San Francisco real estate market in six weeks and lived to tell the tale.
The San Francisco Bay Area has its own urban myth: that of a dot-com CEO who finds a killer loft for his company in the South of Market neighborhood and pays monthly rent of just a dollar per square foot. This CEO is a bit like the Loch Ness monster or Sasquatch: lots of people claim to know someone who knows someone who's seen him. If you believe he exists, you might want to buy the bridge I'm selling in Brooklyn. And, yes, I'm asking for options as part of the deal.
My cofounders and I lucked out a year ago when we started Gazooba, a company that allows Web businesses to reward visitors who refer friends to their sites. The three of us had been working in the New York office of a Web-consulting company called Netyear Group, which also has digs on the West Coast. Netyear agreed to sublet some of its space to us, and since we were young and poor and shining with virtue (and since Netyear owned some of our stock), it also threw in the use of a few computers and nobly renounced a security deposit. Sweet.
That 1,500 square feet was acceptable when the company consisted of just me and my cofounders, Zen and Shanti. But by last December our ranks had swelled to 14 people. It had reached the point that every time we added a desk for a new employee, we had to throw out some other piece of furniture. We'd already dumped three couches, and I feared for the conference-room table.
Having read in The Industry Standard that office space in the Bay Area is harder to find than venture-capital money, I hoped to gain some look-around time by extending our lease, which was due to run out in February. Netyear was moving out, so I would have to appeal directly to the company from which it leased space: Japanese-owned Trans Cosmos USA. Both Trans Cosmos USA and Netyear began life as U.S. subsidiaries of Japanese companies, so I thought we'd get good treatment. Confident of a warm familial reception, I made an appointment to speak by phone with Kohara-san, the man in Trans Cosmos USA's Seattle office who holds sway over these matters.
I dialed Kohara-san's number, blissfully unaware that our fate had already been sealed. The previous month some representatives from a Japanese company called Hikari Tsushin had visited Gazooba to discuss a possible investment. Nothing came of it (we weren't ready to expand to Japan), and we innocently bid them good-bye. Who knew that Hikari Tsushin and Trans Cosmos are Japanese rivals, competing with each other to invest in U.S. start-ups? Somehow the news reached Trans Cosmos's top dogs in Tokyo that Hikari folk had been in their building at our invitation, which sent their corporate girdles into a collective twist. Having lived in Japan myself, I understood the significance of Kohara-san's gently sucking air through his teeth throughout our phone conversation. We were screwed.
With just a month and a half left before we were out in the street, I sought advice from our board. One member, a former CEO, called in a favor and hooked me up with her favorite commercial real estate agent, a British gentleman named Paul Middle who normally works with much bigger fish. I told Paul we were looking for 6,000 square feet in either the financial district or SoMa -- South of Market -- the neighborhood that is to dot-com companies what dropped gelato is to ants.
As we walked to our first appointment, Paul asked me what I expected to spend. I told him that our current space cost us $3.80 per square foot, and I hoped to get that down to $3. He stopped dead in his tracks and stared at me as though I'd suggested building an office for ourselves out of twigs and straw. "Andy," he said, "before we go any further, we need to educate you about this market. First, you will not get anything for $3 per square foot. Four dollars is in the realm of possibility, but it's a pretty small realm as realms go. Second, since you're a start-up, be prepared to pay up to 12 months' rent up front. While you're at it, be prepared to pay up to 24 months' rent as an enhanced security deposit in the form of cash or a letter of credit. And while you're at that, understand that you'll be competing with five or six dot-coms for every space you see. Oh, and you realize they'll want stock options, yes?"
My expectations now six feet under, I followed Paul to the first vacant space, a nothing-to-write-home-about office building South of Market. Paul acknowledged that the space lacked distinction but assured me of the building's pedigree. ("Microsoft is a tenant," he said in hushed tones, "but there are a bunch of dot-coms, too.") Recognizing that choosiness was not an option, I put in a bid at the asking price: $4 per square foot. Wonder of wonders, the company that was subletting the space sounded ready to accept it.
Back at the office, I strutted around like the ant who moved the rubber-tree plant. "Vacancy rate, schmacency rate," I said dismissively, regaling Zen and Shanti with my accomplishment. "What's everyone making such a big deal about?" Then the phone rang. It was Paul, telling me the deal was dead. The sublessor had been pressured by one of its investors to give preference to a dot-com in the investor's portfolio. Once more, the abyss loomed.
I had promised Paul an exclusive, but with only a week to go before our deadline, I told him I'd need to enlist more help. That help came in the form of Charles, recommended by our benefits consultant as "an out-of-the-box thinker." I wasn't entirely sure what that meant as it applied to real estate, but I found out when Charles led me to a half-empty women's clothing store, a kind of downscale Merry-Go-Round where the floor was strewn with dress racks, curtains still hung in the dressing-room stalls, and the ubiquitous mirrors reflected my dismay. "All this place needs is a few alterations," said Charles, gesturing toward the large storefront window. "To me it says Internet."
Our next stop appeared to be a former mechanic's garage. The room was dark and cold, with oil stains on the concrete floor. Charles looked surprised when I asked to move on. "Andy," he pleaded, his arms spread wide, "you've got to imagine this place with carpeting!"
As the end of January drew near, I began to wish I was driving something larger than my new Volkswagen Beetle, since it looked as though I'd shortly be working out of the front seat. Then Paul called me with a new lead: a law firm in the financial district was looking to sublet 6,000 feet. The call came during a marketing meeting. I hightailed it out of there so fast my chair spun.
The law firm was asking $45 per square foot per year. Two bids were already in, so I offered $50. Paul prepared the bid package and informed me that, of course, the prospective landlords would want to review Gazooba's financials and our business plan. I offered to send my dental records if it would help.
Dazzled by either our Web strategy or my lack of cavities, the law firm offered us a six-month lease followed by monthly extensions. It wasn't great, but at least the lawyers didn't ask for stock. They also wanted five months' rent up front -- about $120,000 -- and promised just 60 days' notice in the event they wanted us to scram. Those last two conditions seemed out of line to me; I was determined to gain at least some concession.
In the property manager's office, Paul and I met with the law firm's office manager and real estate agent. Drawing on my business-school negotiations training, I disguised my plea as an offer. "I would prefer 90 days' notice of the need to vacate," I told the agent, "but if you can't manage that, we would accept a reduction in the up-front rent to four months." The agent smiled back. "Sixty days is the best we can do," she replied. "And since you want to discuss it, we'll be asking for six months' rent in advance."
"Thank you," I said. "Would you like a Gazooba T-shirt?"
Episode 1: A New Beginning
The Game of the Name
Take My Job Offer, Please. Pretty Please
There's No Such Thing as a Free Launch
Bridge Financing over the River Scared
Let the Good Times Roll
There's a New Man in Town
I Really Must Be Going
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