Invasion of the Tech Tenants

Technology tenants’ leasing volume is at a historic high. But you have to negotiate leases differently when a tenant wants a climbing wall, dense occupancy ratios—and a welcoming attitude toward dogs and bicycles.

WeWork’s South Lake Union space in Seattle. (WeWork)

WeWork’s South Lake Union space in Seattle. (WeWork)

Technology tenants’ leasing volume is at a historic high. Tech companies account for 30 percent of all occupied office space in the San Francisco Bay area, while in the western Los Angeles area nicknamed Silicon Beach, they occupy about 15 percent of office space. In Bellevue, Washington, tech tenants represent 70 percent of the office space, and in the Seattle area, they occupy about 45 percent.

The surge of tech leasing has escalated rental rates, decreased vacancy rates, and, not surprisingly, caused owners to focus on attracting more tech tenants. All tech tenants, regardless of size and maturity, want to use office space in new and different ways. Successful landlords must rethink traditional viewpoints while maintaining protections relating to cash flow, building value, and sale and financing metrics.

A landlord’s ability to deal with the wide array of new lease issues is highly dependent on the characteristics of the tenant. Not all technology tenants are the same, and for the purposes of lease negotiation, they sometimes can be divided into three somewhat overlapping categories—startup, emerging, and mature—based on business maturity and financial strength.


  • Startup tenants. Some of the most dynamic tech tenants, these businesses are in their earliest stages of development. Lease negotiations with startup tenants generally reflect their entrepreneurial leadership and demand for significant creative amenities, including such nontraditional features as rock-climbing walls, floor-to-floor fire poles, and slides.
  • Emerging tenants. These are tenants that have become more established and are either gearing up for or have recently completed an initial public offering (IPO). Although they have little to no earnings history, they have significant economic potential. Lease negotiations with emerging tenants reflect their finances-focused leadership and follow a more conservative space use approach than those with startup tenants.
  • Mature tenants. With a history of steady revenue and profits and broad name recognition (for example, Google, Apple, Microsoft, Facebook, and Netflix), mature tenants in their lease negotiations emphasize high-quality employee work environments at desirable locations with a preference for campus-style work centers.

New Lease Issues

All tech tenants, regardless of type, value the ability to create workspaces that will accommodate high density and can be used on a 24/7 basis. They also want places that allow employees to engage in recreation without leaving the work environment. Consequently, owners need to design and construct new developments and renovate existing buildings to include systems and structures that accommodate high employee density and high-traffic uses, including such elements as high-speed elevators, wide fire stairs, and extra restrooms.

Some owners try to restrict desired density levels by including a specified limitation in the lease documents. For example, they might specify that a tenant’s use not result in a density exceeding one person per 300 square feet (28 sq m) of the premises. Not surprisingly, this approach is usually met with significant tenant resistance.

A preferred approach requires simply that employee density levels comply with the law, stipulating that the owner is not responsible if such higher density is not accommodated by the design specifications of the building systems and structure.

For example, the lease might state that the building’s heating and air-conditioning system will achieve a specified temperature range tied to specified density standards, that the electrical capacity of the building will accommodate a specified connected load, and that the elevators will run at a specified speed tied to building occupancy. The lease can then allow the tenant to install at its own expense supplemental heating and air-conditioning units to maintain comfortable temperatures on the premises and use fire stairs to expedite travel between floors.

Many tech tenants also demand rent-free and at least partial exclusive use of amenity space and facilities in common areas, such as green space, roof decks, terraces, and fitness centers. If exclusivity is granted, owners should retain the right to use such areas for landlord-hosted events and to show the space to potential investors. In addition, owners should maintain approval rights over all personal property and fixtures that the tenant installs in these areas and dictate corresponding quality standards.

Especially on ground-up developments, tech tenants are drawn to projects that allow for alternative commuting opportunities. Though this is frequently limited by the location of the project, for emerging tenants without their own transportation programs, owners often offer shuttle service or subsidies for use of public transportation. Owners should provide traditional bicycle racks, as well secured bicycle storage lockers and shower facilities. On a project-by-project basis, owners should also consider allowing bicycles to be brought into tenants’ premises, taking into account the path of travel, the effect on elevator use, and possible damage to common areas.

Many tech tenants are interested in bringing dogs into the premises. If an owner decides to allow dogs, the lease should limit the number, type, and size of dogs; specify the path dogs will travel to enter a building (for example, no ground-floor lobby access); and include the ability to ban specific dogs for aggressive or unwanted behavior or for a dog owner’s failure to comply with project rules.

Some of these requirements, however, such as those regarding path of travel, can be relaxed for a campus-style project, as opposed to a high-rise, multitenant environment. Also, most mature tenants and many emerging tenants, especially those located in an urban setting, either do not require the ability to have dogs, given the potential for disruption of the work environment, or will implement their own restrictive dog policies.

Other typical tech tenant, nongeneral office uses include fitness centers, wellness centers, cafeterias, and child care facilities. Lease provisions should prohibit use of these facilities by the public, and if applicable, other tenants of the project, and include requirements for third-party providers to cover such obligations as insurance, licensing, and indemnification. Leases also should specify involvement by landlord engineers in initial construction and tenant restoration and removal obligations when the lease expires, and mandate compliance with applicable laws, licensing, and health and safety codes.

New Twists on Traditional Issues

Because tech tenants are different from traditional office tenants, many traditional leasing issues take on a new light.

For startup and emerging tenants, credit enhancement, nearly always in the form of a letter of credit, is a key focus. Typically, startup tenants provide letters of credit equal to 12 to 18 months of base rent, and emerging tenants provide letters of credit equal to seven to eight months. Determining the amount of the letter of credit for an emerging tenant depends on a number of factors that can distinguish tenants within this category, such as how close the tenant is to an IPO, how recently the tenant completed an IPO, market capitalization following the IPO, a tenant’s profit history, and the length of time a tenant has been in business.

Given the size of the letters of credit tech tenants often provide, owners should require that the letter-of-credit issuer be on a short list of specified, financially stable banks—for example, JPMorgan Chase, Wells Fargo, or Bank of America. Owners should resist accepting a letter of credit from the investment banking or internet banking divisions of specified banks and instead insist on the main, publicly traded, and rated entity.

In a typical tenant lease, the amount of the letter of credit is tied to the landlord’s out-of-pocket costs; therefore, reductions occur at specified intervals throughout the lease term as expenses are amortized through the rent stream. However, for tech tenants, the letter of credit is also used to secure the owners’ financial risk, so reductions should only occur if the tenant is able to meet certain financial thresholds—for example, a set number of quarters of positive operating cash flow or a minimum market capitalization rate after becoming publicly traded.

Emerging and mature tenants focus heavily on owners providing protection from competitors, which typically means restricting landlords from leasing space at a project to competitors or granting competitors signage rights. Many tech tenants claim such protection is needed to discourage competitor poaching of employees, though the ubiquity of the internet and the use of social media to recruit talent (as opposed to recruiting based on proximity) makes such concerns suspect. Even so, tenant sensitivity to this issue makes it unlikely that a landlord will be able to completely avoid granting competitor protections.

In such cases, leases should do the following:


  • specify a finite list of competitors and avoid subjective competitor definitions;
  • exclude affiliate entities of the competitor;
  • pertain only to competitors that compete with the business the tenant is primarily operating from the premises (for example, Samsung’s cellphone division would have different competitors than Samsung’s television division);
  • include the ability for the tenant to modify the list, but no more than once during a specified time period;
  • apply to the original tenant and require minimum leasing and occupancy thresholds; and
  • not apply to corporate mergers of any existing tenants at the project or to the subleases or assignments by such tenants.

Especially for startup tenants, leases should include tenant surrender and restoration obligations for nongeneral office installations. At a minimum, the amount of the letter of credit at the end of the lease term should include enough funds to satisfy removal and restoration obligations.

In ground-up developments, emerging tenants often seek to influence design aesthetics and the functionality of building systems. Landlords should establish parameters and timing for this input to minimize negative effects on the building quality and the construction schedule. Mature tenants, on the other hand, usually prefer that an owner not build certain project components and instead will take on these obligations themselves, with broader control rights.

New Nonlease Issues

In ground-up developments, emerging tenants typically require review and approval of the lease document by their accounting firms. The accounting firm’s goal is to avoid including the building as a capital asset as opposed to a lease liability on the tenant’s books. This determination is based on several factors, including a tenant’s liability during construction, the tenant’s ability to participate in the building design, and the ability of tenant funds to be used to construct the building.

Unfortunately, because each accounting firm, and even teams within an accounting firm, has a different and ever-expanding interpretation of the applicable accounting rules, each deal inevitably requires negotiating and developing unique solutions. The bottom line for landlords is that accommodating a tenant’s accounting concerns should never result in any significant increase in landlord liability or risk.

Finally, many technology tenants are highly sensitive to intellectual property issues. In no event should the tenant’s intellectual property concerns prevent a landlord from maintaining its ordinary course of business, which means expressly permitting use of the tenant’s name in marketing and offering materials, disclosure of lease and tenant information in annual financial reports, and maintaining an up-to-date and detailed project website.

Anton N. Natsis is a partner and the chair of the Global Real Estate Group of Allen Matkins Leck Gamble Mallory & Natsis. Elizabeth J. Wilgenburg is a senior associate in that group.

Members Sign In
Don’t have an account yet? Sign up for a ULI guest account.
Members Get More

With a ULI membership, you’ll stay informed on the most important topics shaping the world of real estate with unlimited access to the award-winning Urban Land magazine.

Learn more about the benefits of membership
Already have an account?