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With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Eli Ceryak of Cushman & Wakefield - The 2018 Startup Real Estate Outlook

Posted on: 01/30/2018

Eli Ceryak

Eli Ceryak

Senior Vice President/Commercial Real Estate Broker - Cushman and Wakefield

Eli Ceryak of Cushman and Wakefield - Podcast Summary

Eli Ceryak of Cushman & Wakefield, our first 2 time guest on Founders and Friends (!), stops by to discuss the 2018 Startup Real Estate Outlook. Eli has done a fantastic job for Kruze Consulting finding two offices in San Francisco already and has also helped locate our new San Jose office. Eli is one of the best Startup Real Estate Brokers in San Francisco and has some great advice and predictions in this podcast.

Eli Ceryak of Cushman and Wakefield - Podcast Transcript

Scott: Welcome New Founders and Friends podcast with Scott Orn. Before we get to an awesome podcast with Eli Ceryak of Cushman and Wakefield, just wanted to give a quick shoutout to Kruze Consulting who helps brings us this podcast. Kruze has a cool new offering, KruzeTax.com. Go to that URL and if you just need a tax return, if you’re a startup and just need your taxes done, we will do it. We have a really slick interface that asks you all the questions we need to know and we also have a nice little thing that helps you upload all the documents. Once we get that, we’ll get you a quote and get the tax return done in five days. It’s that easy, so check out Kruzetax.com when you get a chance. Now on to Eli Ceryak of Cushman and Wakefield. Thanks. Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting and my very special guest today is Eli Ceryak of Cushman and Wakefield. Welcome Eli Ceryak.
Eli: Hey, Scott. Glad to be here.
Scott: This is quite an honor. It’s my first second time doing a podcast with someone. Eli is amazing at real estate. I’ll talk a little bit more about that, but we want to have him on again to talk about going forward in 2018 and what the market looks like for start-ups in the 2018 real estate market.
Eli: I am honored to be back for a second time.
Scott: The first second time guest. Amazing. I can’t believe we even made it this far. We have a bunch of things we’re going to talk about. The cool thing is Kruze Consulting used Eli to do another lease this year and I think it was September, right? Yeah. We’re sitting in our brand new space that Eli helped find us. He was amazing once again, so I can’t recommend him enough. Please use Eli if you’re going to get some start-up space. We also learned a little bit. I learned a little bit going through that process. Things like the on our first lease that we can kind of share with the audience and questions I asked Eli, so that should be really good. First, let’s talk about what 2018 looks like going forward for you and the start-up real estate market.
Eli: We are expecting another big year in 2018. 2017 saw some of the largest tech expansions that we’ve seen in San Francisco history and I think that’s particularly remarkable because we’re now seven or eight years into this economic boom. Those of us that have been doing this a little while are used to whipsaw markets where it’s boom-bust, it’s three or four-year cycles. This has just been a long sustained boom and then you look at the companies that have expanded and done big leases this year, it’s not all of them, but a lot of them are more established type players. There’s Amazon, there’s Facebook that did a big lease for a brand new building at 181 Fremont. It’s almost 100% tech, but a lot of it is the more established tech players, which it feels less risky and less fragile than it has previously. It feels like this boom is going to on for the foreseeable future.
Scott: The crazy thing about that is though like Facebook is what? Ten years old or maybe, no, maybe 12 years old. Something like that. It’s not like they’ve been around forever, it’s just like they’re so ingrained in our life. You have a really good list here maybe we can post. There’s some new names on it. Companies that feel like they’ve been around forever to us, but maybe not to the rest of the community, like Slack, Okta, or Atlassian. Those companies have all done huge leases in the San Francisco market and those companies are … I mean Atlassian’s been around forever because they came out of Australia and were kind of the slow ramp. Okta, Slack, and Wish haven’t been around that long. These are pretty new companies taking a lot of space.
Eli: They are and the growth has been phenomenal. I think if you look at we have about 13 companies on this list that did deals that were over 100,000 square feet. I think by the end of the year the actual number is going to be 17. A couple that we’re missing on this list and a couple things that may happen at the end of 2017. I feel like the Slack’s, Okta’s, Atlassian’s are probably looking at it from a risk perspective. They are some of the newer less proven companies, but it’s also I still think it’s so remarkable that these companies are employing 1,000 or thousands of people. One thing that worries me maybe more so than other cycles is it’s not clear to me how all these companies are getting the talent. They all want to be here in San Francisco. They all want the top tier talent. I worry is there enough top-tier talent to go around. I also worry about as the Bay area becomes a more and more expensive place to live do people decide that the quality of life here just because of the, mostly because of the expense. This has not happened in mass yet, but do they start looking at other markets in other parts of the country to grow because of the cost of living and cost of doing business here.
Scott: Totally. For us, our answer to that was starting a San Jose office and you know because you helped us with San Jose too. We could recruit a really high-quality person down in San Jose and their cost of living would be a lot cheaper, so that’s worked for us so far. We’re still in the early stages of that. We’re still working out the kinks on that. Not everyone wants to commute to San Francisco or not everyone can afford to live in San Francisco. It’s kind of a sad fact. I wish our public government would build so some more, get some more housing permits going and let’s build some more skyscrapers and make it a little more affordable. Not just for our team members, but for Vanessa and I. We want to be able to buy a house pretty soon too. It would make all of our lives a lot easier if we had cheaper housing in San Francisco, that’s for sure.
Eli: Yeah. I couldn’t agree more. I think long-term, that is I think the regions biggest challenge is these are very complex problems with complex solutions, but the lack of housing and the need for more housing is just crystal clear. San Francisco and the entire region need to be doing whatever they can to add more housing because even with the housing boom a decade ago, there’s just we have not as a region built anywhere near the housing that we need. It’s putting a strain on workers. I’ve lived here for 17 years now. I’m not married with young children and we live in San Francisco. As the economy’s done well, we’ve done well, but it is a challenge to make things work in San Francisco and the Bay area.
Scott: For sure. Looking for to 2018 for the big company, it sounds like those guys are confident. They’re taking a lot of space. What about kind of the late stage start-up market companies. All those guys, except for Slack and Wish are pretty much IPO and those companies have raised huge late-stage rounds so they’re effectively IPO’d, just privately. What do you see for the late stage market in terms of taking space in San Francisco.
Eli: I think it really depends on the size of those companies. If you can find space that’s already built, if you can find sublease space that maybe is already furnished and wired and well designed, I think there are tremendous cost savings. It’s been really hard to find those kinds of spaces and going back a couple years ago it looked like we were going to have an uptick in sublease space. It actually looked like we were going to have this uptick in sublease space that was potentially going to happen at the same all these brand new buildings came online. What’s happened is the brand new buildings have almost all been 100% leased. The subleased space did not really when the sublease spaces hit the market it is gone really quickly. Companies, I’ll use Twitter as an example, that looked like they were maybe going go through a rough patch and potentially put a lot of space on the market. Twitter put a little bit of space on the market and it all got leased very very quickly and that sort of stabilized. Going back a couple years ago, it looked like that might be a wave of okay, Twitter’s going to cut back and then maybe all these other companies are going to cut back as well and we’re going to have a lot of space on the market. That just did not happen at all. Those types of opportunities are out there, but they’re hard to find. I think probably the single best piece of advice I could give is to start planning early. You don’t need to go out and rush into a transaction and do a land grab, but just start the planning part early. Understand the different iterations of what your growth might look like. Understand what’s important to you from a location perspective, from a budget perspective. Also know, that once you have that checklist of the things that are most important to you that you’re not going to get all those things. Think about okay, are we willing to sacrifice a little bit on location? Are we willing to sacrifice a little bit? Are we willing to push our budget a little bit? Just as an example, if we’re working on kind of a three-year growth plan or exit plan, are you willing to make an exception and take a space for five years or seven years if it check’s all the other boxes. You just need to have a good plan in place and give yourself plenty of time and that’ll help have a better outcome.
Scott: Yeah. That’s really good advice because that was something that I didn’t really … I think on our first space, working with you, we got really lucky and literally like I think the day we started working with you, you found something for us. It was like this amazing, so of course, we thought that’s how the real estate market works, of course. You extrapolate from that one moment. In our new space at 333 Kearny, we actually, it took us probably like three months, right? Maybe four months looking before we really found the place that we were going to move into. It was getting stressful. We’re a fast-growing company so we had we like didn’t have a couch in our office anymore. We had to get rid of the lunch table and people were eating in the conference rooms, which maybe sounds good or cool for a hyper-growth start-up, but it’s actually not cool. It actually really affects the quality of life in the office. I would not recommend that to anybody. If we could have planned better and maybe had our expectations set a little better, we would’ve been able to avoid those downside situations where, I mean I know it bummed out our team where they had to sit there and eat lunch in the conference room. No one wants to do that. It’s nice to have a chill area where you can go sit on the couch and take a phone call or something like that. The whole plan ahead is really good advice. On your point about scarifies, that’s a really good one too. You know this, but our prior office like didn’t have a kitchen. We had basically to bring in water and things like that. In every other aspect, that office was awesome and so we took it and we’re glad we took it, but it would’ve been nice to have a kitchen, but that was just part of the deal. We didn’t get everything we wanted, but it ended up working out and being fantastic for us. Kind of know in your head, you may not be able to get some of the creatures comforts that you prefer.
Eli: Exactly, yeah. I mentioned the sublease space is pretty supply constrained and I think the other thing is that if you get out and plan early, the key decision makers on your team kind of understand what you want, there’s a reasonable chance that when you start the process, the space that you want is not going to be on the market. This is a very fluid fast moving market, but if you identify that through starting the process early, getting buy-in from all the internal decision makers, it will help you be able to move quickly when the right opportunity arises. Obviously, in a perfect world that opportunity would arise and you would have two or three other back up options as well, but that’s a lot easier done if you give yourself enough time. There’s certain landlords or ever sub landlords where there’s a good tenant-landlord match and I think by giving yourself more time, more often than not, it’s going to be about it’s the right space as opposed to the right building owner or owner of that space that you’re making a deal with, but if you give yourself a little bit more time than you have an opportunity to flush out those issues as well. Those can be everything from … You know, one example, is security deposits. There’s some landlords are very old school and any tech they are going to want a massive security deposit from and there’s some that are going to be willing to take a little more risk by giving yourself more time as the tenant in that situation, you can better address those issues and if you’re having to make a rushed decision.
Scott: For sure. For our security deposit. I’m in this unique position where I get to see the terms of a lot of the leases that our clients are signing. A lot of clients can get away with away two months of security deposit, but I think in our … And those are venture back companies, so those are companies that have like a big balance sheet. They can show the landlord that they have five or ten million dollars in cash. Things like that. For us, it was unique in that we’re a family-owned business and so I think our landlord in our new space wanted three, I think he ended up asking for three and a half months of security deposit, which we were actually fine doing because we knew, you know, we knew we had the money and could do it. If that reduced his risk that he was feeling, that was actually fine, but just be prepared if you’re not like a venture back company or haven’t raised a ton of funding yet then be prepared to do more of a security deposit, if you can’t show that balance sheet with a ton of cash on it. That’s another big thing that happened to us.
Eli: I think we were on the first deal we did, I think with you guys, we were two months.
Scott: Yeah.
Eli: That was a … You were subleasing, but that was a sublandlord who I felt understood your business really well and was really comfortable with it and so it just, I mean that’s a good example of it just really varies landlord to landlord and sublandlord to sublandlord on what their expectations are. I’ve had clients that have had one landlord that wanted a two months security deposit and another that wanted something closer to eight months for the same company.
Scott: Wow. Eight months.
Eli: It had this huge spread on based on how they looked at the business and the risk in the business. It can be all over the place.
Scott: That’s interesting. The other tip that I feel like we learned in our process was it kind of relates back to the planning is don’t if you’re going to need to sublet your space, don’t let it get down to the wire where the timeline is not attractive to the sub lessees. For example for us, because we didn’t plan ahead far enough and it took us three or four months to find a place, we had then compressed our remaining lease at the previous place. I think we only have like eight months left, or something like that. It turns out, that is a very difficult amount of time to actually sublease out because anyone who moves into that space only has kind of seven or eight months to actually use it before they need to move again. Now, our situation was a little complex and that had already signed a lease at the end of our lease to take over that space. I think in probably most cases, the landlord would be willing to kind of extend the original terms and things like that. In our case, there wasn’t the ability to extend the terms so anyone who was going to sublease from us really only had eight months in that space and that made it really hard to sublease. We ended up getting lucky and worked some things out with . That was awesome. I could easily have seen us getting stuck with paying double rent for eight months and you know, it was just you live and you learn and you go through these things. If we would have done a better job of planning, I think we could’ve avoided that and maybe subleased it out when it had 12 months, which would have made it a lot more … Is that generally, like is 12 months kind of the minimum you think?
Eli: It is. In this market there are enough growing companies and scrappy start-ups that you can actually a few years ago, if you have anything less than 12 months you just wrote the whole thing off. There was basically no chance or an extremely minimal chance that you were going to find a tenant to take a space for less than a year. That’s changed. You can actually find people and recover some of those sunk rent costs, but yeah, generally it’s a year. It’s interesting, I think you and I have talked about this some, but you look at a We Work where a lot of people are in month to month leases and the companies there are very comfortable with that. It’s interesting that it’s challenging too if you’ve got an eight-month sublease it’s really hard to find somebody, yet We Work is opening locations all over the city where people are going month to month with no you know, there I think is some risk that if other companies are growing you might have to move.
Scott: Oh, I didn’t know. We Work could actually ask you to leave?
Eli: I think I may be wrong about that. I know that the rules are very strict that … I think you actually, now that I’m saying it, I think the tenants actually do have some rights, but I think that the demand is We Work is strong enough that if you go to them and tell them, “We’re leaving.” In a lot of cases, particularly in San Francisco, your space gets leased out from under you. You don’t have the ability to kind of say, “Hey, we’re thinking about leaving, but we might want to leave in 30 days, 60 days, or 90 days.” The demand I think is so strong that as soon as you give notice, there’s a waiting list of tenants that are going to take your desk out from under you.
Scott: That’s definitely the case. We had another … This is turning into like what we learned podcast, which is awesome. We went to San Jose. Our logic was let’s do We Work. I think that the thing that people don’t quite appreciate about them is they do all the IT infrastructure. They have all the desks. They have all the equipment. You don’t really have to do anything, whereas, when we set up our other offices, like there’s a crazy amount of IT that needs to happen. There’s locks, there’s alarms, there’s so many little things and plus you have to pay for all the desks and things like that and movers. The infrastructure costs are pretty high. Now, of course, when you’re staying in a lease and you’ve bought all the stuff, it actually works out to your benefit. We Work is very convenient. You can really get in there quickly. We did, I think we rented six desks to begin with. Filled that up instantly. We were like, okay, let’s get ten or 12 and we called them and this is a real-life story. They were like, “Guess what? Two days before you called, someone came in and bought every available desk at our We Work. There’s no capacity on any floor for anything.” We were thinking like it had to be an Amazon or a Google or some big company that you know, had those kinds of resources, but literally, the San Jose We Work got completely sold out two days before we requested more space. There’s no leeway. We were stuck in our space. We’ve since been able to move up to a ten person office, which has been very lucky, but we’re at the mercy of … We Work is just such a powerful brand. They make it so easy. It really is a like a great value prop for the renter and so that’s reflected and there’s just being no extra space in San Jose.
Eli: They’ve figured out a real valuable niche in the marketplace. I think they’ve opened five or six new locations in San Francisco over the past year.
Scott: Wow.
Eli: They are getting really close. I don’t think they’re quite there yet, but they are really close to having a million square feet leased in San Francisco in say ten or 12 different locations. It’s just a remarkable amount of square footage and it’s happening because of the demand. They open their locations and they fill up really really quickly. They are switching to more of a … A lot of their tenants it’s more of an enterprise model where it’s I think it’s started as small scrappy entrepreneur’s one or two-person companies. Now, it’s a third of their business is with big companies taking down an entire floor or an entire location. I think that speaks to what a good value prop they have.
Scott: It really is though.
Eli: They’re clearly figuring something out that works well for the tenants, for the buyers of real estate.
Scott: I would highly recommend that technique of just if you’re going to a new market, use We Work at first because we now know that San Jose worked for us so we’re going to build San Jose up more. We didn’t know at that time, so having a month to month was actually really attractive to us. Anything you see for 2018 going forward like for the small start-ups, maybe the five to 15 person start-ups? Basically, who we were last year. Have you any piece of advice or anything?
Eli: I do think the same planning piece holds true. Even if you, it seems like it’s a small commitment and you know something that maybe doesn’t seem like if it’s you’re a two-person or five-person team, it might seem like maybe it’s not that different than renting an apartment, I would still think real carefully about what it is that’s important to you. Have a good plan in place. It’s really hard to find those small spaces. I mean, it’s anything below 5,000 square feet. There’s so many big tenants out there that a lot of buildings are getting … If a landlord can put together a full floor or a full building for a big tenant, they’re doing that. A lot of the smaller space on the market is going away and then there’s enough demand that all the small spaces are staying full. Just know that it’s going to be a probably a challenging process, you know, find somebody that knows the market well to help you navigate that. If you’re a growing ten person company, I would do whatever you can to avoid signing a five-year lease.
Scott: Oh, God. Yeah.
Eli: You’re going to grow out of the space in six to 12 months or not need the space and so try and avoid that. Definitely if you can find something that whether it’s a We Work type solution or whether it’s something that’s a sublease that has furniture and things in place that can minimize your start-up cost, definitely do that.
Scott: One of the things on the furniture is a lot of cap X for a small company. I actually found … I was surprised at the moving expenses are not that expensive. Once you have the furniture, it’s not too bad. I think it cost us $5,000 or $6,000 in moving expenses. Now, there’s a lot of like paint jobs and repairs and things like that and IT costs, but yeah, it’s that initial … based on one of our workstations, probably costs I think $1,000 or $1,100.
Eli: Yeah, that’s about right.
Scott: That’s not including the computer. That’s like monitors, desks, chair, it’s probably more like $1,400, now that I think about it because we have like double monitors and things like that. Everyone one of those, every time you add someone it’s a material cost so just think about that as you’re hiring people or doing your projections on your hiring. We have actually an entire spreadsheet. I think it cost us something like $5,000 to hire a new employee with all the software we use and everything like that so just think about that. I highly recommend, that’s a really good exercise to go through. If you’re a ten person company going to 15, you know that’s $25,000 in cap X and cap X plus software you’re going to have to pay next year, in addition to more rent and things like that. It’s a good little metric. You had, while we had the mics turned off, this always happens, people make the best points. Under buying versus over buying. Give me that sound bite you were telling me. You’re really smart to think this way.
Eli: One of the challenges any growing tech company is going to deal with is don’t want to be in the business of going out and getting a new office every year. It’s good for your real estate broker, but not really good for anybody else. If you’re a rapidly growing tech company, that’s a really vexing problem to address because if you hit your numbers or numbers and you’re growing rapidly, you very well may end up in a situation where you just need to go out and find new space on a somewhat regular basis. I think it’s having whoever the key stakeholders are on your internal team kind of really think about that. What’s more important? Is it the kind of keeping costs low and maybe having to move if you hit your growth numbers versus just not wanting to deal with the pain of moving and maybe over buying on real estate a little bit? Historically, over buying has been a much, much, much bigger problem than under buying, but I’ve seen it a little more balanced now where you can just … Businesses are doing well enough that under buying has become a problem on how much space you take.
Scott: Yeah, I mean if you use us for an example. We were joking that we may end up having to move again in September. It actually makes me almost gives me a stomach ache to think about that because it’s incredibly disruptive and it takes so much time and energy, but if it’s the right thing to do, it’s the right thing to do. We have consciously made the decision to under buy and project out basically a year and say if things go so well that we have to move out of our space in a year, that’s a great problem to have. We’re willing to shoulder that cost. I think I’ve always told companies to under buy too because there’s a lot to be said for the energy and having people packed into a room. It gives you a sense of like we’re in it together and this is a start-up and things like that. But, like I said, I also found the downsides to that when we didn’t have a lunch table, didn’t have couches to sit on, things like that. It was kind of embarrassing and I know people didn’t like it. I’m more towards the maybe buy 18 months or something like that. Maybe loosen up a little bit. In two years.
Eli: I think a good way to look at it is I think when you’re a smaller scrappier growing company, you should be under buying. As you get to a certain size, then it’s okay to overbuy. I’ll go back and use Twitter as an example. Twitter has a million square feet in mid-market and they’ve subleased maybe 100 or 200,000 square feet of it. It’s inconvenient for Twitter to have to go out and sublease some space that they’re not using and this all happened over a year ago, but at that size, I mean Twitter’s a publicly traded company. They’ve had some ups and downs, but it’s not having a little bit of extra real estate that they took down for growth reasons in a building that is their urban campus. I mean, they’re really almost the flagship tenant in mid-market in civic center. It’s really in the grand scheme of things, it’s not that big of a deal. You’re not going to go at that size, you’re not going to go out of business because you took a little bit too much real estate. When you’re younger and growing, I think it is a lot riskier. It’s probably not going to put you out of business, but it could cause real problems for you if you get out over your skis on how much space you’re taking.
Scott: For sure. Like if Twitter would’ve had under bought and had gone from 400, needed to go from 400,000 to 800,000 or whatever, that would’ve been really disruptive for their business so they did the right thing.
Eli: Exactly.
Scott: Like you said, there’s plenty of people around who can sop up the extra inventory as well. I normally am very conservative, but I think one of the lessons I’ve learned is maybe we should have shot for like 18 months worth of space or things like that. I mean, you and I we had this talk, Vanessa, we all weighed in and the idea was to be conservative. Again, if you’re outgrowing your space in a year, that’s an awesome problem to have and we can all deal with that. Maybe a little bit more would’ve been good for us, but it is what it is. Very hard to find space that fits in San Francisco as well. There was a term in our lease that confused me a lot and I had to call you a couple times on this. It was something to the effect of the tenant, us, would pay kind of our share of operational costs on an annual basis. I was super confused about and we talked about it. Can you maybe explain that to people. I know it was a new term for me so I think it could be very helpful for the people who are listening.
Eli: Yeah, absolutely. Most leases and there’s different types of leases that in terms of whether the landlord or the tenant is responsible for the operating expenses in a building. Most office leases are either full-service leases where the landlord pays the expenses, but passes the increases on to the tenant or sometimes they’re what we called industrial gross, where the tenant is paying their own PG bill and the tenant is taking care of the janitorial, but the building owner is paying the other operating expenses, but then passes on the increases. Any building is going to have, the operating expenses for the building are things like real estate taxes, ongoing maintenance, insurance, property management, those are maybe security if you have onsite security, those are typically some of the big ones. In most leases, those in the initial year of the lease are paid for by the landlord. As those things get more expensive, if you move in 2017 and then in 2018 all those costs go up by about 3%, the landlord in most leases can pass those costs on the tenant. It’s important to understand what they are. I think the biggest risks are if there’s a building sale and there’s a major real estate property tax reassessment and that gets passed on. That can be really significant. If there’s a …
Scott: That’s a great point, by the way. I’ve had one of our clients call us because it seemed very fishy to me, but their landlord was selling kind of selling the company. Selling the real estate to a new LLC every year to mark up the value and was hitting them with increased property taxes every year.
Eli: Yeah, that seems …
Scott: Do you remember me texting you about that? It happened like a year. I was like that seems crazy, but it turns out it’s legal. They could do it. It was making their lease like go up in material, not on cost. That’s something I had never encountered before. That’s a really good point. What are the other kind of?
Eli: Real estate taxes is a big one. If there are planned capital expenditure’s and that could be replacing an elevator, that could be replacing a roof, that could be replacing a roof, that could be a other significant building upgrades. Those can typically be passed on. A lot of times there’s an amortization schedule that’s outlined in the lease. There should be, so it gets amortized over ten years. There’s some debate about what or not debate, there’s just some ambiguity about what is a capital expenditure? If a landlord’s doing a big lobby upgrade that obviously, the tenants benefit from that to a degree, but if a landlord’s doing a million dollar upgrade of their lobby and you’re in half the building, you don’t want to end up with half that cost passed on to you. You got to make sure those things are clearly spelled out. We saw some issues with PG . This is going back to the kind of Enron, the brown out where there were those huge PG spikes.
Scott: I remember that, yeah.
Eli: That was about 15 years ago. That’s been less of an issue in the last ten years. Those are kind of the things to look for on the operational.
Scott: They’re usually done pro-rata right? We have seven floors in our building so we’re responsible for one-seventh of those fees costs.
Eli: Exactly.
Scott: It’s an important thing because it freaked me out when I saw that. I was like well, what happens if they decide to replace an elevator or something like that. We could be on the hook for a lot of money.
Eli: Also, if you’re doing a two or three-year lease, it’s important. If you’re doing a seven-year lease, five-year lease, seven or ten-year lease, it’s really really important to understand what those costs are because by the time you’re in year five, six, or seven, they can be pretty significant.
Scott: That’s a really good point. I had another one. You kind of cover this a little bit, but start-ups are trying to minimize the costs like out of the gate, basically. You had two good points.
Eli: Subleasing and We Work are I think look at those sorts of options. We talked a little bit about … I can’t remember if this was when the mics were on or not, but if you have a three year business plan or your investors have a two or three year business plan, or there’s an IPO on the horizon or some sort of exit, try to build your real estate strategy around that business plan. If it’s a two-year business plan, don’t sign a seven-year lease. If it’s a more stable long-term business plan then you can look at a longer-term lease, but those are things to pay close attention to.
Scott: Yeah, those are really good points. Any closing thoughts here? You predict basically a strong 2018, right?
Eli: Strong 2018. It’s I think anybody in California should have mixed feelings about this tax cut, but I think it will throw a little kind of sugar on the boom. I don’t think they expansion that we’re seeing is going to end any time soon. I can’t stress enough how concerned I am about livability, housing crisis, homeless crisis. I read a journalist Tom Braithwaite wrote an article recently in the Financial Times and talking about how San Francisco is going all these the technology here is amazing. All the things that are happening here and you look around the world and just how much the innovation is happening in San Francisco and in Silicon Valley, but shortage of housing and just the homeless crisis it just seems like it’s every block in San Francisco. He described it as more like Blade Runner and less like the Jetson’s, which I just thought was the perfect way to put it. It’s like 20 years ago the vision would’ve been flying cars and automated cars and this just cool tech-oriented future, which I think we’re heading in the right direction with a lot of that, but you look at just some of the gritty life on the streets in the San Francisco and it has that Blade Runner-like feel to it. I thought that was a really insightful thing for him to point out.
Scott: It’s definitely that there’s a huge a homeless problem and a lot of drugs on the street. It’s very easy to walk a couple blocks and see someone shooting up on the street. It’s a terrible, I mean it’s 2017 or almost 2018. It’s crazy to even say that. For middle-class folks like us, like more housing would be the gift from God. We just need more housing. Hopefully, the politician’s get their act together and can do more of that. We’ll probably redo this podcast next December after we have to move again and I learn a bunch other things in doing our lease, but thank you for all your help Eli. You’ve been an awesome partner for Kruze Consulting and again, highly recommend other start-ups out there to reach out to you. You’re awesome at what you do and it’s been a pleasure working with you.
Eli: I would love to do that. I’m happy to be back and wish you a prosperous 2018.
Scott: Awesome. Thanks, man. Appreciate it. Take care. Page1 14

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