Real Estate 101 for Biotech Startups
As a biotech entrepreneur, there are three basic questions to answer before starting a business: 1) What are you going to do? 2) Who is going to do it? 3) Where are you going to do it?
After founding your startup, you probably have a good idea of the first two - the tech and the team - but where are you going to actually do the work? After all, you need a lab to do research and you need to move out of the academic lab to create an independent business. Where you choose to locate your startup is one of the most consequential decisions you will make for your company that can affect its productivity and financial health for years to come.
In all likelihood, this is your first venture into the world of commercial real estate. Delivering a functional and safe laboratory environment for your team is a big undertaking. Here is our guide to the basics as you begin your journey.
What Are My Options?
Depending on where you live, there might be a large variety of options for your lab. If you are in a large city with a well-developed biotech ecosystem (e.g. Boston, San Francisco), then there are likely a comprehensive range of options available, so you can shop around for the right fit for your company. Startups in other areas might find their options more limited, but you can still find a great home for your company with a more do-it-yourself approach. Here are a few options to consider as you plan your company’s early growth:
Coworking Labs/Incubators: Most large cities now have at least one biotech-focused incubator facility, and while the spaces and services available vary widely, they all offer great value for money to the earliest stage companies. These facilities are run by various entities for a variety of purposes - everything from high-end, corporate-sponsored R&D incubators to small community-run non-profit wet labs.
Typically, an incubator or coworking lab offers a small amount of space for your company - as little as one bench in a shared laboratory, up to private labs and offices for growing companies. Often, incubators have shared amenities, equipment, and services that add value or help you save on costs. There is a wide range of pricing models, from a-la-carte “pay as you go,” to all-inclusive monthly memberships, to equity-for-rent accelerator models. Some incubators have maximum tenancies of as little as one year, while others have minimum residency terms, so make sure you do your homework to find a good fit for your team.
Multi-tenant buildings: Particularly in large biotech hubs, there may be many multi-tenant laboratory buildings that are available for lease. Occupying a unit as small as 1000 square feet within a larger building lowers your costs for building amenities and overheads. Many biotech-focused buildings already have the unique utilities and systems that are necessary for building your biotech lab. Leasing a suite in an established biotech development will also make it much easier to set up your lab’s logistical processes, from getting hazardous waste service to your temperature-sensitive deliveries. If relevant service providers are already familiar with your building, it will be much easier and faster to initiate your services.
Sole tenant lease: For the most adventurous or most starved of opportunities, there is always the option to directly lease or sub-lease an entire building. While it is the most capital-intensive and difficult option, it can also provide a stable and reliable home for your company for the long-term. It is likely that this is a step that you will eventually take as your company grows, so it’s never too early to start learning the basics of commercial real estate as you plan the next few years of your company’s growth.
You’re ready to start looking for your startup’s first home. Other than a general idea of how much lab space you will need and the general area you want to be in, where do you start?
First of all, find out about the zoning regulations in your area. There is a huge diversity of approaches that state and local governments take to regulating commercial real estate, and so it’s important to understand how the local authorities view labs in your area. Sometimes “R&D” is restricted to manufacturing zones, other times you may be allowed a lab in a “medical research” zone, or even a regular commercial zone. Some cities have virtually no zoning, other than building codes (which are also something you’ll need to know some basics about).
Beyond the legality of where you can house your biotech business, there are a lot of technical terms in commercial real estate that will be new or unfamiliar, but are critically important to understanding your costs and obligations. Here’s a short list of some common important deal terms that you should know:
Triple-Net (NNN)/Net (Single Net): Commercial leases often require tenants to pay for a certain amount of the building’s overhead costs. Two of the most common terms for this are Net (or single-Net), which means you pay for the building taxes (or your share of them in multi-tenant buildings) on top of your rent; and Triple-Net (NNN), where you are liable for the building’s taxes, insurance, and maintenance, in addition to rent. There are many other subtle variations, but the basic terms should be noted on the listing. It’s advisable to ask the landlord for a good-faith estimate of those costs upfront as you negotiate the lease so you can get a real idea of the real costs of your tenancy.
Tenant Improvements (T.I.s): Most likely, a commercially leased building will be delivered to you in “base” condition - i.e. there’s a big open room with an electrical box somewhere in the corner. Any structural work you do to build out the interior (like walls, utility lines, ducting, etc.) are referred to as “T.I.s” - and they come with a LOT of rules, and also opportunities. As part of lease negotiations, landlords might pay for a certain amount of T.I.s, and amortize that cost over the course of your lease, thus saving you upfront costs to build out your lab that you pay back over time in slightly higher rent. Some leases will require landlord permission (and/or city permits) for T.I.s, so make sure you have an open discussion before you sign a lease about your intentions. At the end of lease, most leases also require you to return the space to its original condition - which can mean a large unexpected cost.
Heating, Ventilation, and Air Conditioning (HVAC): This will likely be by far the biggest T.I. expense and one of the most important technical design areas to get right when creating a functional lab space. The enormous cost of clinical-grade labs is largely thanks to extensive HVAC work with balanced pressure zones, but it’s important to realize in even a very basic lab space there are a lot of heat-generating pieces of equipment, so you need significantly more capacity than in a comparable office space.
Getting a Good Deal
There are a lot of differences between the residential leases that you might be familiar with, and commercial leases. Take your time and do your homework - in all likelihood, it will take 6+ months from signing the lease to deliver a working laboratory that is ready to inhabit, so it’s worth putting in the time and effort at the start to make sure your building will work for your company.
Lease terms in commercial buildings tend to be much longer than residential - often 5+ years, and rarely under 2, so there are often a lot of ways for a landlord to make a deal that works for your company now, and in a few years’ time. One particularity is that in a commercial lease, you are normally liable for the ENTIRE lifetime of the lease - so if you want to move out 2 years into a 5-year deal, you still have to come up with 3 years of rent - either by yourself, or by sub-letting (if you are allowed to - again, check the lease terms!).
These long terms mean making a good decision early on is vital, but it also means that landlords can be relatively flexible on lease terms for your company now, and into the future. Don’t be afraid to ask for free rent (seriously!) for a few months, contributions to T.I.s, deferment of some non-rent costs until later in the lease, or a back loaded rent schedule that keeps rent low at the start and escalates once you can afford it. Real estate investments work on long timelines, so it is less important to make short-term returns than to have reliable, rent-paying, long-term tenants.
What Experts Do I Need?
Commercial real estate is a complex business and not for the faint-hearted. Luckily, there are experts in many fields to help you out. While your needs will differ based on the type and term of space you are looking for, it’s important to know who to reach out to when issues arise:
Brokers: Brokers, real estate agents, and realtors are technically different but for our purposes are essentially the same thing. If you are looking to lease a whole building, or even a suite in a multi-tenant building, you will probably need a real estate agent to help you close the lease. Real estate law varies considerably state-to-state, so it’s definitely useful to find an expert to help you find and close your lease. Brokers generally get paid commission by the landlord on closing, so it’s essentially a free service for you. Make sure your broker is familiar with laboratories! There are many subtypes of commercial buildings, and the needs of laboratories are unique and atypical. Like most experts, a great realtor will take time to learn about you and spend significant time helping you find the place of your dreams; a bad realtor will push you to the most expensive place they think you can afford to maximize their commission, regardless of your needs. Take the time to search for a fit, get recommendations from friends and colleagues, and pay attention to realtors’ listening skills when you first engage.
Lawyers: If this is your first lease, it’s definitely wise to have a lawyer look over it. A full red-line markup of a commercial lease might cost you close to $1000, but can save you significantly more over the term of the lease. If you use a large law firm for your IP filings, it’s likely they have a leasing division, or can at least recommend someone in the space who they trust.
Architects: One of the most common questions from biotechs looking for their first lease is “do I need an architect?” The likelihood is that if you are asking, then probably yes. If your T.I.s include significant structural work like building interior walls, installing HVAC, running high-voltage electrical cables, then yes, you certainly need to engage an architect to ensure that all the building work and systems you install are properly designed and installed according to code. A good architect firm will also be able to bring in system engineers, general contractors, etc. to help plan the buildout and create a realistic cost estimate for your work.
General/Specialized Contractors: If you only need minor fixes and updates to get your new lab up to speed then simply finding good contractors can be enough. Ask around for recommendations and advice and find someone who understands your needs and is both responsive and effective. Over the years at Lab Launch, we’ve relied heavily on our electricians and HVAC engineers to keep our labs working and comfortable, so find someone you trust and begin to build a long relationship!