Landlords Swap Stock Options for Rent

July 1, 2000

The phenomenal growth of tech start-ups is fortifying the office markets in cities from Seattle to Miami. Companies that start with a 2,500-square-foot sublease often need 25,000–50,000 square feet within a year.

This is good news for the leasing agents who represent these dot-com gazelles, but it presents a puzzling problem for property owners: How do start-ups with no credit history convince landlords they’ll pay the rent?

Finding an arrangement acceptable to both tenant and landlord can be tricky. The idea of “credit enhancement” takes on new meaning with technology companies that have yet to turn a profit, Insignia/ESG broker John Shlesinger told a meeting of the Atlanta Commercial Board of REALTORS® earlier this year.

“Technology is changing us,” he said. “[Credit enhancement] has become a huge issue, especially with the dot-com world we’re getting into.”

As an alternative to rent, some owners are accepting warrants that allow them to buy stock before it’s available to the public--a risky strategy, particularly as venture capital for dot-coms dwindles, but one that offers the possibility of a big payoff. Other owners are requiring fledgling high-tech companies to pay a year’s rent in advance.

Tenants often look to their leasing agents to help come up with a formula they can offer landlords leery of a company’s sketchy or nonexistent credit history.

In Atlanta, entrepreneurial owner Jim Cumming has accepted his first warrants as partial payment of rent for space in the Flatiron Building.

Cumming said his confidence in’s principals and their business plan convinced him that accepting stock options instead of all cash was a good idea. For the company, this frees up vital cash that can be used instead for growing and hiring talent.

Ken Ashley, a Cushman & Wakefield of Georgia broker who represents, said he expects more landlords to begin taking warrants from technology start-ups.

“The landlords who are more entrepreneurial and who understand technology are demonstrating to these fast-growing companies that they’re willing to work with them on space needs,” he said in an interview with The Atlanta Journal-Constitution.

Now institutional owners and real estate investment trusts are realizing that to remain competitive, they must also consider alternative payments, such as warrants or advanced rent.

Duke-Weeks Realty Corp. of Indianapolis, a REIT, recently accepted warrants from a high-tech company that needed industrial space. After about three months, the warrants were worth three years’ rent--a nice dividend--though Duke-Weeks realizes the value changes daily. The REIT doesn’t consider the warrants to have any value on its balance sheet.

One landlord’s rep in Atlanta says that although he’s thankful for the dot-com phenomenon, it might have a downside: When a building has too many companies with suspect credit, it might be hard to sell the property. Buyers will opt for a building filled with creditworthy companies.

Still, warrants and equity will most likely become more common currency for lease payments. As they do, tenants will require their agents to become more financially savvy so that they can convince landlords to change their definition of creditworthiness.

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