Planning, Capital and Flexibility – Things That all Biotech Companies Should Know when Leasing Real Estate.

Having worked in a biotech laboratory during my undergraduate years, in addition to representing biotechnology companies for all their real estate needs over the past two decades, I have first-hand experience how the Biotech industry, is truly boom or bust. On average it takes over 10 years and ~1 billion dollars to bring a new drug to market. Most of theses costs come from research and development also including also hefty real estate costs. Real estate for biotech companies can be one of the most troublesome, expensive and inflexible ventures for companies. Getting your arms around planning, capital expenditures and flexibly are key to a successful biotech real estate transaction.

Planning:

One of the biggest concerns with biotech companies related to current and future space needs is identifying and implementing a proper planning process. What’s the best way to ramp up space needs when milestones are met? A few ways this can be accomplished is 1) Negotiate expansion rights into the lease, 2) Hire an architect and construction manager to help identify key milestone dates and how those dates will impact space needs, 3) Start planning which departments may be moved offsite should expansion be required during the lease term which may free up space in your existing building if needed, and last 4) Review space options on an annual basis with your real estate partner to ensure you are up to speed with the market dynamics. The biotech real estate market is one segment that has turned the corner and is now clearly a landlord market. Rents are at an all-time high and spaces are leased 12 -18 months in advance!

Capital:

Ensuring enough runway, minimization of capital is key to a biotech company’s success. When leasing new or additional space, ensure that capital expenditures are kept to a minimum without compromising operational needs. Locate a facility with infrastructure that can be re-utilized or already built out to some degree, thus eliminating the need to start from scratch with expensive construction costs. Higher improvement allowances translate into higher rental rates and higher security deposits. Last, when negotiating your renewal option, be sure to negotiate that the fair market price will not take into account improvements paid directly by you, the tenant. Otherwise, the landlord will be double dipping, causing you pay for those improvements twice should you desire to renew the lease.

Flexibility and Growth:

A biotech company’s dream is to lease space in a large building on a month-to-month basis while the landlord holds the balance of the building off the market for future tenants. Hence, allowing growth when needed. However, we all know this is not realistic. Several ideas may ease this concern. 1) Locate into building that is owned by a landlord who also owns several other properties in the surrounding area, making it much easier to relocate or expand your company to another building in the landlord’s portfolio, 2) Acquire space in a large business park where there are multiple tenants who have leases expiring year in and year out. This increases the odds that growth space will be available nearby when required, 3) Obtain a termination right in your lease should the landlord not be able to accommodate your expansion needs by a certain date, 4) Secure a shorter term lease (e.g. three or five years – pending market conditions) with one to two one-year fixed rate renewal options. While this is more widespread in a buyers market, it is a tactic worth exploring, and most important 4) Should multiple leases already exist for your current space(s), ensure all your leases terminate on the same date. This will enhance your leverage in the market when the time comes to renew or relocate and you wont have the excess rent overhang with staggered lease expirations.

Biotech companies and their investors are in the business of saving lives but also making money. Real estate pitfalls can be problematic and troublesome if not handled correctly from start. While it is nearly impossible to tell what the future holds, taking a few precautionary measures outlined above will enable a biotech company a greater chance of survival by properly planning the space, focusing on minimizing capital expenditures and obtaining the real estate flexibility the company needs.