The idea’s out there, but swapping shares of technology firms for services rendered is a rather new phenomenon in the grounded world of commercial real estate.
Most developers aren’t willing to gamble on a cash-starved and credit-poor start-up of any type,especially at a time when rental rates and land values continue to rise.
But with tech companies playing a larger role in today’s economy and tech IPOs shooting through the roof, more large landlords are at least considering ways to hedge their bets.
“The failure rate for all types of small businesses is very high,so how do you know which tech company is going to make it?” said L.M. Cummings, president of Hillwood West in San Clemente.
New Partnerships
The parent company’s Hillwood Development, which is controlled by Ross Perot Jr., has decided to take a shot at partnering in the early stages with computer-related businesses.
“So many of these companies are idea-driven and not flush with cash,” said Cummings. “We’re looking at trading space for shares of start-ups. We could miss on five but if we hit just one, there’s a whole lot more money to be made on a hot technology firm than a typical lease deal.”
Perot’s Texas-based company has set up an entire new division through its Hillwood Investments operation to search for suitable high-tech partners.
“But we’re being very selective,” said Cummings. “A lot of people (in other industries) are trying to find the next technology gold mine.”
Since most of Hillwood Development’s 8 million square feet of properties are clustered around the Dallas-Ft. Worth market, he expects most of the space-for-shares trading to take place in the Lone Star State.
“We don’t have enough properties yet in Orange County to trade straight up,” said Cummings. “But we’re talking right now with several local technology companies about becoming some sort of a financial partner.”
Hillwood is willing to swap space and provide venture capital to technology companies for more reasons that just sharing in the gains of the new economy.
“More developers are going to start seeing that investing in technology start-ups kills two birds with one stone,” he said. “Not only can you increase revenues by partnering with the right tech firm, but you can also be the one to build their new headquarters. So it can create new business in several different ways.”
Although considered an early pioneer in the space-for-shares field, Hillwood realizes that plenty of others are also thinking along the same lines.
“There’s no question you’re going to find more developers doing some form of trading space for revenue in the future,” said Cummings.
Peter Zofrea, a partner with Ernst & Young Kenneth Leventhal Real Estate Group in Newport Beach, has discussed the situation with several Orange County developers.
“A lot of REITs are talking about taking stock in exchange for part of a technology company’s rent,” he said. “For a large REIT or developer, trading space still represents a relatively small percentage of their overall portfolio.”
Creative Deals
Many developers unwilling to provide space for free are still talking to high-tech firms about striking deals in other ways, he added.
“A problem for a lot of technology companies is that they want any cash flow to go into product development,” said Zofrea. “So what they’ve been doing is posting letters of credit and agreeing to allow landlords to charge premium rents.”
But times are changing. Zofrea is seeing more landlords willing to lower lease rates for potentially lucrative high-tech ventures.
“The risk is that if the economy turns south, making too many concessions to high-tech companies will leave a lot of space open,” he said.
Developers have been offering old warehouse and office space at lower rents to technology start-ups around Orange County for several years, according to Paul Marshall of Opus West in Irvine.
But few new buildings are being developed as incubator space in Orange County, he said.
“If a technology company takes off, you have to provide enough space to cover their growth , which can be difficult to measure,” said Marshall. “But if they don’t grow and actually become smaller, then you’re also in a difficult situation.”
Opus West, one of the larger developers in Orange County, minimizes such variables by taking advantage of its broad mix of buildings.
Building Tenants
The county’s largest landlord, the Irvine Co., also can use size to its advantage. It has developed about 700,000 square feet to offer to smaller firms short of cash.
Dick Sim, president of the company’s investment properties group, said most of that space is carved into 500-square-foot to 1,500-square-foot increments.
“It’s very small space for a guy moving out of his garage and needing a business address,” he said. “Rents are usually in the $1-a-square-foot range, and they get a small office with space in back for a truck to deliver product.”
The Irvine Co. has been tracking its technology tenants in the Irvine Spectrum since 1985. A dozen of its original technology clients started out renting a total of some 40,000 square feet.
“Now, those same companies occupy more than 1.3 million square feet in the Spectrum,” said Sim.
“That’s the way we chose to do it, and that’s the way we’ll continue to work with technology firms,” he added. “We want to be landlords, not part of a business we’re unfamiliar with.”
The Irvine Co. is targeting high-tech start-ups with more incubator projects in the future. Sim said he expects plans to be announced later this year to build 100,000 square feet of new incubator space in the Irvine Spectrum.
“It doesn’t produce a great return,” he said. “But it’s a catalyst that builds a larger base for future development. So it’s a strategy we’re going to continue to pursue.” n
