A version of this article previously appeared Forbes.
Entrepreneurs have to be wily in all of their transactions, especially long-term commitments, such as property leases. In speaking with Steve Bermudez, former senior executive at Citrix, I was surprised that he was able to make money on some of his leases, by baking into his agreements the ability for Citrix to share in the upside realized by its landlord upon a sale of the property.
Steve and his team augmented this deca-million dollar windfall by wisely negotiating tax credits with local municipalities early in the process, which strengthened his hand with potential landlords and resulted in an additional multi-million dollar impact to the company’s bottom line.
After we initially spoke, I researched some of the properties Steve negotiated, including the old Dillion Supply warehouse in Raleigh, NC. Curious to learn more, I followed up with some additional questions, which I captured in the following interview.
John Greathouse: So Steve, how does a company turn their office lease into a money maker? That sounds like an incredibly entrepreneurial thing to do, irrespective of a company’s size.
Steve Bermudez: (laughs) No kidding. It’s not easy, but I believe that every time you look to open an office for your business you have to look at it as truly an investment in your business. You have to be strategic around selecting the location in relation to your talent base and client base regardless of what stage your company is at in its growth.
We found a location that the city of Raleigh was actively looking to revitalize, was also centrally located amongst top tier universities in the region, was within 30-minutes of the regional airport, and was walking distance to several new restaurants, bars, and other regional attractions. Which meant that we found a place that was up and coming where you could recruit top talent, fly customers and employees in and out with ease, have a place to go to lunch or dinner nearby during the day.
We were able to leverage our position of potentially bringing 900 new high paying jobs to an area in desperate need of revitalization and where there were few competing technology companies to make a highly compelling proposition at the state, federal, and local levels to provide the highest levels of tax credits. If you are looking for a long term lease, you also have to be extremely strategic about the partners you are signing up with. It’s a long term relationship. With the momentum and support of the local region with us, we were able to negotiate a profit share with our developer given the extent of tenant improvements Citrix was going to personally fund which was highly irregular for this region.
The true money maker is the combination of all of this to attract and retain the top talent in the industry. We created a place to truly work better and liver better following Citrix’s core values.
Greathouse: I’m impressed that you negotiated to share the upside in the value of the building. If the property had not sold, you didn’t stand to lose anything by negotiating this provision. It was total upside. I always encourage entrepreneurs to put a provision or two into their agreements that might have a low likelihood, but a potentially big payoff. The other side likely will give them to you, as they won’t think there ever going to happen. I call it “playing long ball” because you are taking a multi-year view of the transaction
Bermudez: Yea, I agree. A big part of negotiating this provision was also to help establish and maintain partnership with the developer. The developer’s success was also our success and with that in mind we worked hand in hand to design and build a facility utilizing the same design and construction teams which ultimately enabled the sale of the building for the highest price per square foot in the history of Raleigh and kicked off transforming the area into thriving community.
Greathouse: Agreed. By aligning your long-term interests, you went from antagonists to collaborators. Brilliant.
During the past 15-years, Citrix grew via acquisition, which resulted in the company having lease obligations all over the world. Are there lessons for entrepreneurs in the way you and your team consolidated these properties? I believe you saved the company tens of millions of dollars annually with this effort.
Bermudez: Long term real estate assets and liabilities are often overlooked during mergers and acquisitions, in even larger companies. The key is the fewer locations you have, the more you save in terms of overhead, equipment, maintenance, and general infrastructure. The ROI however is that your teams become much more cohesive and productive typically under the same roof. If you have extra space, I would encourage companies and entrepreneurs to consider subleasing this extra space to other companies to reduce expense. In general, every square foot of real estate should serve a specific purpose and that purpose generally is to help support and grow your business.
Greathouse: I understand that you also leveraged tax credits to offset the cost of the buildout. This isn’t always of immediate benefit to startups which have not achieved profitability, but still worth pursuing, as some programs compensate companies with cash, for each job created. How should entrepreneurs, who may only be creating a few jobs, take advantage of such opportunities?
Bermudez: Tax credits are generally available for companies at any stage in their growth although they vary greatly from state to state, city to city, and region to region within that city. When looking strategically at where you would like grow your business, typically most sophisticated commercial real estate companies have a local partner which you ask to be referred (to) which is an expert on incentives and tax credits and gives you initial guidance on what the range of possibilities are. One trick of the trade however is to make sure that you try to apply for such support ahead of making a real estate transaction and simply add it and treat it as added benefit to making your move to your new office. It’s typically the cherry on top but sometimes you can find it can also be the cream on that dessert of the deal you make.
Thanks again Steve. I agree with your mindset that every asset, especially at a startup, should have an associated ROI. Going forward, I’m going to encourage all of my portfolio companies to be strategic about sharing the potential upside with their landlords and locking in tax credits before they enter into leasing conversations.
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