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The Hedge Fund Real Estate Landscape: What's right for your fund?

By Mary Beth Hamilton | Tuesday, June 15th, 2010

Welcome to the fourth and final installment of our 'What you need to know about IT before launching your hedge fund' series.  Last week we examined 'Five common technologyBlog Series: Launching a Hedge Fund mistakes and how to avoid them.'  This week we're looking at selecting real estate. 

As you prepare to launch your new hedge fund, you will face some overwhelming choices in the area of hedge fund real estate. Will you run your hedge fund from your home office or a hedge fund hotel? Will you sublease space? Will you bet on a prestigious address as a key to future success? As you struggle to answer these questions, you must consider your expected growth, your economic resources and your investors’ needs.

First, determine your hedge fund’s real estate needs.

As you begin to consider your real estate options, keep in mind how you would like investors to perceive your office space and how the workflow of your location will affect their perceptions. If you mainly meet with clients in their offices or homes, this is less of a concern. If, however, you wish to host investors in your hedge fund offices, you should consider more than just rudimentary personal working space including:

  • Offices for professional staff

  • Cubicles for support and administrative staff

  • Reception area

  • Conference room(s)

  • Kitchen/common area(s)

  • Supply/maintenance space

Once you know which of the above items are on your list of needs, you can start to determine the pros and cons of your hedge fund real estate options.

Option #1: An Executive Suite (aka Hedge Fund Hotel)Managed Suites

There are numerous advantages to this option. Long-term commercial leases typically require at least three-to-five-year commitments. Agreements at executive suites, also known as managed suites or hedge fund hotels, usually offer six-to-12-month leases. This can be attractive to the new hedge fund manager eager to gauge his or her success before locking into a major financial agreement.

With a hedge fund executive suite, you can avoid investing directly in office equipment, technology packages and trained administrative support; these can be purchased in a standardized package with some flexibility in customizing the services you wish to use. The executive suite also offers the new firm an entry to prime real estate areas, which might otherwise be cost prohibitive.

There are downsides to this option, however. Often, executive suites come with a number of hidden costs and fees written into the leasing contract, particularly in the event of a premature breach of the lease agreement. Management may also adjust rates according to a nonnegotiable schedule.

The cost of a hedge fund hotel executive suite for one professional and one administrative staff member can run between $800 and $1,200 per month, depending on its location.

You can expect to be charged separately for use of the following:Managed Suites office

  • Reception and conference rooms

  • Kitchen and lounge areas

  • Listing in lobby directory

  • Cleaning services

  • Mailroom services, copying and fax transmissions

  • Dedicated receptionist or phone answering service

  • Technology such as broadband, video conferencing, support staff

Option #2: A Sublease

You can get many of the benefits of an executive suite with the chance for more flexible agreements when you sublease from an existing business. When you choose this option, you should seek out not only a financially agreeable situation, but also one with a business that shares some characteristics or complementary services with your firm. This provides an opportunity for your nascent business to align itself with a more established “partner” that could direct clients your way.

Benefits of subleasing for a hedge fund can include:

  • Shared common areas such as meeting rooms, kitchens and reception areas

  • Shared administrative and support staff with the other business

  • Lower overhead expenses and no installation fees for utilities, phone or Internet services

  • Costs of subleasing agreements vary greatly based on location. However, you can expect to pay the price per-square-foot estimate of the entire office space, with either a pro rata charge for use of common spaces or a fixed-fee arrangement.

Option #3: Leasing Commercial Space

This option gives your hedge fund the greatest flexibility, but also the greatest commitment. These are typically multi-year leases and are the most expensive of the three options.
Commercial real estate advisors can help you navigate highly customizable leasing contracts or you can contract directly with a landlord. If you choose the latter, have the paperwork reviewed by an attorney or real estate specialist and familiarize yourself with the terms typically used in these contracts, including:

  • Permitted use of the premises – A broad range of uses allows you to be flexible in how you use your office space.

  • Lease term – Commercial landlords will usually offer either discounts or some concessions in exchange for longer lease terms.

  • Rent escalations – Usually, lease agreements include percentage increases linked to the Consumer Price Index or another real estate index. However, if you are considering a lease of three years or more, you may be able to defer rent escalations for the first two years. Another option is to attempt to negotiate a cap on the amount of annual rent increase.

  • Tenant improvements – One of the primary benefits of leasing your own space is the ability to adapt its look. While most commercial leases prohibit alterations without the landlord’s consent, you can request a clause that permits you to make minor improvements that are nonstructural in nature without having to secure such approvals.

  • Repairs, improvements and replacements – If you are planning any customization of the office space, make sure to spend some time discussing this clause with the landlord. It generally states that you agree to return the premises to their original state.

  • Renewal options – This clause is your opportunity to renew your rent at a fixed, predetermined price, rather than “fair market” value.

  • Right of first refusal or first offer for additional space – This is particularly important for young firms that may expect growth in their initial years. This clause provides the right (but not the obligation) to rent any office space that becomes available before the landlord offers it to any other parties.

  • Personal lease guarantees – Some landlords may want to include a clause in the lease agreement that makes the business owner personally liable for any damages or overdue rent, even if the tenant is a corporation or another type of business entity.

  • Work letter – This document describes standard fixtures, upgrades and repairs for which your landlord is willing to pay. If you plan on updating the space, the work letter may include information about whether you or the landlord bears the cost of the improvements.

Costs for this option vary greatly based on location.ECI Managed Suites

As you decide on one of the above real estate options, make sure your choice represents realistic financial considerations and gives you enough flexibility to adapt as your business needs change.

Finally, Resources...

Eze Castle Integration’s team has deep experience in helping clients evaluate real estate options to determine if they meet the client’s current and future needs. We also know the questions to ask when you're checking out real estate – contact us for assistance.

Our Eze Managed Suites are another great option for clients seeking temporary space in a hedge fund hotel.

Finally, if you're launching a hedge fund be sure to download our Hedge Fund Launch Kit – it is getting rave reviews.

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