Real Estate Obstacles and Opportunities for Foreign Companies Doing Business in NYC

NEW YORK CITY—New York City has become a hub for foreign tech startups. Germany, Israel, Canada and France have all established tech accelerators here, and, as a result, the industry has grown dramatically in the past 15 years. Today, New York City is second only to Silicon Valley as a home to technology and other emerging companies. With all that New York City has to offer, companies tend to lose sight of some of the logistical challenges that arise when creating a physical presence here, such as finding and leasing the right office space.

Typically, foreign entities will form a wholly owned subsidiary in the US to run their operations here, and in many instances, they incorporate in Delaware and register to do business in New York, where their global or U.S. headquarters will be located. But once foreign startups are ready to open their doors in New York, they need to find an office to accommodate their current (and often times, projected number of) New York-based employees. Startups that begin operations in a co-working space may, after a year or two, require 40,000 square feet of space, and this exponential growth, while certainly a positive, comes with obstacles. It is not uncommon for a company to have four leases in five years, so a ten, seven, or even five-year lease becomes problematic unless it is structured with significant flexibility.

While the right to sublease is almost always included in an office lease, it can be heavily restricted. Landlords also may insist upon a sizable security deposit in the form of cash or a  letter of credit, or even a personal guarantee, for newly formed entities that do not have a track record with strong financials. Plus, the transaction costs of building out multiple spaces over the course of a few years, broker’s fees, legal fees and moving costs add up. For a new or emerging company, these added restrictions and expenses can be financially onerous.

While these impositions may be costly and logistically challenging, they are far outweighed by the opportunities New York City has to offer for emerging companies. In early 2018, there was more than 550 million square feet of office space in Manhattan alone, nearly 8 million of which is co-working space. Finding the right space to fit a company’s needs, and finding it quickly, is never difficult. Nor is finding access to funding, as VC and other investors made over $12 billion in early stage capital investments in New York startups in 2017. Many financial services companies, media conglomerates, retail and fashion brands, accounting and law firms, have a significant presence here, helping to facilitate company growth and product development.

Over the last 10 years, New York City’s tech workforce has grown rapidly—far outpacing the growth of the rest of the country—and now accounts for more than 360,000 jobs, making it the largest metropolitan tech workforce in the US. The pool of top tech talent in New York is sure to grow organically in the coming years, with many prominent academic institutions focusing on tech, including the newly formed Cornell Tech–a partnership between Cornell and Technion Israel Institute of Technology, that is housed in a state-of-the-art digital campus on Roosevelt Island.

In addition, the announcement of Amazon’s new headquarters in Long Island City is a clear indication that tech startups, domestic and foreign, will continue to flock to New York City. Although New York City is not always an easy market to navigate, especially with its arcane and complicated rules and requirements for businesses, including with respect to real estate, the advantages it offers to high technology startup companies are second to none. And as New York City’s tech industry continues to grow, additional governmental programs and services, some of which exist already, may help support these new companies through the office leasing process and make it more palatable.

Jared E. Paioff is a partner at the law firm of Schwartz Sladkus Reich Greenberg Atlas LLP.  His practice areas primarily include real estate and general business litigation. He also specializes in counseling and litigating on behalf of startups and emerging companies. The views expressed here are the author’s own and not those of ALM’s Real Estate Media Group.