ROLE OF LANDLORDS

In any environment, landlords seem poised to provide the real estate and laboratory space biotech companies required. However, very few would ever consider building a new facility until they have a leasing commitment from a company. By pre-leasing the space, the landlord stays slightly ahead of the game, anticipating downturns so they are not left owning unoccupied buildings during periods of low demand. Consequently, landlords generally demand the kind of rental prices and long-term commitments to large spaces that only established companies can afford.

Constructing a building as a laboratory-ready shell (more about "shell space" below) costs $80-$120/sf. To then build out this shell space into a typical laboratory facility would cost an additional $100-$125/sf. Therefore, a finished 150,000 sf building would around $30M.

A landlord will often take out a short-term high-interest construction loan to build a new facility, but will refinance to a long-term low-interest loan once the building is completed and a tenant is occupying the space. If a large company that has committed to a space decides not to use it, there is an increased risk that the company may break the lease (i.e. refuse to make its payments), and this risk is unacceptable to the institution offering the landlord the long-term loan. Therefore, the landlord will need to find tenants who actually will use the facility at a rate comparable to the original lease to meet the conditions of the long-term loan. If no other large companies want the space, the landlord might consider splitting the space into units that multiple smaller companies can lease to ensure that the building is occupied.

The landlord's prime concern is the financial stability of the tenant. Most leases require a 10-year commitment, giving the landlord a stable return over a long time as long as the company can afford to make its payments. To provide some comfort to the landlord, a tenant will be required to place a security deposit in escrow typically equal to one year of rent and associated operating costs. In the event a tenant goes out of business and defaults on the lease, the security deposit buys the landlord time to release the facility (sometimes at a higher rate than the previous tenant paid since now the facility is finished).