Life Sciences – A booming real estate asset class | White & Case LLP
Over the past few years, and closely following in the footsteps of the United States, the UK life sciences industry has grown exponentially. This growth has been accelerated by government support for the scientific community in the aftermath of Brexit, as well as increased exposure to life sciences and the pharmaceutical industry following the COVID-19 pandemic. From a real estate perspective, a recent study by Jones Lang LaSalle estimated that there is up to £ 15bn of capital that has been allocated by funds and various other real estate investors for the sector, including only about 10% have been deployed to date. . Investors are drawn from both the UK and overseas to the UK’s “Golden Triangle” of London, Oxford and Cambridge. But what are the main legal documentation requirements specific to this asset class?
Start-up and initial phase – v Intermediate phase and scale-up
To answer this question, we must first consider that there are two distinct phases of development for a life science occupant – first, there is the onset, or early stage, and second, there is the middle stage, or scale. up. Typically, a start-up / newbie occupant will not have the appetite, nor the capital, to invest in a long-term lease or other long-term business arrangement. In fact, a start-up / early-stage occupant will really want (and expect) to partner with a real estate investor who can provide a ready-to-use lab and office space, often via a facility. incubator, providing access to the latest technologies, and allowing the proximity of eminent scientists and technology experts. Often in these incubators (like those provided by Imperial College Thinkspace), day-to-day support is provided by a technology commercialization partner, often affiliated with the owner. Incubation labs should be well-equipped and versatile, and writing offices / suites often encompass open-plan offices, flexible offices, meeting rooms, business support services, and training. In contrast, mid-term / full-scale of the market, occupants are likely to seek a longer term solution to their lab and office space needs, and may be prepared to invest more capital up front on the costs of development and ensure an appropriate solution. long-term service standards.
Start-up and early stage – Flexibility is key
Much like the space itself, professional conditions for occupants in start-up / start-up phase should be flexible, with short-term, short-notice occupancy, and instant access to the most innovative laboratory equipment, a business imperative. Therefore, life science investors for this phase of the market cannot simply passively collect rent, as a landlord for a longer-term occupant would under a lease with a rent review at the end of the day. rise only. The investor will have to offer attractive and collaborative work solutions to a greater number of occupants. They, and in particular their lenders, will need to be comfortable with a business plan that provides for occupancy on an ad hoc basis, although the occupant will have to pay a premium for this state-of-the-art laboratory equipment. , access to marketing partners and support.
Mid-Stage and Scale-Up – A more permanent employment approach
On the other hand, for the middle phase / ramp-up phase of the market, where occupants will not need and will not want to pay for the flexibility, support and innovation described by the incubator solution described above. above, a longer term a term rental solution will probably be necessary. So what are the most important terms to consider with respect to these leases? Seven options are described below:
- Rental lengths – Unlike other asset classes, where lease terms are shorter, for life sciences, it is not uncommon to find lease terms of 15/20 years. This is due to the occupants’ need to be in a particular geographic location, which is often driven by the availability of a talent pool, or the importance of being close to universities / learning centers. In addition to the large capital expenditure incurred by the tenant to fit out the premises to meet their needs, the result is that longer term leases are generally desirable. Provided that the strength of the tenant agreement is attractive, this in turn will be attractive to investors and their lenders, which in part explains the increased concentration of investors in the life sciences sector.
- Lease renewals – For the same reason that an emphyteutic lease is attractive for an occupant of this sector (see immediately above), the same applies to the renewal of the statutory lease right.
- Services and service standards – The availability of electricity, data and other utilities will be crucial for the occupant. Therefore, owners will need to provide exemplary service and service standards. While not common in the market at this point, there is a move towards penalties for homeowners who fail to provide 24-hour access to utilities to specified service standards, due to significant losses. that an occupant may face as a result of utility outages. . In addition, it is common for tenants to take responsibility for the repair and maintenance of owner’s facilities and equipment, so that they can have the peace of mind that they will always be suitable for their business needs. If a landlord is to allow this in a multi-tenant building, careful consideration should be given to where that plant and equipment may be communal – when a tenant may be willing to take responsibility for the plant and equipment. who provide for its own demise, it will almost certainly be less willing to meet the needs of another occupant.
- Sharing the occupation – The needs of both parties must be carefully balanced here – the landlord will want to keep their tenant entity pre-approved and verified on the hook for lease obligations, and a typical lease will limit assignment and sublet, with approval prior to the owner being required in both cases. There is no difference here in the world of life sciences, with market players (and their lenders) currently reluctant to offer little leeway here. However, restricting occupancy sharing to only group companies, as seen with so many asset classes, is not popular in the life sciences field. While the middle / scale-up phase of the market typically no longer needs the support and collaboration provided by a collaborative incubator / working environment, sharing innovative ideas and research is crucial for the community. scientific and allows a shared occupation. with a group of entities larger than the affiliated company vehicles is commonly seen. The landlord and his lenders will ensure that no legal relationship between landlord and tenant is created by such sharing agreements, but in practice this should be completely avoidable.
- Provisions relating to the protection of the mortgage lender – Although not often present in rack rental leases, mortgage protection provisions in leases for life sciences spaces are common. Lenders in the life sciences business won’t want to risk losing a lease, or even a landlord who collects commercial rent arrears on valuable lab equipment, without having the option to intervene on behalf of the tenant / to otherwise remedy lease violations. . This will also be of interest to homeowner’s lenders, as it helps preserve the rental income stream that no doubt goes to service the homeowner’s debt.
- Owner access – Due to the nature of the premises and activities of a life science occupant, the typical lease clause that grants a landlord a right of access to disappearance is unlikely to be appropriate. Some areas of the disappearance are likely only accessible by highly trained officers wearing appropriate protective gear.
- Confidentiality – Many members of the scientific community are sensitive to advertising their business or activities from a particular location. This must be balanced against the owner’s wish to improve their own profile in the market by announcing the presence of a particular tenant. This will need to be considered on a case-by-case basis, but it is important to agree at the head stage of the terms of any transaction, as it is likely to be a key point for both sides.
The real estate sector certainly has its role to play with the UK’s growing focus on life sciences and pharmacy. Coupled with the drastically reduced appetite of market participants for investment in physical commerce, hospitality and leisure, or even office space, and with significant equity and debt to deploy, the shift to this class of alternative assets is not surprising. Increasingly, industry and government support scientific research and development, and the work-from-home solution is simply not an option for laboratory research and development professionals. When this is combined with the wide range of start-up / start-up opportunities, as well as the (quite different) mid-stage / scale-up outlook including attractive lease terms, we believe the investment in lifelong real estate, the sciences are here to stay in the medium and long term.