(FORTUNE Magazine) – Jim Sanfillippo found himself facing increasingly bold questions. "What is your burn rate?" "When do you expect to break even?" "What is your acquisition fee per user?" Certainly every cash-hungry Internet business expects to endure these questions from venture capitalists. But this time, San Francisco landlords were doing the grilling.

Landlords, in both the Valley and San Francisco, are emerging as the new power brokers. They're getting pickier about tenants and making demands that were unheard of a year ago--like requiring a security deposit of as much as two years' rent. Equity, however, is the surest way to land a lease. Sanfillippo, director of facilities at startup Internet company i-drive, recalls one landlord's asking for three shares for every square foot of space. The company would have to offer 30,000 shares; Sanfillippo declined. After all, the space in question was a two-year short-term lease. (For more on i-drive, see "The Online Storage Wars.") When a landlord asked Beerud Sheth for warrants (shares in the company at pre-IPO prices), he too said, "No way." The co-founder of eLance, a startup that's building a global online services market, says the landlord eventually capitulated but did insist on an upfront payment of one year's rent.

It's getting tougher for Internet companies to say no. Dot-coms are seeking four million square feet of space in San Francisco. Less than one million is available, says Daron Craft, vice president of the CAC group, a San Francisco real estate firm. In the trendy South of Market, space is especially scarce--just 146,000 square feet is available. Tenants are paying up to $60 a square foot, up from $40 a square foot just six months ago, Craft says.

It may seem these landlords are practicing price gouging. But the fact is, they face hefty risks renting office space to new businesses. In a typical scenario, a six-month-old company is committing to a lease of $15 million over the next ten years. The company raised $10 million from investors, but who's to say it will be around after it's burned through the cash?

However, with office space at a premium, some startups are more than willing to throw in equity. "Warrants are a small price to pay," says Deborah Newton, vice president of operations for Just In Time Solutions, a San Francisco firm that is developing an online bill-payment system. The company already paid warrants to leasing vendors, shareholders, and investment bankers, so adding the landlord didn't seem all that bad, Newton says. "We're talking about a huge chunk of change--our rent will end up being $1.4 million next year, so it's not surprising they would want to get in on the action as well."

In fact, some startups are making money through sublets. Jeff Bonforte, i-drive's CEO, thinks the company will outgrow its new space in less than a year. "We'll probably make more on subletting our own space this year than on anything else." Now that's an innovative revenue stream.

--Jodi Mardesich