Last week I wrote about some considerations when considering subleasing your office. This week, I’ll outline a few realities of subleasing from the tenant’s perspective. There are quite a few positives that can be achieved with a sublease, but a few risks as well.
1. You are getting a smoking deal! The sublandlord is eager to start collecting rent and recovering whatever he can from what he’s paying in rent. Your rent will be less than similar space that would be negotiated directly from a landlord. This allows you to occupy a nicer building than you might otherwise be able to at the same price point.
2. An additional bonus… Furniture, phone systems, and other infrastructure may be included.
3. Legal fees will probably be less. A sublease document is typically 1/3 the length of a traditional lease. While you’ll have to review the master lease (as you’ll be subject to the same responsibilities as the sublessor) there won’t be any terms to negotiate. It’s just an easier document to review.
1. You don’t have the same rights as a master tenant. The sublease document makes you subordinate to the sublandlord and master landlord. Most landlords will treat you as if you are a tenant, but occasionally, you’ll be stuck using the master landlord as a go-between when you need maintenance or repairs. There should be clear mechanisms in the sublease document outlining how issues like burned out light bulbs or other minor repairs will be addressed.
2. You may be evicted if the sublandlord defaults. If the sublandlord can’t meet all of their obligations under the master lease, and your sublease rent payments won’t make the landlord whole, chances are he’ll want you out. Be sure to understand the financial health of the sublandlord before entering into a sublease arrangement.
3. There will be a big bump in rent when the sublease expires. Chances are the landlord isn’t going to let you renew on a direct basis for the same rate as the sublease. You’ll either end up paying more or relocating at the end of the term, which may negate the savings you achieved during the sublease.
Subleases should be considered with direct space when evaluating options as your existing lease term nears expiration. As with direct leases, be aware of the opportunities and the potential exposure.
There are a variety of reasons that a tenant might consider placing their space on the sublease market. Whether it’s because you’ve outgrown the space and need more capacity or business has contracted and there is too much capacity, subleasing can provide some relief from the lease obligation. Here are four things to consider as you plan to list your space for sublease.
1. How much time is left on the lease? Both short-term and long-term subleases can be attractive to potential subtenants, but they each require their own marketing tactics. A longer term lease (four years or more) will compete with spaces being offered directly by landlords and may be able to achieve a higher sublease rent. Shorter term leases will appeal to tenants in transition and will also have to be priced more aggressively.
2. How much space are you planning to offer? Do you need to exit the entire space? Or is a portion of the space still needed for ongoing operations? You should run a cost/benefit analysis to understand whether placing the entire space on the market is more cost-effective than demising the premises and subleasing a portion. Demising space is expensive and difficult to justify for a shorter term. It might be better to sublease the entire premises and relocate to another facility.
3. How much up-front capital is required to complete the sublease? There are a number of out-of-pocket expenses that will have to be paid almost immediately. Rental concessions, brokerage commissions (for both the listing and procuring broker) demising costs, space clean-up (paint and carpet clean-up), legal fees for preparing the sublease document, etc, are all costs that should be included with the sublease analysis.
4. What does your lease say? Many master leases have restrictions regarding how a space can be subleased, and to whom. Landlords don’t want subleases in their buildings competing with their direct availabilities and will retain the right to reject subleases to existing tenants. Additionally, they don’t want a subtenant undercutting their rental pricing and may place limits regarding the pricing at which a sublease can be offered to the market.
Subleases can be a terrific way to mitigate exposure on a lease that is no longer serving the business function, and a good broker can help you navigate the market to achieve a solution that covers some or all of the remaining lease exposure. Next week we’ll discuss subleasing from a tenant’s perspective.
One of the first lessons I learned when I started in the corporate world was to never approach my boss with a problem that wasn’t also immediate followed with an idea for a solution.
He taught me that screw ups, obstacles, and changing circumstances happen, but just walking in without a solution was not an appropriate behavior. It was okay if my solution wasn’t ideal, and frequently in the beginning they were pretty weak, but it taught me how to think and problem solve.
It was also a great lesson in client management. From my perspective, the cardinal sin of client interaction is presenting a problem or issue without a proposal to solve the problem. Clients never like bad news, but they’ve hired me for a reason. The solution may be costly, it may require more time, or tax precious resources, but it’s better than just dumping a problem onto the client’s desk and hoping he tells you what he wants.
I can’t even remember how many times I’ve had deals go sideways when everything seemed to be going so well. It’s easy to get focused (and lazy) when you have an ideal transaction that should be a win-win. The price is right, the terms are okay, and everything seems to make sense. But for lack of a better way to say it, sometimes “shit happens.” Yes, it takes extra work to keep back up options in place that might not ever come to fruition, but it will provide an alternative in the event that your primary deal falls apart.
I get it. Everybody is comfortable and feels good. Things are moving along smoothly. But inevitably there will be a hiccup somewhere in the discussions. Maybe another partner within the management structure had second thoughts or there are some legal terms that can’t be settled. Without a substitute, you are left with settling for unacceptable terms or killing the opportunity all together.
One of the value-adds of a quality broker is to keep secondary options on the table. Of course, it’s important that everyone understands their position in the negotiation pecking order and be transparent with all parties involved but it’s good to keep everyone focused and motivated.
The only time I’ve ever had people get really angry or upset is when they have only one option on the table and for one reason or another somebody decides to walk away. People can get angry, take things personally, and lash out in a hope to create an intimidating atmosphere. Bullying isn’t a great negotiating strategy and it can leave everybody at the table with a bad taste in their mouth.
“Always have another option” is a lesson I learned from a client a long time ago. As long as you keep that other option in mind and our comfortable walking away you can negotiate knowing that this deal is it the end of the world if it doesn’t get done.