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.