Got too Much Space? 

Sublease it.

For those of us who have been in the real estate business during challenging economic times, 2010 is certainly a year of change.  The sublease market is a dominant theme fueled by corporate restructuring and downsizing. This article is a resource for business leaders and entrepreneurs who may be faced with subleasing their space.

 (Note: a Sublessor is the entity trying to sublet their space to reduce their lease financial obligation; a Sublessee is the entity who would be the tenant taking over the space from the sublessor.  The Prime Landlord is the owner of the property with whom the sublessor did the original lease).

Reviewing the Options

Business leaders need to remember: the primary objective of subleasing is to reduce or remove the lease/rent obligation.  This can be accomplished in four ways: the buyout, the sublet, the recapture and the write-off.   This article will focus on the most common approach: subleasing.

Even if a sublease takes place, the sublessor still remains liable to the landlord for the financial obligations in the original lease for the duration of the lease.  Also, in many leases, options given to the original tenant by the landlord don’t necessarily transfer to a subleessee.   For example, options to renew the lease or expansion rights may not be granted to a subleessee.  The sublessee should attempt to find out from the landlord under what conditions rights or options would be transferable.  It’s important to read the ”Sublease and Assignment” section of the primary lease before setting forth to subletting a space. 

Marketing Sublease Space

The fact of the marketplace is that commercial Realtors represent most of all the commercial tenants, depending on geographical market differences. It seems to be a better use of the firm’s money to have the space listed and marketed professionally, with the listing agent sharing his/her fee with the procuring agent.

Putting a Price Tag on Space

A sublease will only help companies re-capture some of their monthly rent.  If a tenant signed a lease when the market was tight and rents were high, there may be a good chance that their contract rate (what they’re paying according to their lease) maybe higher than what space is being marketed in a “soft” market.  Nevertheless in most cases tenants will discount their rates from 25% to 75% of the current lease rate. A commercial Realtor will be able to provide market survey information that will enable the tenant to price the sublease space appropriately.

Additional Tips on Subleasing

·       Seek professional advice from a commercial Realtor.  They will be able to break down the sublease process and help you be most competitive.

·       Take your ego out of the decision. Subleases can come together relatively quickly once parties start negotiating.  Focus on getting a reasonable deal as quickly as possible.

·       In most cases it is more attractive to market sublease space with the furniture included.  It is reasonable to negotiate a separate monthly rent for use of furniture.

·       Check the financials and credit history of a sublessee to make sure they’re strong.  Negotiate a suitable security deposit and hold it as the last month or two’s rent.

·       Be sure the sublease agreement provides that the sublessee pays for any additional costs associated with their occupancy of the space such as if they incur after hours HVAC charges or request the landlord to perform special work.

·       Subleasing is a race.  Give serious consideration and evaluation to your first prospect.  Passing on a deal you think is too low could result in waiting months for the next prospect. 

David Morris, CCIM, SIOR

SVP/Managing Director

Grubb & Ellis|Gundaker Commecial

2011 President, St. Louis Association of Realtors Commercial Division