Jul 01, 2014

5 Things Every Subtenant Should Know Before Entering a Sublease

By Don Catalano


CRE, commercial real estate tips, commercial real estate, subleasing tipsCorporate real estate users usually turn to sublease space for one of two reasons, sometimes both. For some tenants, subleased space can be the only way to get into a full building that is desirable. At other times, tenants are drawn to subtenancy because it usually offers opportunities to get space at a discount.

It's Fast and Flexible

When you sublease space, you're usually taking it over from another corporate real estate user that no longer needs it, but still has to pay for it. This typically creates a situation where the sublessor, also known as the sandwich tenant, is usually very motivated to get a lease signed. As long as you can get the necessary approvals from the primary landlord, you can usually complete a sublease deal relatively quickly. You might also find that the sublessor is particularly flexible. After all, since that corporate real estate department is on the hook for the lease, any revenue that it gets from you is pure profit.


Take It or Leave It

Sublease space might be fast and cheap, but it usually isn't going to be customized. Given the short length of most subleases, it rarely makes sense for the landlord or sublessor to offer incentives to move you in and you might not get adequate ROI on any leasehold improvements that you do. As such, you're probably going to have to deal with the space on an as-is basis.

However, this can be a benefit and you can walk into TIs that are well beyond what your budget will allow. If you're in a market with lots of space available for sublease, it can pay to be picky.


Your Time is Limited

Remember that subleases are frequently short-lived. You will have the remainder of the initial lease term and in most cases, that will be all. Even if the lease has options, landlords usually give themselves the right to cancel them in the case of a subtenancy situation. With this in mind, you will either want to commence negotiations with the landlord to take over the space or start looking for space before your sublease expires.

Prepare for Rate Shock

If you're subleasing at a discount, the savings can be a boost to your bottom line. However, that discount can end abruptly when your sublease ends. If your sublessor is subsidizing your rent, they’ll want to stop that process as quickly as it can get out of the lease. The landlord probably won't make a new rent for you at the subsidized level, either, unless the market has significant vacancy. As such, you could be looking at a significant rate shock when your rent adjusts to market.

You Don't Have to Sublease

Just because a space is available for sublease doesn't mean that you have to sublease it. Unless the building's owner or asset manager has other plans for the space, a sublease situation is a problem for him even though he's still getting the full rent from the original tenant. With that in mind, the landlord may be willing to either let the original tenant out of the lease or allow the tenant to buy themself out and let you negotiate for the space yourself. You might not get the same discount by taking over the space on a new lease, but you could end up with tenant improvement allowances, free rent and a long-term lease with options. Depending on your corporate real estate priorities, those benefits could outweigh any short-term savings that come from being a subtenant.

When Subleasing Your CRE Space is a Good Idea

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Don Catalano

Don Catalano