Jul 05, 2013

Everything You Need to Know About Subleasing Your Space

By Don Catalano

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Everything You Need to Know About Subleasing Your Space.jpg

Nothing can damage the financial performance of your corporate real estate portfolio more than unused and unnecessary space. Whether you're looking at a too-big space that needs right-sizing, or carrying leases on locations that you've vacated, mitigating your losses by finding a subtenant should be a top priority for you. With a little bit of effort, you can usually cut, if not eliminate, your rental expenditures.

 

Step One: Read Your Lease

Before starting to sublease your property, meet with your attorney and carefully review the lease. Many landlords include provisions that limit your ability to sublease spaces. Some will require you to assign any profits that you earn from subleasing at a rent above your face rent to them. Others, on the other hand, allow you to assign your lease to another tenant. In that relatively uncommon instance, you might be able to shed all of your liability for the lease.

Step Two: Stay or Go

If the space is already vacant or if you've determined that you're going to close down the entire space, the decision is already made for you. If, however, you need to rightsize a space, sit down with your space planner to determine what it will cost to split your space into a piece that you retain and one that you sublease. If it's not cost effective to divide the space, or if there's a bigger market for the larger space, move out and start over in a new space. Otherwise, if you choose to stay, formulate a plan for how you'll handle a renewal of the partial space since you probably won't be able to use your renewal options. 

 

Step Three: List the Space

Sublease spaces aren't always easy to lease. The fact that they're pre-configured and that they frequently have relatively short terms, it can be hard to find a tenant that wants to move in. There are two ways to mitigate this problem: You can offer a very low rent, or you can market the space aggressively or, in many cases, do both. 

Step Four: Find Someone

If you are paying $20 net per square foot on a vacant space in a building with $12 CAMs, is it worth leasing to a tenant that only wants to pay $8 net? On one hand, you're only getting 40 percent of your contract rent, but on the other hand, $20 of your $32 occupancy cost is covered. Given that subleases have a short term, there's a real cost in waiting for a perfect tenant, and the cost of waiting goes up as your lease gets shorter. If you can find a good-enough tenant that can pay the rent, satisfies your landlord, and is making a reasonable offer, it's wise to get the space subleased and move on.

 

Step Five: Be a Landlord

Unless you're able to assign the lease and walk away from it, once you've subleased your space, you become the landlord (to an extent.) If possible, let the building's owner handle as much of the day-to-day tenant management as possible. For example, you don't need the subtenant calling you so that you can call the landlord's manager when a light bulb burns out. However, if you're still responsible for the lease, you will still need to keep an eye on the space. It's wise to pay the rent and CAMs directly so that you can be sure that they're being paid. It's also a good idea to periodically inspect the space and make sure it's being properly maintained.


Read more great CRE Subleasing Articles:

When Subleasing Your Space is A Good Idea

5 Things Every Subtenant Should Know Before Entering a Sublease

A Tenant's Guide to Finding the Perfect Sublessee

 

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Topics: corporate real estate management, Office Utilization

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Don Catalano

Don Catalano

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