Aug 19, 2014

When Subleasing Your Space is A Good Idea

By Don Catalano

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Sublease_AgreementAs you review your company’s commercial real estate holdings, you might find spaces that no longer suit your needs. In those cases, subleasing can help to blunt their impact on your bottom line.


When you sublease out a commercial real estate space, your relationship with your landlord essentially doesn’t change. You remain obligated for the space and enjoy the same rights and responsibilities under your lease. However, instead of using the space yourself or having it sit vacant, you find someone else to occupy it. That subtenant pays you rent, which you then use to help defray some or all of your costs.

When to Sublease Commercial Real Estate

While it might seem obvious that you would want to sublease out any unused spaces, there are a few considerations to keep in mind:

  1. Partially Used Spaces. If you can easily divide underutilized spaces, they can also be candidates for subleasing. This way, you keep the location but get a third party to help pay your occupancy costs. A separating wall is usually easy and inexpensive to build, giving both you and your subtenant a greater sense of privacy.

  2. Remaining Term Considerations. If you have nine years left on a lease for a newly-unused space, subleasing it is almost always a wise decision. With six months left, though, the cost of finding a tenant and paying commission to a commercial real estate broker could cancel out any income that you receive from the subtenant.

  3. Below Market Face Rents. Given that rents have been rapidly increasing in some markets, it is possible that you could have spaces on which you are paying below market rents. If you no longer need those locations, they are excellent candidates for subleasing. Before projecting your profits, though, carefully review your lease. Some landlords include language that allows them to take the profit if you sublease for more than your face rent.

5 Things You Should Know Before Entering a Sublease

 

Talk To Your Landlord

Before subleasing out your space, take the time to talk to your landlord or his representative. No matter what your lease says, the commercial real estate world is highly fluid, and you might be able to negotiate an alternative to subleasing. For instance, if you have one-third of a floor and the tenant that has the rest of the floor wants to expand, you could end up getting let out of your lease. Your landlord might also be willing to let you shrink your space in exchange for your willingness to sign a longer-term lease for that reduced area.

Another option can be to assign your space. If your lease allows you to, this can get you out of responsibility for the space in whole or in part. Typically, this process has to be completed with the permission of your landlord.

Carrying unused vacant commercial real estate space in your company's portfolio is almost never a good strategy. For many spaces, subleasing can help to cut your losses and reduce your overall portfolio-wide occupancy cost. However, subleasing is not always the best option available. As such, talking with a commercial real estate broker and formulating an all-encompassing strategy is usually your best first step. 

 

Other great Commercial Real Estate articles:

A Tenant's Guide to Finding the Perfect Sublessee

Protecting Yourself from Signing the Wrong Office Lease

Six Amenities to Look for in Office Space

 

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Topics: commercial real estate

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Don Catalano

Don Catalano

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