Too Good To Be True? Navigating the Sublease Market

 

Too Good To Be True?  Navigating the Sublease Market
By: Andrew Rebennack

Looking for office space?  Chances are you’ve come across the term “sublease.”  It may seem like a great deal, but is it?  Could your business benefit from a sublease?  What does it really mean and what are the risks lurking in the fine print?  Unfortunately, there’s no one-size-fits-all answer for these questions.  While every tenant has a unique set of circumstances, there are some key pros and cons to consider.

The Pros

  1.  Lower rent.  You can often secure an attractive, below-market rate on a sublease.  The Sublessor is often highly motivated to make a deal and turn over the space.  If saving money is a hot-button issue for you, this can be a huge upside!
  2. Shorter term.  Most landlords in our market prefer a 3- to 5-year lease.  In the sublease market, there’s opportunity for a much shorter-term lease, ranging from a couple of months to 1 – 2 years.  As an example, for a growing start-up that’s unsure of how much space they’ll eventually need or when, a short-term sublease creates much needed breathing room in a time of volatile growth.
  3. Flexible qualification.  If your business is new, or has had a complicated operating history, it may be easier to qualify on a sublease.  There are fewer hoops to jump through and a little less focus on the quality of credit.
  4. Lower security deposit.  Typically, a subtenant’s security deposit is less than it would be on a direct lease with the landlord, which preserves precious working capital.
  5. Furniture included.  Depending on the situation, a subtenant might even be able to lease the space with furniture included, significantly reducing the time and out-of-pocket expense of setting up your new office.

The Cons

  1. Shorter term.  A moment ago, this wan an item in the pro column, but it has a dowside as well.  If you’re actually ready to settle in for the long term, any rate saving on a sublease could be offset by the unnecessary headache of moving sooner than you’d like, or finding less-favorable terms available in your next landlord negotiation. 
  2. Landlord might recapture.  Let’s say you find a sublease space tha tyou love, you spend weeks negotiating the deal, and then the landlord decides to recatrue the space and totally blows everything up.  Now, you’ve wasted a ton of time and find yourself back at square one. 
  3. Landlord consent.  In almost every sublease, the landlord must give formal consent to the transaction.  That means no matter how fast or how well you negotiated a sublease, you’re still stuck waiting (as much as 30 days) and hoping the landlord will bless the deal! 
  4. No tenant improvement money available.  Usually, sublease spaces are leased “as is.”  That means the landlord isn’t offering any money for improvements.  You need ot make sure the space works for you in its current condition, or be prepared to use your own funds to make any changes you need.  
  5. Eviction.  This is a Big One.  If the sublessor defaults on the lease, your company is at risk of eviction on short notice.  We talked about your financial strength, but you need to be sure the company you’re subleasing from is strong too.  During negotiations, your broker should negotiate for your right to be notified if the original tenant defaults.  

As you can see, there’s a lot to consider.  The attributes of a sublease that benefit one company could be a significant liability for another.  A leasing specialist can help you navigate the market and find the right s[ace.  If you have questions or are actively looking for office space, give us a call–our expert services come at no cost to you!

Learn more about my practice here. 

Andrew Rebennack, Sales & Leasing Associate, BRE# 02025935

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