With the steep slide in petroleum commodities in the past few months, we anticipate more and more office space to be available for sublease as oil companies look to reduce overhead. If you’re a company that will be in the market for new space in the coming months you will obviously want to consider these opportunities. Subleases often provide quality finishes and sometimes even the furniture, fixtures and equipment at a discounted rental rate to what the landlord may be charging for primary space in the same building. However, subleases are not always the bargain they seem.
Primary factors to be considered are the amount of time remaining on the existing lease term, the tenant improvement allowance offered, the and the specific language of the primary lease. The language in the primary lease is often overlooked, but the primary lease remains the controlling document for your tenancy. Before you sublease another tenant’s space you need to have the lease thoroughly reviewed by a commercial broker or real estate attorney. A tenant may tell you they have expansion options, renewal options, termination options, etc., but you need to examine the fine print. Options and things like signage rights are often personal to the primary tenant and cannot be assigned over to a subtenant.
Another issue to consider with subleases is whether a tenant improvement allowance will be offered. The best subtenants are typically those that can move into a space on an as-is basis because that same company that is looking to cut overhead is not looking to spend their cash on your renovations. However, if you have to fund your own improvements, you can often offset at least a portion of that expense with a few months of free rent on the front end of the sublease term.
Lastly, have a solid understanding of the financial strength of the company you are subleasing from. The primary reason companies sublet space is a change in their financial health. The primary tenant remains liable to the landlord under a sublease. If the company you are subleasing from is on life support, it is highly unlikely that your sublease rental payments are going to be the financial panacea that creates a Lazarus moment for them. If they default on the primary lease, you could be out on the street. Granted, some landlords might work with you to convert you to a primary tenant, but there’s no guaranty of that and it is highly unlikely you will get the same discounted rate from the landlord that you negotiated with the defaulted tenant.
Don’t get me wrong, subleases can be great opportunities, especially for growing companies who don’t necessarily want to be tied to a long-term lease. It also offers the ability to move up to a higher class of building than a company might be able to afford otherwise. In a competitive job market, having a nicer office in a building with better amenities than your competition can sometimes be a deciding factor for job candidates. What you should carefully consider though is where the market will be when the sublease expires and you need to negotiate a new lease with that building’s landlord. If you’ve sublet a $22/SF property for $18/SF for 3 years, but the market is still a landlord’s market when the lease expires, you could be faced with the choice of paying a $25/SF rental rate or seeking new space in a cheaper building. So you need to weigh the benefits of enjoying 3 years in a building that is nicer than you can really afford the hassle and perceived instability of moving again in 3 years.
Subleases work best for companies that can actually afford the market rent for the building in which the sublease opportunity exists. If you can afford a $22/SF building and the sublease space works for you, by all means, go ahead and lease it at a discounted rate and use those savings to increase the bottom line, purchase new computers or increase the 401k match.
Subleasing presents great opportunities for companies to gain access to high-quality space in high-quality buildings at rates below market, but like anything else, in life, you get what you pay for. A sublease can be rife with pitfalls. Look before you lease and seek the services of a good commercial broker or at the very least make sure your attorney has reviewed both the sublease and the primary lease prior to entering into what can be a very uncertain future.
