Things To Think About When Subleasing Office Space

09-18-2016 | by Looking For Space

Choosing a Sublease being offered by a Tenant, instead of a Direct lease being offered by a Landlord can have a number of advantages for a new company. First, a sublease will generally be for a shorter period of time than a direct lease which will generally be for a period between 5 and 10 years. The sublease is the "tail" of the lease that another company wants to dispose of, at some point during the term of their direct lease. Usually this will be because the company is expanding and has run out of space. The need to move to larger quarters is generally a sign of good economic health. But, when the company moves it still has an obligation to honor and pay for the first (smaller) direct lease. The liability of this obligation cannot be escaped, but the economic obligation can be covered by the rent paid by the subtenant and sometimes there is even profit that can be made when subleasing a space.

Generally, a sublease is regarded as a "dwindling asset" where the shorter the remaining term generally translates to a lower rental. The subtenant "scores" when the sublease rental is below the current market rental value and the only problem with successive subleases is that the tenant generally has to move every couple of years - which for an ongoing business is a bit "nomadic". Usually, when there is a good supply of space, a tenant can expect to save between 10% and 30% as a discount from market rental. However, when the supply of good space gets constricted, we very often see sublease asking rents run in parallel with direct space that is being re-leased (but not newly constructed).

Another positive factor for tenants seeking sublet space is that office equipment and furnishings can often be made available. The most common thing a company leaves behind when moving to larger space is workstations and desks. Frequently they will take the desk chairs with them, but often they buy new workstations and desks for their new space. Also, we often see phone systems being upgraded, and the old phone system is left in the space - instead of buying a whole new system the subtenant can often reconfigure the existing equipment to suit their needs.

The downside of a sublease is that the subtenant is tied to the fortunes of the lease holder. When the original tenant is in good financial shape the subtenant has no issues. Subtenant pays rent to original tenant. Original tenant pays rent to the Landlord. Problems arise when the original tenant is in bad financial shape and defaults on the obligation. Whether or not the subtenant has paid its rent to the original tenant, if the original tenant does not pay the Landlord the subtenant can be evicted. Sometimes, for a strong subtenant in this situation the Landlord will accept the rent directly from the subtenant - but this is always subject to negotiation and it depends on the nature of the circumstances between the Landlord and Original Tenant. This is the prime danger of a sublease because the subtenant does not have privity wth the landlord, and can get squeezed out when there are problems.

Usually we see "bargain hunters" in this area, and more often than not they have found excellent rentals under their subleases. However in Manhattan we have noticed in the past several years that there seems to be a shortage of good small space on the market (under 10,000 sq. ft) and with that shortage comes increased asking rentals for spaces available for sublease, so the differential in asking rentals between NYC direct space and sublease space is not always so large. You'll see a lot more bargains when the economy is going through a downturn and companies are simply "dumping" space to reduce their financial obligations.

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