Monday, January 8, 2018

Subleasing: Before you become a sublandlord...

Should you offer your unused space for sublease?  Maybe... but maybe not.

First, what is a sublease? A sublease occurs when a tenant leases all or a portion of its leased space to another party.  The tenant becomes a landlord (called sublandlord) to the new party, who becomes a subtenant. 

And why might someone consider subleasing their space?  Some parties intentionally lease a space with the intent to sublease it (ex: executive office suites like Regus, or a hospital that leases a large space and then sublets to individual practices).  That's not you if you're reading this article.  More often than not, a sublease stems from someone having leased space that they no longer need.  Maybe they don't need any of it, or maybe they just have a portion of their space available.   But they'd like to bring in some revenue to offset the economic bleeding.

So should you put your space on the market?

Many factors combine to determine the likelihood that you'll get what you want by subletting. A few of the many questions to consider are:
  1. Is my direct lease sublet-friendly?
  2. Can my space be carved up physically/operationally?
  3. Is there enough term left on my lease to be marketable?
  4. Is my space desirable?
  5. What do I need to save to make the work worthwhile? 
  6. Am I in a good financial position myself? (think tenant modifications, real estate agent fees, and tenant reviews of your finances).
  7. What uses are permitted under my lease?
  8. What competing spaces are available and how might they impact me?
  9. Am I prepared to manage a subtenant?
The first 3 questions are key... if any of them are a "no" then subletting likely won't work.  The rest often require assistance... particularly number 8.

The "assistance" matter brings us to the next big decision... should you use an agent?  I advise at least speaking with one to flesh out the questions above.  In addition to providing "go/no go" clarity, an agent (a qualified one) will find you a tenant faster, gain you a higher rate, protect your valuable time, and insure that you don't overlook any of the terms that make subleases so complex. And since time really is money in this context, you'll find that they pay for themselves.*

At the end of the day, subleasing can be a great solution for cutting ongoing losses related to surplus space.  The trick is to verifying that you're a good candidate before investing in what can be a very time-consuming process.


* Note: Agents won't always be an option, because not all spaces are economically listable. If the total contracted sublease rent over the sublease term is going to be less than $150,000, a commercial agents who know how to penetrate companies effectively may be reluctant to take the listing for fear that they won't be able to cover their own costs.

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