Friday, March 6, 2015

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.

John
404.547.2009

* 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.

Friday, February 6, 2015

Subleasing: Things to consider as a subtenant

Looking to lease space? In today's economy, sublease space will certainly be an option. The question is, "Is sublease space right for me?" To equip you to answer this question for yourself, I'll address a few of the major points here.

In general, subleasing is something you will want to consider because of the monetary benefits.
  • You WILL pay below-market rent.
  • In many cases the space will come fully furnished and wired for communications.
  • Some spaces even come with phone, surveillance, access control, and/or audio/visual systems.
  • There's a strong likelihood that you can take ownership of this personal property at the conclusion of the sublease.
Before we get into the factors to watch, why do I believe that sublease space will be an option? Because there's a lot of it.  Consider the statistics from the end of November of 2013, taken from CoStar:
  • Over 3.48 million square feet of sublease office space was available in metro Atlanta, comprised of 519 spaces distributed among 354 properties and ranging in size from 64 SF to almost 79KSF.
  • Around 25% of the available office space in metro Atlanta is being offered for sublease.
So back to our question: "Should I consider it?" Generally speaking, the answer is yes, it makes good business sense for the reasons stated above.

BUT there are many factors to consider that would not cross the radar in a direct lease.  Here are a few:

The remaining term. This is a critical point. Because moves are expensive and a key benefit is the rent savings, you must realize these savings long enough to see a true win. Saving $100,000 per year in rent isn't worth it if you'll spend $75,000 to move and the master lease expires in 1 year. It seems rudimentary, but this key question is occasionally overlooked.

The sublessor. Are they solid? You're going to be sending them a big check every month, so you need them to be reliable. Believe it or not, I know of a law firm who was taken advantage of by a sublandord who accepted their security deposit and first month's rent and then disappeared just after the law firm took occupancy. Consider the following:
  • Are they likely to survive the remaining lease term?
  • Can you trust them to pay their rent to the landlord?
  • If required, will/can they intermediate between you and the landlord?
The space. If the space requires modification for your use, there are a litany of issues to consider:
  • Will the landlord approve your modifications?
  • If you're not taking over the whole space, how will communications wiring be handled?
  • Who will pay for the modifications?
  • Will the space have to be returned to its original condition?
  • Will the subtenant incur liability for and modifications the sublandlord made prior to the sublease?
The landlord. Your sublease contract will be with the sublessor, but your day to day operational interactions will be with the landlord. Will they work amicably with you?

The master lease. You MUST review the master lease, because it take precedence over your sublease. Are its terms and conditions acceptable?

Other Details. There are many other factors you'll want to keep in mind as you review a particular space. A few include:
  • Parking. Who will pay for any parking spaces? Will you get control of any reserved spaces? What if you don't need all of the spaces called for in the lease? What if you need more?
  • Expiration. What will your options be at the expiration of the sublease term? Are you willing to pay market rent for the property, or will you have to move at lease expiration?
  • Signage. Can you be listed on the marquis?
  • Conflicting tenants. If you're not in the same business as your sublandlord (you probably won't be), are there any prohibitions or exclusions that will lock you out of the space?
As a closing thought, I strongly urge you to use professional representation. Subleasing will require coordination among three parties and the interlaced, overlapping issues can carry serious consequences. Your representation should come at no cost to you, as the sublandlord will have already built your representative's fees into their cost structure.  If you don't know a reliable agent, give me a call... I'll give you a fair assessment of whether you need help and how to best find it.

John
404.547.2009

Monday, January 5, 2015

What is the medical cost of a building?

PBS’s Frontline show aired an interview a few years ago on a very insightful method for reducing healthcare costs. Although not directly related to healthcare real estate, it caught my eye because their findings correlated medical costs to buildings and the actions they took appear to be reducing these costs. Our Healthcare Properties Group routinely works with medical practices that use a revenue per square foot model to determine space efficiency… but this article takes it to new levels that could save us ALL money if the model can be implemented at a broader level.

Here’s a recap of the article:

Camden, New Jersey is a very small, very challenged city. It has high poverty (among the nation’s top 3), high corruption (3 mayors convicted for corruption), and half of its police force was laid off recently. As evidence of Camden’s challenges, various aspects of its operations have been taken over by the state on multiple occasions. On the medical front, there are 79,000 residents, two hospitals, 3 emergency rooms, and about 12 primary care offices in the city. Emergency waits are long, and first available doctor appointments can be days or months away.

After encountering the tragic shooting of a Rutgers University senior and a lackadaisical attitude by Camden police, a doctor by the name of Jeffrey Brenner decided to get to the bottom of the city’s problems. Thus began an in depth data-tracking, gathering, and analytical process in which he came up with some amazing findings. Ultimately, he was able to determine geographic hot spots for crime-related and accidental injuries, diseases, etc… at the zip code, neighborhood, and even building and patient levels. (As a real estate broker in the healthcare space, the building-level statistics intrigued me.)

By correlating events with medical billing data, Dr. Brenner eventually determined which buildings were bringing the greatest costs to healthcare systems. The answers were very concentrated – two buildings in particular stood out. They were nice buildings run by good people, but their 5.5-year impacts were amazing. One building held 350 people and had $15M in payments to the city’s 3 hospitals and emergency rooms (ER’s). The other building held 600 people and had $12M in payments over the same period. Interestingly, $12M was enough money to put a nurse practitioner on every floor of that particular building over the entire 5.5 year period.

Other findings:
  • One percent of the city’s residents generated about 30% of the hospital and ER costs. Five percent accounted for 60%. THAT is concentrated. Camden’s most expensive patient had over $600,000 in hospital bills paid during the prior 5 years. 43 other patients cost $3M ($69,767 each).
  • The #1 reason people came to the ER was head colds, with nearly 12,000 visits. Number 2? Ear infections, followed by sore throat, then asthma, then stomach virus. None of these cases HAD to be treated at an ER… primary care physicians or urgent care facilities could have handled them at a much lower cost.

Taking the data further, Dr. Brenner asserts that all groups have similar statistics… commercially insured, Medicare, any given company… the numbers and ratios hold true.

To fast-forward through the interview, the understanding of exactly where these costs were coming from allowed Dr. Brenner to implement new models for delivering health care. After gaining funding, he hired a nurse practitioner, community health worker, and social worker, and took preventative medicine and obstacle resolution to the areas (and people) of concentration. The team cost $225,000 per year, and preliminary estimates are that they’ve brought a 40-50% reduction in visits and costs. The net savings are difficult to calculate exactly, but there’s little doubt that the approach is saving millions.

The tough part is the broader implementation. In today’s fee-for-service system, there’s no mechanism for billing Medicare or Medicaid for the kind of preventative care the team provides (read the full write-up here for examples of what they did). The proposal has been that the teams be paid for via the savings they generate… sort of an entrepreneurial model. They would have to be careful to avoid the “money for nothing” crowd, of course, but it has potential.

The article goes on to discuss various implementation ideas, some supply/demand balance adjustments that may become necessary, and concerns over weaning patients successfully from this new model back to the fee-for-service (mainstream) world.

Again, the interesting part to me was the idea of tracking medical costs by building. The Healthcare Properties Group routinely works with medical practices who use a revenue per square foot model to determine space efficiency… but Dr. Brenner takes it a new direction by determining healthcare system costs per square foot and then attacking high-cost areas. If his findings gain traction, perhaps we can ALL save money.