Subleasing: Some things to think about

Many forces create tremendous upheavals in today's business environment. These changes often reflect themselves in changing space needs, particularly in the office and industrial market areas. Either expansion or contraction can create the need to sublet space.

A Philosophical Approach

When a company signs a lease, it should consider the rent money as "already spent." Similar to a financed purchase, the space is bought at the time the lease is signed, but paid for over the period of use. When the space is no long required, it needs to be sold and often at an attractive price.

Vacant space is a lot like a theater ticket; it has no value the day after the show. A landlord's long-term interest in a building makes it beneficial to be patient and to try to maximize a stable income stream thereby enhancing the value of the building. A building owner can benefit by holding out for just the right user, one who will complement the tenant mix and pay top dollar.

The sublessor has no such long-term interest and no potential upside. Therefore, it is important that the space be offered for what the market will bring in the shortest possible time. It is not unusual to see a misguided sublessor discourage interest by asking too much rent, thus wasting valuable and expensive time, and subsequently subleasing at a price that could have been achieved months earlier had the space been properly prices. A knowledgeable broker can guide the sublessor by establishing an appropriate price and then very quickly expose the property to potential users.

Dealing With The Building Owner

When you no longer need space, first try to negotiate a settlement with the landlord. If you can achieve this, the problem can be resolved quickly and effectively. Some tenants ill-advisedly undertake this effort themselves. A knowledgeable broker can intercede on the tenant's behalf and will do so for a modest fee. The broker is better able to negotiate the settlement with the landlord since the broker understands current market conditions and knows what motivates a landlord to cooperate.

Occasionally, a tenant will ask the landlord for assistance in finding a sublessee. This may not succeed if there are other vacancies in the building. In any event, it may not be a very good idea because the landlord's goals and objectives differ from the tenant's.

The Sublessor's Needs

First, the sublessor wants quick results for the reasons described earlier. Second, the sublessor looks for a sublease tenant who will take space "as is." Third, the sublessor needs a tenant who will accommodate the remaining term of the primary lease and who will take all of the space since dividing the space for sublease becomes even more complex. Further, the sublessor needs a tenant the landlord will accept since most lease agreements required the landlord's approval prior to subletting. Finally, the sublessor needs a tenant who will not create undue liability through potential damage, misuse, or contamination of the facilities.

Sublessee's Concerns

Sublessees are usually bargain hunters. Economic incentives must exist to outweigh the risks and complications associated with being a sublessee. The sublessee must understand and agree to all of the terms of the main lese. The sublessor cannot convey anything that he/she does not possess and can only convey those rights included in the main lease.

Summary

Subleasing can be difficult for all parties concerned. Sublessors must be willing to offer favorable economic terms to bargain hunting sublesses. Generalizing pricing is difficult since this varies with market conditions and the specific space considerations. However, 80 cents on the dollar based on current effective rates for similar space in the marketplace would be typical. For the sublessor, that's making the best of a bad situation. The sooner this fact is recognized, the greater the savings that can be realized.