Your company acquires a company in a city where you already have an office. Your business model changes and you need less space than you once did. You grow and need more space so you have to relocate. Or, unfortunately, your business in a tertiary market dries up and you close that office.
All of these scenarios can trigger the need to dispose of excess space. If that space is leased and you do not have a termination option in your lease, you will need to consider subleasing it.
I often have clients approach me about subleasing space for them – something I am happy to help them do. I always spend time on the front end making sure they know the expenses associated with subleasing so that they have realistic recovery expectations.
Because a subtenant is buying your remaining obligation, they are going to expect a discount off of your rental rate – even if that rate is already below market. The size of the discount is often related to the term remaining on your lease. Since relocating an existing office or opening an office is expensive, a larger discount from market is expected on a shorter term.
The landlord is responsible for paying both the landlord’s and the tenant’s brokers’ commissions. This amount is market dependent but a good rule of thumb is to plan on paying 6% of the sublease value in total commissions.
It takes time to find a tenant, negotiate a sublease, negotiate a consent with the master landlord[i], and do any construction/furniture installation required for move-in. Downtime can easily range from three to 12+ months.
Depending on your market, a tenant improvement allowance or free rent may be necessary incentives to induce a tenant to sublease your space. If you do not want to come out of pocket for tenant improvements, be prepared to offer free rent in lieu of an allowance.
You will incur legal fees to draft the sublease. In addition, many leases require tenants to pay the legal fees incurred by the master landlord in reviewing the sublease and consent documents. Plan on a minimum of $2,000.00 and know that these costs can skyrocket if your lease is large, your obligation is a longer term or the subtenant is difficult.
If you are only subleasing a portion of your space, you will incur costs to physically separate that space from the space you intend to keep. Those costs could be as small as building one wall or as large as separating an HVAC loop, relocating a server room or adding additional egress points.
Is There Anything Left?
In the spirt of “underpromise and overperform,” I advise clients to plan on a 50% recovery of their obligation through sublease. Sometimes, depending on the market and the lease rate, we can do better. But the costs add up – and now you know why.
[i] Many leases give the master landlord 30 days to consent to a sublease once it has been executed by the subtenant and sublandlord.