The unique circumstances of the parties and space on offer combined with a landlord’s position within a market can make for an amazing deal when subleasing.
But subleasing can also be a risky move. Let’s look at the benefits and drawbacks.
The Benefits
Price
In a soft market sublease space almost always trades below market rates.
Flexibility
Subleases are often available for shorter-than-typical terms and may allow for finishes that would otherwise be out of price range.
Furnishings and equipment
Sometimes, the sublandlord will leave furniture or communications equipment. This could add up to significant upfront savings for a company whose requirements are suited to what is left behind.
Location
Access to a building can sometimes be found with a sublease situation that might not otherwise have an ideal space or be within cost parameters.
Leverage
Negotiating leverage with a sublandlord exists by default. The company offering the sublease is doing so for a reason. And that’s not usually because they are in a positive situation. Often, any relief is welcomed and this puts the subtenant in the driver’s seat.
The Drawbacks
T.I. Money and Modifications
The sublandlord is likely hurting for money already. They are not likely to provide a generous allowance, if any. Time is probably of the essence so they won’t want to wait around while the subtenant completes a build-out. The master landlord has no obligation to the new tenant, either, so likely won’t front any cash now in anticipation of a return years in the future.
Terms
You probably need to live with the terms that the sub-landlord negotiated with the master landlord. Options to renew or expand are not usually transferable. If the term is short, the master landlord has little incentive to extend a sub tenant’s lease now at today’s rates. This is especially true if they anticipate that the market may be better (for them) at lease expiration.
Amateur Landlord
With rare exception, a sublandlord will probably experience a learning curve. This can mean additional time to resolve potential issues and come to an agreement with otherwise simple negotiations.
Trust
In a sublease situation, there is always a risk that the sublandlord could default or declare bankruptcy. A subtenant may also be subject to significant pass-through charges starting the day possession is taken. It is pertinent that the small print is clearly defined and appropriate addendums included to protect the new tenant.
Companies tend to “upgrade” when subleasing. They’ll often take a class of space or finishes that would rent for rates above what they would otherwise be willing or able to pay. Unfortunately, when the sublease expires, they’ll have to either pay the higher market rates or incur the cost of moving. Doing due diligence prior to accepting a sublease agreement could add up to saving a lot of time, money, and frustration in the long run.
Looking to move or expand your space? Contact Ryan Hartsell with questions or assistance to purchase or lease commercial real estate in and around the Houston, Texas area.
