Sublease Overview: What is the Best Approach (part 1)

​The activity of subleasing real estate space says much about the current state of the market. Subleasing is when you have term remaining on your lease, and you rent all or a portion of your space to another company who also become financially responsible for the rent until the expiration of the term. A ‘healthy’ supply of sublease space is an amount that gets rented quickly at rates close to market for similar non-sublease, or direct deal, space.  A ‘non-healthy’ amount of sublease space would be when sublease space sits longer than normal on the market and is renting for considerably lower than market rates for similar direct lease offerings.  Overall, the sublease market will demonstrate the health of the supply-demand fundamentals (the foundational rule for economic markets) within the region. When vacancy is low, the sublease market will be healthy and strong.

Currently we are in a market with low vacancy rates. Therefore, if you are in a situation where you need to relocate for some reason, the option of subleasing your current facility can help your decision. But what are some of the key considerations when looking at subleasing space?   We will briefly cover several topics in this article, and in the next article we will cover several more. Your overall strategy, understanding the timing, getting Master Lessor approval, and what price to charge are among the top considerations. 
 
What is the overall strategy?  Is your business expanding or contracting?  Are you purchasing a facility or relocating to another market?  Is the current facility inadequate to handle your business load?  These are just some of the reasons that trigger a sublease evaluation, and each can result in a different strategy for getting your place subleased.  While this stage is often assumed, it is important to pause on the front end and clarify, as it will affect your other considerations.  Speaking with a professional real estate advisor in addition to your other advisors can bring clarity to this stage.
 
Once an overall strategy has been envisioned, understanding the timing for the execution of the strategy is critical.  With the sublease as well as another transaction at your next location also concurrently underway, there are typically more people involved and approvals can take longer.  When you are trying to line up the timing of your move-out with another company moving in behind you, any issues with timing can cause a domino effect of delays.  Therefore, it is important to have everyone on the same page regarding timing expectations and process so that transitions can be as streamlined as possible. 

Once you have marketed the space and found someone who wants to rent it, Master Lessor or building owner needs to approve both the use and financials of the prospective new tenant.  The use approval, will hinge on how the proposed use conforms to the vision the Master Lessor has for the property, and if the use is permitted by the local municipality.  Typically, there is also an “application or review” fee that is built into the original lease, and the Sublessor, or company current the tenant on the lease, needs to pay the Master Lessor that review fee.  ​

Another hot topic for evaluating of the sublease option is “What price can I charge for this space?”  In an appreciating market, Sublessors, those trying to sublease space they currently occupy, are usually pleasantly surprised that the rent they can charge will more than cover their current lease obligations. However, in a depreciating market, the inverse is also true.  Therefore, having a broker who can properly assess the trends of the market and the unique features of your sublease space, they will give you real-time interpretation of what the appropriate rate should be. 
 
We have merely touched on these topics, and each deserves a more in-depth discussion unique to your scenario.  Please call us anytime to explore these ideas further. In the next article we will discuss   terminating a previous lease, appropriate commission amounts, profit sharing of rents, and condition of the premises.  Stay tuned for more.