You know you don’t want or need your office space anymore but you don’t know what to do with it. In this blog, we will help explain what a sublease is, clarify what a sublease isn’t and then look at the 9 steps you need to take to successfully sublease your space.
I’ve seen so many tenants struggle with the subleasing process that I wanted to create a resource for companies to make it simpler for them.
Before we get to the steps it’s important to talk about what a sublease is and is not.
A sublease is finding someone to use your space and pay you rent. In effect, you become a landlord. Your goal is to find someone to help subsidize your rent payments. Ideally in full, but more likely a significant portion of your financial obligation to your landlord.
A sublease does not get you off the lease—it’s important to know that.
So, what are some reasons companies sublease their space? Growth; mergers and acquisitions; contraction due to either market or internal financial conditions; future expansion space
Here are 9 simple steps to follow to help you sublease your office space:
1. Confirm your right to sublease
Dust off your lease document and head over to the sublease and assignment section. Make sure you have the right to sublease and understand the steps you must follow as laid out by the landlord to make them aware of your intentions and what you must do to get their blessing to sublease your space.
2. Choose a real estate adviser
The team you choose to help you sublease your space is crucial. Why? Because their efforts in many instances are going to be a major determining factor in achieving your goal of getting your space sublet.
They will guide you in a number of ways.
First and foremost educating you on the current market environment. What’s the right pricing for your space? What’s the competition like? What are the other spaces that are available in the market similar to yours?
They will also: create marketing materials, coordinate tours of your space for interested parties and negotiate on your behalf.
Most importantly your adviser is your sales team. They’re the ones that will reach out to the office leasing community to create awareness. Even more important than that they will be doing individual outreach to the market. This means informing the decision-makers of the companies in the surrounding area of the availability of your space with the goal of hopefully finding you a subtenant. Time is a crucial element in this equation because the more time your space is on the market the more money you are spending on space you don’t want or need.
3. Listing the space
Remember you are trying to be found among hundreds of millions of square feet of office space. Listing it correctly is crucial and why your advisers play such a critical role in your success. The goal is to create interest so tenants tour the space and put in proposals
4. Review proposals
Getting a proposal at your price is half the battle. The other part is understanding from whom. Who is going to live in your space? What do they do? Is there use approved in the building? But even more importantly, what is their financial health?
It’s well within your right and crucial frankly. It’s important to see their financials to understand that company’s ability to pay their rent to you. The last thing you want to do is spend time and money trying to sublease only to be back trying to sublet your space again. Remember the less time that’s left on your lease the greater the discount you’ll have to offer someone. Why? Because companies don’t want to move that frequently and remember through all this you still owe your landlord the full amount every month
5. Agree to terms
With the help of your real estate adviser, you will document all of the points of your financial agreement like base rent, electricity, yearly increases, real estate taxes, concessions (whether that be free rent or tenant improvement allowance) and equally important the security deposit.
6. Hire a real estate lawyer who specializes in office leases
Office leasing is its own animal. You need to have someone representing you who understands the nuances. An attorney who can draft a document that puts the proper protections in place for you and your business. Remember you are now becoming a landlord and you need to be protected. Your real estate lawyer is your insurance to make sure you are looked after. It’s important to note it’s their job to take the term sheet and put it in legal form. A good real estate adviser will work with the attorney to make sure the document reflects the financial terms agreed. Don’t expect the lawyer to do it themselves
7. Sign and countersign a sublease
You should be feeling good at this point but you’re not out of the woods yet.
8. Get consent
Remember a deal isn’t done until approval is received from the building landlord. This is their opportunity to say no. Why would they say no? There are three main reasons:
- They don’t like the tenant. It’s well within their right. They will consider the type of the company, the foot traffic that’s coming in as a result of the business, the impact that tenant may have on the building systems like elevators, or maybe the incoming tenant is a competitor to another tenant in the building. If there is already an agreement in place signed by the landlord acknowledging no other similar type companies can be in the building then consent can be denied.
- They already have a tenant who needs more space in the building. Remember a landlord would prefer to keep a growing tenant. If a tenant can’t find the space it needs it will likely leave the building. With this being the case the landlord wants to do everything it can to keep that relationship and that cash flow.
- The Landlord sees an opportunity to make some money. If the existing tenant is paying a below-market rent and the landlord sees an opportunity to re-rent the space for more they could elect to recapture the space (while this doesn’t happen very frequently, it’s important to know it could happen)
If there are no issues with the subtenant, there’s no demand from an existing tenant, and there’s no opportunity to make more money then you’re in the homestretch
You successfully navigated the sublease process and have a tenant that at least in part if not in full is helping subsidize your existing lease obligations.