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WINDWATER BLOG

Subleasing Office Space: The Benefits, Risks and Costs

 

Subleasing office space can be an amazing opportunity for businesses with flexible requirements.

If you’re looking to sublease your existing office, you can capture some of the rent costs today with the flexibility to occupy more space in the future.

For companies that need to dedicated office space quickly, subleases provide the opportunity to move in fast and with minimal upfront fees.

But at the same time, locking into an office sublease has the potential to completely disrupt and burden both sides if you go into the process blindly.

Read on to discover the ins and outs of subleasing office space to determine whether it’s a wise option for your business.

How Do Office Subleases Work?

Traditional lease agreements typically involve a building owner (lessor) and a business owner or occupant (lessee). Subleases, on the other hand, occur when a lessee rents out all or a portion of his or her office space, effectively becoming the “sublessor.”

Not all lessees are entitled to sublease their office space, however. The rental agreement outlines the rules that the lessee agrees to, which can prohibit the act of subleasing.

Because sublease agreements occur within a traditional lease, they are typically shorter and less expensive than leasing from a building owner.

The Benefits of Subleasing Office Space

Subleases allow sublessors to offset some costs incurred through their lease agreement.

But subleases have plenty of upside for sublessees that desire shorter-term lease agreements and don’t have stringent layout requirements. Some benefits include:

Greater Negotiating Power

Sublessors are typically crunched for time and eager to generate an additional revenue stream. Due to this urgency, sublessees gain greater negotiating power in the sublease process.  

Below-Market Rates

Subleases allow the sublessor to offset some costs of a large office. As a result, subleases are typically available below market rates to attract more prospects.

No Long-Term Commitment

As a company subleasing office space, you’re typically only locked into a fraction of the lease timeline that the lessor has agreed to, offering greater flexibility in your business plan.

Minimal Upfront Capital Required

Traditional office leases typically require you to pay a security deposit, a few months’ rent and additional build-out costs before you occupy the space. However, most subleased offices come furnished and are move-in ready, saving you thousands of dollars upfront.

Quick Move-In Timeframe

When leasing office, there’s often a lengthy (and costly) build-out process involved before your business can move in. By subleasing, you eliminate this step and can typically move in much faster than with traditional businesses leases.

Cons of Subleasing Office Space

Despite the flexibility of subleases, they pose a serious risk to both the sublessor and sublessee. For examples:

Risk in Default from Sublessor

When subleasing office space, you’re hitching an agreement to the sublessor and relying on that person to make payments to the owner. If the sublessor defaults on his or her payment or is evicted, your business also suffers the consequences.

Risk Sublessor Pockets “Rent” Payments

As a sublessee, you also run the risk of the sublessor pocketing payments without your knowledge, rather than passing those on to the owner.

Minimal Tenant Improvements (TIs)

Sublease agreements are often rigid with TIs, giving sublessees little room to make basic improvements or customize the space to their business needs.  

6 Questions to Ask When Subleasing Office Space

Now that you understand the hidden costs of signing a sublease, you may be wondering: Is subleasing an office worth the risk?

Here are six questions that potential sublessors should ask before engaging in a sublease:

1. Do You Have to Sublease Your Office Space?

Landlords typically accommodate growth within their portfolio.

If you need to increase your size, check to see if your existing landlord has any vacancy available for you to move into. If this works out, you can add the new space to your current lease, or sign a new lease for the larger space. In this case, you can avoid your sublease entirely.  

The same is not always true for downsizing. Landlords rarely make accommodations to tenants that result in them reducing their cash flow. If there is a smaller space available, the landlord may charge you a higher rent than you are paying now to offset their loss, removing any cost savings for your move.

2. Will Your Landlord Approve the Sublease?

Chances are, your lease has language about a sublease. Some agreements clearly state that you are not able to sublease your space during your term. If you can sublease your space, you generally need to get your landlord’s consent. Although the landlord cannot reasonably withhold their consent, they generally reserve 30 days and a processing fee to do this.

If you need to sublease your space within 30 days, you may not have enough time to find a subtenant and get your landlord’s consent.

Additionally, your landlord may not let you sublease your space if there is a competing vacancy available for a direct lease.

3. Are You Still in the Space?

Offices are usually subleased faster when they are vacant opposed to occupied. When an office is “move-in” ready, the sublessee can easily see the condition of the space and get excited to start moving in. If your business is still operating in the space, it may not present as well, and sublessees may have a hard time imagining themselves in the space.

4. Are You Prepared to Take a Loss?

Be prepared to get offers on your sublease between 50% to 75% of your lease obligation.

The value of a sublease differs from that of a direct lease. When a tenant signs a lease directly with a landlord, there are various concessions negotiated into the lease (free rent, tenant improvements, etc).

If your goal is to offset a loss as a result of vacant space, you may not be prepared to offer the same concessions your landlord would.

5. What Are Your Furniture Plans?

Sublessees may want your furniture, or they may want the space delivered vacant. If you’re moving into another space, do you plan on taking your furniture with you? If you are not taking the furniture with you, and the tenant does not want the furniture, are you prepared to remove it?

6. Have You Factored Commissions and Tenant Improvements Into Your Financial Review?

When you sublease your space, you then become a sublessor/sublandlord. This means you may need to accommodate brokerage commissions and tenant improvements for the sublessee.

This raises another issue, specifically when it comes to restoration. If you are building out a space for a sublessee, who is responsible for putting it back to its original condition at the end of the term?

Whether you’re in the market looking at subleases or considering renting out your leased space, there are actions you can take to minimize your risk or exposure.

But at the end of the day, it’s important to ask: Do the business benefits justify taking the chance on a sublease?

Still have questions about your sublease or lease opportunities? Contact WindWater today to discover the best opportunity for your business.