Over the past few years, my company has been busy helping clients sublease office space, either by finding sub-tenants for those who have shifted to remote work or by securing subleases for clients seeking ready-to-move-in offices at good prices. Subleasing involves more complexity than direct leasing, requiring the coordination of tenants, subtenants and landlords, all of who can vary in their level of cooperation and motivation. Even the names of the players can be confusing. For example, the company that is trying to sublease its space can be known as the “sublessor,” “master tenant” or simply, “tenant.” Understanding and communicating correctly with all the parties to a sublease is a key first step.
Let’s say you no longer have use for your office space, but have multiple years left on the lease term. When considering subleasing your space, it’s essential to understand your lease’s sublease provisions, as landlords often impose restrictions that can complicate the process. Review the sublease language in the lease early in the process. Some landlords heavily restrict subleasing unless it’s clearly beneficial to them. Knowing your rights and obligations is crucial for negotiation.
In many urban markets after 2020, subleasing has become highly competitive and challenging. However, in Boise, there is strong demand for functional, move-in-ready spaces. Most spaces available for sublease in Boise are either subleased or sublease interest has led to a lease buyout from the landlord. Well-located and furnished spaces don’t usually need to be offered at a steep discount. More critical than the offered rate is the deal’s commencement. It’s generally better to consider a deal with a lower rate for an immediate start than wait several months for a higher rate, as delays cost money. Once you negotiate a sublease deal, present the terms and the subtenant’s financials to your landlord. Many landlords prefer leasing directly to a company wanting the space rather than a tenant looking to offload their lease. The creditworthiness of the parties plays a large role in this decision for a landlord. If a buyout isn’t possible, request a consent document from the landlord to attach to the sublease. It’s vital to secure this consent early to avoid wasting time and money on legal fees should the landlord refuse to approve the deal.
A furnished “turnkey” sublease space is highly attractive for many prospective subtenants and can be an excellent marketing point. Be realistic about the furniture’s value. Often, furniture is included free as an incentive to a subtenant. On the other hand, a client recently sold $80,000 worth of furniture for $30,000, which satisfied both parties and secured the deal. But if furniture isn’t sold at the sublease’s start, decide who will own it (and therefore remove it) at lease end and at what cost, if any. Create a detailed inventory of the furnishings, fixtures, and equipment (FF&E) and attach it to the sublease and any Bill of Sale involved in the transaction.
If you’re looking for new office space, should you consider sublease spaces? For sure! But be mindful of market conditions and the various pitfalls. In Boise, don’t expect significant discounts on the rental rate. If your start date is months away, know that sublessors might favor immediate deals and be less motivated to agree to a deal that doesn’t start for months. When negotiating, ask for a copy of the tenant’s lease (financial terms might be redacted). The sublease language could allow the landlord to cancel the lease if a sublease is pursued. Investing time and money in a space only to have the landlord cancel can be a significant setback. Additionally, be aware that if the tenant defaults, you could lose the space as landlords often have the right to recapture or cancel the lease in case of a tenant default. Subleasing from large corporations can be particularly tricky. Despite assurances from their real estate or facility teams, final approval can be slow and may get vetoed by higher executives. Always have a backup plan.
Subleases can be excellent space solutions but approach them with caution.
Greg Gaddis, SIOR, CCIM, and his Boise based company, Tenant Realty Advisors , assist commercial space occupiers with their office and industrial space needs. He can be contacted at greg@tenantrealtyadvisors.com.
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