It is not uncommon for tenants to need to sublease their space. Business needs are dynamic and the leases, usually five or more years in length, are stagnant. Whether you are subleasing because you need more space, less space, or no longer need space, here are six items to consider:
1. Stay focused on the goal
The goal is to receive the most cash flow over a finite period, which is the time left on your lease. Tenants often get sidetracked with how the deal compares to the market, but the reality is that is not relevant unless you have many offers on the table. It is essential to survey the offers that you have and evaluate the risk of turning down an offer to wait for one that is better. For example, if you have 30 months remaining on the lease, you will not want to wait three months (10% of term) for an offer that achieves 5% more in rent per month.
2. Understand where the market is now versus when the lease was signed
Understanding the market is important to effectively subleasing your space. Unless the market has appreciated significantly since you signed the lease, you should be prepared for there to be a delta between the lease rental rate and the sublease rental rate. Knowing the market will help you project and plan for this delta.
3. Evaluate quality of the subtenant
Remember that a sublease does not get you off the hook on the master lease. If your subtenant defaults, the landlord still needs to be paid. You will want to take a thorough look at the subtenant’s financial to ensure they have the cash flow to pay the rent.
4. Consider time left on lease
The shorter the time you have left on your lease, the more difficult it will be to sublease. While the flexibility of a shorter sublease can be attractive to many businesses, tenants do not usually like to enter into subleases of less than one year because there is too much uncertainty. In this case, working with the landlord to accommodate the subtenant at the end of your sublease may be the best solution for all parties.
Tenants often sublease space with the expectation that furniture will be available. While this can be a concession baked into the sublease, the reality is there is little residual value in used office furniture. Unless you have an immediate need for the furniture, be prepared to part ways for a nominal amount.
6. Remember Landlord Consent timing (often 30 days)
When subleasing, you are at the burden of a third party, the landlord. While you and a subtenant may be prepared for a lease to start immediately, there is often a clause in the lease that gives the landlord a specified period to review the sublease for approval. Be aware of this time frame as it may impact the sublease and cash flow.