There are inherent advantages and disadvantages to an office sublease . When considering relocation, office tenants should carefully compare the sublease option with a direct lease (for more on office relocation, read How to Find the Right Office Location in 10 Steps). In many cases, the benefits of a sublease outweigh the disadvantages. Below are three advantages and three disadvantages of subleasing office from another office tenant, compared to signing a direct lease with a professional landlord.
For most firms that sign a sublease, the biggest benefit is receiving a low rent rate. Subleases are almost always significantly less expensive than a direct lease with a landlord. Sublease inventory has increased since the Great Recession, leading to further savings available for those who opt to take a sublease.
Most professional landlords insist on a lease term of at least 3 years for direct leases with new tenants. Companies looking for shorter lease terms are usually forced to renew in their current location. However, most subleases tend to be in the 12 to 24 month range. Of course, a short term is a ‘double-edged sword’, because you will have to renegotiate and/or relocate in the near future. Alternatively, you can negotiate a direct lease agreement with the landlord to start once the sublease expires. For example, you may sign a 1 year sublease with Business A, and simultaneously sign a 4 year direct lease with Landlord B, creating a framework for staying in place for 5 years.
Sublessors tend to be less strict than professional landlords when leasing space to young companies. For startups, professional landlords require personal guarantees, a significant letter of credit, or a large security deposit (up to one year’s rent). Sublessors have less invested in the real estate, so they tend to be more willing to take risk. Thus, sublessors usually will accept less creditworthy tenants and lower security deposits. However, the landlord will usually have to approve any sublease agreement his tenant makes.
Despite the recent increase in sublease inventory, it is still difficult to find an office for sublease that exactly fits the specific needs of a given business. Most sublessors do not offer a Tenant Improvement allowance, so customizing the space is not an option unless you want to spend your own money to do so. Alternatively, you may be able to sign a direct lease in addition to the sublease, with the direct lease starting right after the sublessor’s lease expires. If you also sign a direct lease at the property, the landlord may provide a TI allowance.
As the sublessee, you must be confident in both the primary tenant and the primary landlord. If either party acts unfaithfully, or if the relationship between the two sours, then you will pay the price. For example, if the primary tenant defaults on his rent, through no fault of your own, then you will probably be evicted from your office unless you can quickly sign a direct lease agreement with the landlord.
After your sublease expires, then your firm will be subject again to the market rates of a direct lease. As a sublessee, you likely enjoyed terms that were far below market, and a return to market terms could be a significant disruption to your cash flow. Since most subleases are short term, it doesn’t make sense to relocate from sublease to sublease. A sublease can be a smart way to save money for 1 or 2 years, but it’s not a long term solution.
For more on planning your office relocation, read my article How to Find the Right Office Location in 10 Steps. To discuss the local office market or for more information about available sublease options, contact me at email@example.com or (630) 805-2463.
January 14, 2019
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