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The Rise of Subleasing: Does it Make Sense for Your Company?

What is a sublease? In a sublease, the original tenant leases out part or all their space to a new tenant to reduce the financial burden of paying for excess space. When this happens, the original tenant acts as the sublandlord, and the new tenant becomes the subtenant.Most often, tenants sublet their spaces for financial reasons or have additional space that is not being used.Subleasing your space is always going to be a far better financial decision than to risk defaulting on an existing lease. As with most things, there are advantages and disadvantage to subleasing. If you plan to sublease your office space in the near future, here is an overview of what you need to know. 

Language to Look for in a Sublease Clause:

Every sublease clause is different, so at WRA, we provide our clients with a complete breakdown and outline of the sublease clause. We will help you fulfill all of the Landlord's sublease requirements and ensure that there are not any hiccups along the way. Below is a general list of common requirements to obtain consent in order to sublease your space:

● Notifying Landlord of intent to sublease space.

● Look carefully at the default clause

● Alterations to the space and Approval Process

● Landlord’s approval time and termination/recapture rights.

● Additional fees owed to the landlord for subletting your space.

● Specific documents landlord requires for approval

● Any limitations on subleasing only a portion of the space? Does the landlord have competing space available in the building?

● Financial Requirements specific subtenant would need to meet to obtain approval


Advantages of Subleasing:

There are various reasons why a company might elect to sublease office space. Here are a few:

You have more space than you need - Maybe when you first leased the space, the office was just the right size, but you have downsized since then, and are paying for unused space. In this scenario, subleasing only a portion of your space may make sense, even if you think you may need the space down the road.

Growing Faster than Expected: When the office is starting to feel cramped, it is time to expand. In this situation, there are three options. The first is having your tenant representative ask the existing landlord if there is any space in the building that will fit your needs. The second option is subleasing your entire space and looking for space in the market. The final and most expensive option would be to negotiate a buyout with the existing landlord.

Your Company Downsizes or No Longer Needs Space. If your company has decided to downsize or possibly looking to shift business models (i.e. a virtual workforce), subleasing will help free up cash flow and significantly limit your lease liability.

Supply vs Demand: With Boston ranking 4th among the Top U.S. Cities in 2019 for total VC funding, at just over $3 billion, there is a vast number of startups that are looking for flexible lease options. There will be a significant demand for sublease space, most notably from startups.

Networking opportunities: Subleasing a portion of the space with a complementary business can create opportunities to network, generate new ideas, and grow your referral base with other similar, but non-competing companies.


Disadvantages of Subleasing


If you are considering a Commercial Sublease, keep the following things in mind:

You must ensure subleasing is practical for your business: If your business is looking to sublease a portion of your space, then we need to verify that the office space includes two ways of egress, prepare a build-out budget, get the appropriate vendors in place, and work with the landlord to make sure any build-out falls in line with the building standards for that specific building. Also, do you plan on sharing any space with a potential sub-tenant? (i.e. sharing a common kitchen?)

You are responsible for damages: Since you signed the original lease with the landlord, you are responsible for returning the space to its original condition. While commercial subtenants are typically responsible for maintaining the property, you as the sublessor become responsible should they refuse to repair or pay for the damages.

You must pay the rent no matter what: In any sublease agreement, there is always a risk that the subtenant simply stops paying rent. Each subtenant is carefully vetted by not only the landlord but also the sublandlord. Unfortunately, situations can arise that can cause a subtenant to default. Regardless of the reason, the existing tenant is still responsible for paying the landlord the full rent due each month.

Hidden Costs: The tenant will be responsible for paying for the Landlord to review the sublease agreement. This includes any legal fees incurred during the approval process, which typically are capped between $1,000-$1,500. Depending on whether a tenant is subletting the entire space or a portion of the space, other costs can include brokerage and project management fees, build-out costs, including hard and soft costs.


Sublease Marketing:

In today’s market, subleasing can be a great option for tenants with too much space, looking to consolidate offices, or simply looking to be in a better location. At WRA, we understand there will be competition out there, which is why we do a significant amount of research upfront to make sure our client’s position in the market will help yield the best results. Your space will be seen on multiple platforms, but among other things, we also think it is important to call on every business within a 10-15-mile radius. With the 360 virtual tours we provide each client, it improves the chances of finding a subtenant by 50%. With each sublease there are several factors that need to be considered to market effectively, for example:

● Provide insight into recent trends in the market

  • Average time on the market for sublease space in the area.

  • Average sublease rates and size that are comparable to our client’s space, that may present a more competitive environment.

● Setting Clear Expectations from the start, with a single point of contact that will provide our client with weekly updates to provide complete transparency.

A complete list of available subleases within a 10-15-mile radius that share similar characteristics 

● Creating Marketing Brochure, Floor Plan Creation and/or different Subdivision ideas and plans

● Scheduling and executing all tours

● Preparation and negotiation of all Proposals, LOI’s, sublease agreement


Summary

In a strong market, roughly 3% of the total leased space is available for sublease. However, due to the current Pandemic and economic situation, we will see an influx of sublease space coming available over the next 6-12 months, and the sublease market will become very competitive. Whether your company is thinking about subleasing your space, either now or down the road, we are here to help. WRA promises that with 100% certainty, that we will go above and beyond to ensure that each client walks away knowing they made the right decision when hiring WRA to represent their real estate needs.

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