Thinking about subleasing your office space? Here’s what you need to know.
Office subleasing is a fairly common business practice across the board. There are advantages to subleasing office space, of course, but there are also a few drawbacks. If you plan to sublease your office space in the near future, it would be wise to give it serious thought before making a final decision.
Why Do Companies Sublease Office Space?
It might help to ask this question before delving into the benefits of subleasing: Why do businesses choose to sublease office space?
There are a number of reasons why a company might choose to sublease office space to another business. Here are a few:
- The company has outgrown the space and needs to upgrade but their lease has not expired. In this case, it might be less expensive to sublease to a new tenant rather than break the lease.
- The company might be relocating to a different city, perhaps to take advantage of tax benefits or incentives, or for more practical reasons like being closer to suppliers or business partners. If the lease is still in force for a period of time, the company could be better off subleasing the space.
- Business forces have caused the company to downsize so a smaller office is needed. The company may sublease a part of its office space or all of it and move to another location.
- A merger or acquisition may cause a company to give up its office space, in which case subleasing could be a wise decision.
- A company going out of business may try to defray some of the costs of bankruptcy or liquidation by subleasing office space.
These are just a few reasons why companies might lease out office space they have leased from another company. So now the question: Is subleasing a good deal?
Some Pitfalls to Subleasing Office Space
In almost all cases, office subleasing is done at a lesser rate than the original lease. The primary reason for this is because the other two options for the lease holder are to let the property sit vacant, which doesn’t benefit anyone, or to break the lease. Either of those options could be more expensive than taking a monthly loss.
There are situations under which you definitely do not want to sublease your office space. If the company you are considering has bad credit, then they may be a bad financial risk. You could end up in a worst-case situation if you sublease to a company that can’t pay for the lease or meet the terms of your agreement.
Another scenario you may encounter is a difficult landlord. Your landlord may want to approve your sublease, or your original lease agreement may have stipulations for subleasing that are so unfavorable that it just isn’t financially feasible for you or may provide a management headache you are not willing to take on. This is where you’ve got to have someone who is a savvy negotiator working on your behalf and discussing your company’s interests with both the landlord and your potential sublessor.
If you find yourself in a favorable market where the leasing market is higher than what you are paying for rent, your landlord may want to split any payments over and above your own agreement. If that is the case, check to make sure your split will cover your expenses in finding the right tenant.
What to Do If You Decide To Sublease
Let’s say you’ve spoken to your landlord, your attorney, and a real estate agent. You’ve decided that subleasing is your best option. How do you move forward?
- Read your lease carefully. Is there a clause buried in the lease that would let you break the lease with advance notice (often 90 days)? If so Would that option be better than subleasing?
- Does the lease prohibit you from subleasing? If it does not, make sure you understand the terms under which subleasing is allowable. Does your landlord have final approval? Are you allowed to sublease the entire space or just a portion of it? Do you have a cap on how much rent you can charge? Is there a type of tenant your landlord does not want in the building? Be sure you understand all permissions and restrictions for subleasing.
- Check with your neighbors. Do any of them want to expand into your space? Can they afford it?
- Is subleasing practical? Does the space provide adequate entrance and exit for potential tenants? Will they have enough parking? Does it suit their operation?
- Advertise. You’ll need to put the word out that the space is up for leasing.
- Interview potential sublessors and sign a contract.
In order to make the best financial decision for your company, you should have your accountant work closely with a real estate agent throughout the process. Also include your attorney in all the discussions so that you stay out of legal hot water.
Subleasing your office space to another business can be beneficial if there is a clear financial offset to expenses incurred as a result of your moving out and leasing the space. However, you must weigh those financial benefits against any management hurdles that might make it less favorable.