Office Space: To Sublease or Not to Sublease?

If you are in a position of leadership in your organization and the bottom line is always within your focus, a very important line item on your budget is one of your largest expenses – your office space. With so much financial uncertainty, many organizations are addressing their office space efficiency and work place dynamics in an effort to control costs and maximize the benefit from their office space.

Understanding your occupancy costs each month is important but also understanding how your organization and employees utilize the space is critical. Why are some organizations with 50 employees occupying 12,500 square feet while another organization with 50 employees is occupying 17,500 square feet in the same quality of building and paying the same rental rate? The negative impact of inefficiency on the bottom line is obvious but the solution is not always apparent. Many of these organizations can benefit from subleasing. Subleasing is the primary option for an organization to mitigate the financial impact of inefficient space before an organization’s lease expires.

Step 1: Check your Lease Agreement

A well-negotiated lease will have Subleasing Rights for the organization in the primary lease agreement. Sometimes Landlord’s will attempt to put handicaps on your rights but most should allow subleasing to an organization of your choosing. Their consent is often required but cannot be “reasonably” withheld. Most leases required that you give your Landlord advance notice of 45 days – so keep this in mind and contact them early and keep them informed.

Step 2: Evaluate your Space – Two Types of Sublease Space

There are two types of subleases: Shared Sublease and Separately Demised Sublease Space. There are benefits as well as risks in each option.

Shared Sublease: Whether it is subleasing a few empty offices or half of the office space – this option is best suited for like-minded organizations who may find synergies in sharing a common working environment. This option also is attractive as it diminishes the need for construction costs. The Subtenant will be sharing the use of the conference room, pantry, and workroom at a schedule that will be determined in advance. Due to these benefits, it is possible to charge a premium for individual offices in many cases because of the flexibility that it provides for the Subtenant. In addition, the organization may benefit because the term of the sublease may be more flexible. It is important to have a good working, business cultural fit as well. Remember that you will see and interact with often with this Subtenant.

Separately Demised Sublease Space: This option often affords organizations the most benefits over the remaining lease term. While constructions costs might be significant in the beginning the rewards of covering more of the costs of the prime lease are higher as it allows the Subtenant to retain their own identity, security and privacy. Consult with an architect and a real estate advisor to understand the cost implications of demising and subleasing the space. Your real estate advisor will work with you in determining the most marketable portion of your available space and guide you as to the pricing per present market conditions.

Step 3: Understand the Benefits & Risks:

Consult a real estate advisor from the beginning. A good broker will not charge for a real estate evaluation on subleasing. However, costs are incurred through both sublease options if the organization chooses to move forward and it is important to understand these costs, as they will directly impact the savings to the organization. A real estate ad

visor will walk you through the costs that include brokerage commissions, attorney fees, Landlord fees, architect fees, and constructions costs. It is important to understand that you are creating a distinct legal relationship between yourself and the organization to whom you are subleasing. At the same time, the relationship between you and your Landlord remains intact. If you choose to sublease you will remain liable to your landlord for all the terms under your lease agreement. Remember, if they do not pay their rent to you – you are still liable to the Landlord.

Bottom Line:

Consult a real estate advisor to evaluate your current lease and your space efficiency. This will allow your organization to determine which type of sublease is appropriate. Make sure you choose your Subtenant carefully as it is your organization that will still be responsible to the Landlord for the prime lease. There are pros and cons to each sublease scenario that your real estate advisor will walk you through but if done carefully and thoughtfully this will lead to a successful outcome for your organization.

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