Internal moves -- Subleasing excess office space

As published in the Fairfield County Business Journal and the Westchester County Business Journal

- By Alan Peterson

March 1, 2010. In today’s economy, many tenants are considering subleasing excess office space either for economic or operational reasons. Before deciding to proceed, however, evaluate the many hidden costs in order to make a fully informed decision  

Obligations to tenants

When splitting an office suite for use by others, you will likely need to ensure the new occupants enjoy independent access to restrooms, fire stairs and elevators while preserving your own space as a secure suite. Alternatively, depending on your level of trust, you can carve out an office or two within your space without actually creating a separate suite.

Whatever you decide, however, your lease will probably require you to restore the premises to a single suite, so you must incorporate these costs in your analysis before moving forward. 

In addition, if you wish to lease a large amount of space, your sublease must provide a longer term. For example, as many as 90 percent of the prospects looking for 10,000 or more square feet will refuse to move into space where the lease expires in two years or less. In this situation, to avoid the cost and inconvenience of a second move in two years, prospects would require either, 1) you negotiate a buy-out with the landlord so they can negotiate a direct longer-term deal, or 2) in addition to the sublease, they must negotiate with the landlord for a new lease agreement effective upon its expiration.

 

Obligations to the landlord

 

First of all, evaluate your lease to determine whether it contains any restrictions on subleasing. As you market the space, you become a competitor of the landlord, and your lease may prohibit you from subleasing to an adjacent tenant, another tenant in the same building, or a prospect they have negotiated with during the previous six months. The lease may even include clauses giving the landlord first option in taking back the entire space or unilaterally prohibiting you from subleasing at all. These types of restrictions are becoming more prevalent as tenants give up valuable rights without fully considering the alternatives or consequences.

 

Other subleasing challenges occur when the landlord uses a gross lease to make you pay additional rent when operating expenses increase compared to a “base year,” typically your first year in your new space. Understandably, passing along this type of cost to the subtenant may present an administrative and accounting inconvenience, so tenants often find it preferable to structure the sublease rent as a fixed number with a slight premium rather than a lower rent with the right to pass along a percentage of annual increases over a base amount.

 

Finally, your landlord may require you to share a percentage of the profits derived from subleasing, typically 50-50 after expenses such as commissions and alterations. In the event you are expecting a profit, be sure to confirm the extent that subleasing costs are deducted prior to profit sharing.

 

Obligations to your company

 

In a direct deal with the landlord, tenant alterations are usually funded and amortized into the deal. Under a sublease, however, you as sublandlord may be averse to investing more money into the space. If so, you should be prepared to offer either a discount rent or free rent to cover the reasonable costs of alterations. For this reason, subleases are often structured as an “as is” deal.

 

Finally, depending on the layout, you may find it difficult to consolidate your work force within your remaining space without loss of some valuable areas such as a kitchenette, conference room, IT room or reception area. The cost to relocate and recreate these functions in a downsized office should be factored into your profitability analysis as well.

 

Subleasing can encompass more of an upheaval than you might think. Anticipate and understand consolidation layout costs, sublease income expectations and lease restrictions before reaching a decision. It may be wise to consult with an architect, commercial real estate agent and/or a real estate attorney before proceeding.

 

Alan Peterson is principal of Choyce Peterson, Inc., a commercial real estate brokerage and consulting firm with offices in Stamford and Rye Brook, N.Y. Reach him at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

 

Posted with permission of Westfair Communications, Inc.