Subleasing Commercial Space – Is It For You?

Subleasing has upsides and downsides.

To determine if a sublease is the best fit for your business, consider these questions. Is your business growing or shrinking? What size space does your business need? What is the best location for your business? How long do you want to be there? The answers to these questions will help you determine if a sublease space benefits your current business position. Years of experience provide these simple guidelines for subleasing.

Reasons to Sublease Commercial Space:

  1. The location is ideal for your business and there are no other lease options that support your business expectations.
  2. Your business is in fluctuation and isn’t ready to sign a long lease term lease. Landlords often want a three to five-year commitment minimum with new tenants. A sublease is generally for a shorter timeframe.
  3. Your business and personal financials aren’t at their best. Perhaps your company is new and hasn’t established strong financials or the past year hasn’t been your company’s best on paper. Sublease financial requirements may not be as stringent as signing a lease directly with the landlord. This is because the original tenant remains accountable for paying the rent if the subtenant defaults. Note: A landlord will need to approve any company as the subtenant.
  4. The business is exceeding expectations and now it’s time to test a new location for your business and you don’t want to be obligated to a long-term lease.
  5. The following pros and cons of subleasing commercial space will further refine your decision-making process for a new location. If the pros outweigh the cons, subleasing might be right for you!

Sublease Pros:

  • Your business needs flexibility that a shorter-term lease offers. You are not locked into a long-term lease, which provides more time to perfect your business plan and assess the market as well as what is your optimum size space.
  • Sublease space may be furnished and can reduce upfront costs.
  • In a sublease, you negotiate with the current tenant versus the landlord. The current tenant has reasons for vacating the space and welcomes a subtenant’s income stream to offset their financial obligation to the landlord.
  • The original tenant probably has a rental rate below current market rates and the subtenant may be able to negotiate this even lower.
  • You may be able to negotiate free rent instead of a lower rental rate.
  • If the space is perfect for your business and you want a longer lease term; you may have the option to lease directly from the landlord. This benefits your business budget because the original tenant often absorbs some of the rent obligation to be released fully from their financial commitment to the landlord. This lessens your overall rental commitment.

Sublease Cons:

  • If the suite needs modifications, it’s often at the expense of the subtenant.
  • Your lease terms are what the original tenant negotiated with the landlord. In other words, the subtenant has the same lease obligations as the original tenant.
  • The landlord may require the original tenant to pay them directly. This means the sub-tenant has to trust the original tenant to pay the rent in full and on time.

You have less control over the space and direct communication with the landlord maybe limited.
In the right situation subleasing can be cost effective for your business. By signing a sublease, you are helping the original tenant decrease their financial obligation to the landlord and reduce their legal obligation. As the subtenant, this can be advantageous. Remember to hire a professional to assist you with a sublease transaction. This includes qualified tenant representation and an experienced commercial real estate attorney.

For more on leasing and renewals, read SimpLEASEity™, Andrea Davis’s new book written for the business owner.

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