Whether you’ve outgrown your current office space and are relocating before your original lease expires or you’re right-sizing your office footprint and have unused office space, subleasing can make sense for a number of reasons.
At AQUILA, we’ve successfully subleased space on behalf of numerous clients. As a tenant, it’s important to understand each step of the process and to know what may be expected of you at each step of the way.
In this article, we’ll explain why you might consider subleasing space and guide you through each step of the subleasing process.
Why Sublease Your Office Space?
There are a number of reasons we see tenants consider subleasing their space.
First, you may determine you need to downsize your office space. Whether you occupy multiple floors in a building or just a small suite within a larger project, you may find that you’re not maximizing your space. Subleasing a portion of your space, be it a full floor or portion an unused portion of your existing suite, can be a great way to mitigate your remaining rent obligation. While you’re still responsible for paying rent on the full space, a subtenant can help offset this cost by paying you rent for the space they occupy.
Another common reason for subleasing space is when a company outgrows its current space and needs to relocate to a new, larger space before its lease expires. In this case, subleasing can help you avoid paying double rent for the remainder of your original lease.
Finally, it’s not uncommon for high-growth companies to lease a space larger than what they currently need, in order to accommodate for future growth. In this case, if you sign a longer-term lease for your projected occupancy needs, but you only need half of that space today, you could sublease the remaining half of the space for an initial period of time until you need it all.
Step 1: Analyze Your Lease & Understand Your Options
Once you’ve decided it makes sense to sublease your space, the first thing to do is examine the sublease rights in your lease alongside your broker.
Analyze Your Lease
First, it’s common for you to be required to notify your landlord when you decide to sublease. Your broker should be familiar with what is required and help you submit your notification based on any specific measures outlined in your lease.
Next, you will want to understand what consent restrictions and recapture rights your landlord has on your space. These will have been determined during your original lease negotiations and will be outlined in the language of your lease.
First, you’ll want to also understand what rights your landlord has to withhold or delay their consent to your sublease.
Ideally, your lease will contain language preventing your landlord from unreasonably withholding, conditioning or delaying their consent to a sublease.
Additionally, you’ll want to make sure that there are no restrictions on what type of tenant you can solicit. Some landlords may want to limit what type of tenants occupy their building, prevent you from subleasing to an existing tenant in the building, or restrict your right to sublease to tenants who have shown interest to some degree in the building directly.
Be sure to read carefully to understand if your lease allows you the right to market to all tenants or if there are any restrictions on who can sublet your space.
Lastly, there may or may not be a timeline associated with how long of a period a landlord may have to provide or deny consent. A good tenant representation rep broker will have these conversations early and often with the landlord, as well as continue to push the sublease through for consent in a timely fashion.
A recapture right allows the landlord to take back your entire suite (or premises as outlined in your lease), should you request to sublease.
Once a subtenant is secured and a sublease agreement is signed and submitted to the landlord for approval, the landlord can choose to enact its recapture rights.
AQUILA Pro Tip
Limit Recapture Rights Before You Sign Your Lease
Imagine you occupy a 10,000-sf office with eight years left on your term. Your company decides to move 50% of employees to work remotely for the foreseeable future. Suddenly, even when accounting for social distancing redesign, you only need 7,500 sf of office. If your landlord has recapture rights that are not limited to requests for the entire space and entire term, your landlord could take back your entire space, or essentially force the denial of the sublease. Many factors can come into play in a scenario like this and it is important to have a good tenant representation broker with your best interests in mind from the start.
Your recapture rights are important to understand at the beginning so you can evaluate your options fully and understand all potential outcomes. Your tenant representation broker will be able to help you navigate this language and any potential implications.
Understand Your Options
At this same time, you’ll want to work with your broker to understand your options and sublease strategy.
What’s driving your sublease? Are you in the market for new space? Did you sign a pre-lease in new construction that’s delivering before your current lease expires? Or are you downsizing and hoping to mitigate your rental obligation?
Is your move or downsize contingent upon finding a subtenant? Or do you have plans to move on a certain date?
If you’re subleasing a portion of your space, are you willing to take on the cost to demise the space? Or are you open to a shared environment?
Finally, what concessions can you offer? Is there any unused TI allowance that can be passed on to the subtenant? Are you offering the space empty or furnished? Would you consider changing the paint and carpet for your new tenant?
All of this will help your tenant representation broker understand your project timeline and priorities, as well as help them market and price your sublease.
Step 2: Bring Your Sublease to Market
Next, your broker will help you set an asking price for your sublease and begin the process of marketing your space.
Determine Your Asking Price
There are a number of factors that can influence how your broker recommends you price your sublease. These will include:
- Overall market conditions, such as total market vacancy and overall tenant demand
- Your rental rate
- The condition and layout of the space
- The building asking rate and comparable transactions within the building
- Market asking rates and comparable transactions
- The urgency of securing a subtenant
- And more
In some situations, you may stand to profit from a sublease if the market is tight and your rental rate is well below market. In this case, you may be able to secure a sublease rate above your own rental obligation.
AQUILA Pro Tip
Right to Retain Profits
Make sure that your lease allows you to keep a portion of any profit earned in your sublease. It is standard for landlords to request 50% of any profits made. However, you don’t want to push for a profitable rate if you do not have the right to keep at least 50% of this income.
However, it is more common for companies to sublease their space at a rate lower than what they are obligated to pay in their lease. If your rental rate is at or above market, or there’s an excess of supply compared to demand, it can often make sense to secure a tenant today at a slight loss, than to hold out for several months waiting for a tenant to cover your full obligation. Additionally, subtenants do not receive many of the same rights as direct tenants (such as renewal and expansion options) so it’s reasonable to expect that they may not pay a rate comparable to tenants negotiating with the building directly.
For example, imagine you have 36 months remaining on a 5,000-sf lease at $50/sf/yr. If you agree to terms with a subtenant today at a $42/sf/yr rental rate for the full 36-month term, you’ll recover 85% of your remaining rent obligation.
If you hold out for a tenant willing to pay the full $50/sf/yr rate, you risk losing more money in downtime than you gain in monthly income. If it takes you six months to secure a tenant for the full $50/sf/yr rate (a not uncommon result): the six months of lost income result in just an 83% recovery of your total rental obligation.
The amount of term remaining on a sublease is a key determining factor in how the market will perceive it from a rental rate perspective.
Your broker should provide you with a custom recovery analysis to give estimated best and worst-case recovery scenarios based on your lease situation and the market. A good broker will update this recovery analysis with each offer in order to show you how an offer impacts the whole picture.
Market Your Property
With all of this information in hand, your broker will put together marketing materials to promote your sublease. At a minimum, these materials should include:
- A sublease flyer that features images of the space, a list of property and suite-specific features and highlights, details including size, term, date available and rate, leasing contact information, a location map, etc.
- A listing page on the brokerage firm’s website, making your space easily accessible online and via search
- Broker emails, a regular distribution promoting your property to the firm’s database of local brokers
- A listing on commercial real estate sites like Costar and LoopNet; these sites are a broker’s first stop when searching for spaces for their clients
- A spot in the firm’s available inventory report which is distributed on a monthly basis to the brokerage community
AQUILA Pro Tip
Find a Brokerage Firm with Marketing Horsepower
In addition to these basic marketing materials, at AQUILA we recommend taking professional photography of your space in order to maximize its appeal online and in print collateral. Additionally, we recommend using video to allow prospects to experience your space without leaving their home or office. A high-power marketing department will also be able to provide additional out-of-the-box services and ideas as needed like advertising, events, branding and more.
Engage Prospective Tenants
Your broker will use these materials to get your property in front of prospective tenants and brokers.
In addition to passive marketing via website and email, your broker will monitor incoming tenant requirements and send out your space in response to tenants that may be a good fit.
Additionally, your broker will monitor deals in the market and make sure your space is seen by any potential subtenants.
Your broker will also communicate directly with other tenant representation brokers in the community to make sure everyone is aware of the opportunity and keep your property top of mind.
A part of the prospecting process is bringing tenants into the space for property tours. Be prepared for your broker to bring groups of people through your space during the day. Your broker can coordinate these tours with you, at your preference.
If the space is empty, these should be easy to coordinate. Your broker will likely just need a copy of the key to your space in order to gain access without disturbing you for each tour.
If your company is still occupying the space, be sure to keep the space clean and welcoming. Think of it like selling a house: it’s best practice for knick-knacks and clutter to be tucked away in order to present an appealing space the prospect can see themselves moving into.
AQUILA Pro Tip
Tours During COVID-19
During periods of social distancing as a result of COVID-19, these tours may look a little different. Some tenants do prefer to still visit space in person. In this case, your broker should follow best practices for touring during COVID-19 and if your office is occupied, work with you to schedule tours for downtimes when there are fewer employees in the space, like lunchtime or after business hours.
Throughout the marketing process, your broker should provide regular reports to keep you up to speed on the activity on your space.
Included in this report should be a record of any tours or inquiries, an update on any proposals received or negotiations, and a recap of marketing efforts including emails, new photography or video, advertising performance, etc.
Step 3: Negotiating Your Sublease
Once a tenant is interested in your space, their broker will submit a request for proposal or letter of intent to begin the negotiation process for the sublease.
Your broker will present the request to you alongside an analysis and a recommendation for the next steps in the negotiations. They will help you craft a response, and guide you through the back and forth negotiations until terms can be agreed upon.
If there are multiple parties interested in your space, your broker will help you leverage this interest to get you the best possible terms.
Once terms are agreed upon with a subtenant, you’ll need to finalize the actual sublease agreement with the subtenant (this is a legal document that always helps to have legal counsel create and review as well), and begin conversations with your landlord.
The exact process and protocols for this should be outlined in your lease, and your broker will play an integral part in guiding you through this process and pushing the agreement through with the landlord.
Step 4: The Subtenant Takes Over the Space
Finally, once the subtenant is secured and approved by the landlord, the final step is for you to move out of the space (if you haven’t yet) and meet any criteria you agreed to in the sublease document such as recarpeting or demising the space so the subtenant can move in.
Your broker will also help you set up a process to begin collecting rent from your new subtenant. It’s important to know, your landlord will expect to keep receiving rent payments directly from you, and you will be responsible for collecting from the subtenant.
Now that you understand the process for subleasing your space, here are some other articles that you might find helpful.
- 7 Benefits of Hiring a Tenant Representation Broker
- 8 Other Problems a Tenant Rep Broker Can Help You Solve (Besides Finding & Leasing Office Space)
If you’d like to speak to one of our tenant representation brokers about your subleasing needs, please schedule a consultation today.
Are you interested in learning more about rent relief options in the face of COVID-19? Visit our COVID-19 Austin Commercial Real Estate Resource Center.