If you’re considering subleasing commercial space, there are a lot of different factors to consider. Is this the right option for your business? Are there any risks that you should be aware of? How much is this going to impact your bottom line?
Price Commercial Properties is here to walk you through the process to help you feel more confident in your decision to sublease.
How Does a Commercial Sublease Work?
When renting a commercial space (office, retail, industrial, etc.) for your company, business owners sign a traditional lease agreement provided by the building owner. Subleases work a bit differently and happen when the person leasing the space (lessee) from the building owner decides to rent out their space before the lease terms are up — making them the sublessor.
The original lease agreement will determine if the lessee is allowed to find a sublessor for their space — and dictates any specific rules around subletting set by the building owner. Subleases are often sought after by companies that need a lease term that is shorter than the standard three to a five-year lease agreement.
The Benefits of Subleasing a Commercial Space
For companies that are looking for a shorter-term lease agreement, subleasing provides a variety of benefits. Here are the main advantages sublessors will experience when entering into a sublease agreement.
More Affordable Commerical Spaces
In most cases, subleases are available at a below-market rate as a way to attract more potential sublessors to the property. While there are risks with renting a sublet, which we will cover in more detail below, the risks are often outweighed by the cost. Most companies can reduce their commercial space costs by securing a sublease in place of a traditional lease agreement.
Flexible Lease Terms
Whether your company needs space for a few months while you’re renovating another space or you’re looking to expand your business in a new area, subleasing makes it possible for you to rent a commercial space for less than three to five years (the standard lease terms). While the length of a sublease will vary, the majority range from 12 months to 24 months — sometimes with the option to do shorter. The shorter commitment allows for more flexibility as you figure out your next move.
Expedited Move-In
When moving into a new commercial space, there’s often time that goes into the planning and build-out process to make the space customized to your company’s needs. With a sublease, this build-out process is eliminated, allowing you to move into the location much more quickly than you would with a traditional lease.
Fewer Upfront Costs
With a traditional lease agreement, you can expect to pay a security deposit, first and last months’ rent, and any costs associated with building out the commercial space to fully suit your company’s needs. However, you won’t have many of these costs with a sublease because they’ve already been covered by the lessee. In many cases, the sublet will also come furnished so you and your team can move in without spending large chunks of change upfront.
Increased Negotiating Power
If a space is available as a sublease, the lessee probably needs to get out of their lease agreement for a specific reason. Because of this, sublessors often have far more negotiating power than they would with a standard lease.
What Are the Risks of Subleasing Commercial Space?
While subleasing provides a more affordable option with less commitment, it’s not always the ideal option for every company in search of new commercial space. Before committing to a sublease agreement, make sure you are considering the disadvantages as well.
Limited Lease Renewal Opportunities
When taking over an existing lease as a short-term agreement, there is a chance the building owner doesn’t provide the option for you to extend the lease or take it over completely once it’s finished. While this might be fine depending on the reason you opted for a sublet in the first place, it’s something to take into consideration if there is a chance you would want to extend your stay in the space — preventing you from needing to start the hunt for a commercial space all over again.
Commercial Space Might Be Shared
If you’re taking over a large space, there’s a chance that your sublease is only for a portion of the space — which means that there will be other tenants within the same space as you. Depending on how the specific commercial space is laid out, this could mean you’re directly next to other tenants. As a result, there might be noise and foot traffic that you have no control over.
Fees for Damage Before Your Sublease
Depending on the exact terms within your sublease agreement, there’s a chance that the sublessor will be responsible for all damages to the space — from the time they resided in the spaces, as well as the time prior that is part of the original lease terms. This means that if you take over a space that already has some damage to you, you could be on the hook to pay for those upon moving out. When signing your temporary lease agreement, you must walk the space and take note of any damages that existed before you moved in.
Unideal Floor Plans
When signing a standard lease agreement, move companies moving in will do some sort of buildout to customize the commercial space to their exact needs and specifications. However, when taking over an existing space that has already been customized, you might not find a sublet that fits all your specific business needs. While you might be able to improve the space slightly, customizing it fully is typically not an option — leaving your company to work around the existing floor plan that was set by the previous tenant.
Rates Increase at the End of the Agreement
In most cases, a sublease tends to provide companies with a more cost-effective solution when looking for a new space. Because of this, the rates are often below market value — which can seem like a major win. But this is also something you need to consider if you plan to stick around in the space once the temporary lease agreement is up. If you opt to sign a traditional lease agreement for the space you were subletting, the rates are likely to increase drastically.
Costs Associated with Subleasing Commercial Space
Subleasing costs will be different in every situation, but these are the different costs that you should be aware of in case they come up:
- Brokerage Fees – If you’re looking to find someone to take over your existing lease, you might choose to hire a commercial real estate broker to help rent out your sublease. When you decide to go this route, you won’t have any upfront costs but will be required to pay a brokerage fee once the space is filled.
- Legal Fees – Whether you’re navigating getting out of your existing lease or negotiating with a sublessor, you might opt for legal counsel to provide advice throughout the process. The most complex the negotiations or contracts, the more hours you’re going to rack up on your bill with the lawyer.
- Marketing Expenses – To find a sublessor for the commercial space, you will need to market the space online. Whether this is through online advertisements or physical marketing materials, you need to account for the expenses required to put these together.
- Moving Costs – Whether you’re moving down two floors or a few miles away, you’re likely going to enlist the help of a commercial moving company to seamlessly assist with the transition. Make sure you factor in moving costs.
If you have questions about navigating the sublease process, Price Commercial can help. Our team has experience advising our clients on the best tactics for negotiating new leases, lease renewals, relocations, and lease extensions.
