Risks With Subleasing Commercial Real Estate Space

subleasing commercial real estate space risksWhen you are looking for commercial real estate space for rent such as warehouse, retail, or office space you will typically have the option to rent direct from a landlord or sublease commercial space from an existing company if there are any available that meet your needs. Both have their advantages and disadvantages as well as risks that I will discuss below.

Leasing Commercial Space Direct From the Landlord

Leasing direct from the landlord is pretty straight forward.

  • You find the space you like
  • The landlord verifies that you have good financials
  • Then you negotiate the basic terms, conditions, improvements, and the lease contract.
  • Tenant signs the contract first then the landlord

Subleasing Commercial Real Estate Space From an Existing Company

Leasing commercial sublease space involves many more steps.

  • You find the space you like
  • The Sublessor and Landlord will want to verify your financial status
  • Negotiate basic terms and conditions, and the sublease contract
  • Both the Sublessor and Sublessee sign the sublease contract along with the landlord consent form
  • All the signed contracts are given to the Landlord for final consent and approval (which they typically have 30 days to do so). 

Commercial real estate subleases have a few advantages & disadvantages, and they also have inherent risk.

Advantages of Subleasing Commercial Real Estate Space

  • One advantage of subleasing commercial space are that you can typically negotiate leases rates a little bit below market, or below what a Landlord in the same building would be quoting new tenants. However keep in mind in hot market where there is very little space available it may not be much below market.
  • Another advantage is that you can typically get shorter lease terms. There are some subleases that have 4-5 years left on the lease however in many cases there are typically 1-3 years left on a commercial sublease which gives new companies and startups more flexibility from having to lock in a long lease term.

Disadvantages and Risks With Subleasing Commercial Real Estate Space

  • You have to take the remaining sublease term – in most cases existing companies will want you to sublease the remaining lease term. So if there are 4.5 years left they don’t want someone to only sublease for 1 or 2 years. You will come across a few situations where the Sublessor will be ok with you subleasing for 1 or 2 years, however in most cases you will have to fulfill the remaining lease obligation.
  • You have to take the space “as is” – In most cases you have to take the space “as is”……meaning the sublessor will not be willing to give any tenant improvement money to make changes to the space. You might find one or two that will, however in most cases if you want to make improvements to the space (e.g. new carpet and paint) you will have to pay for it yourself.
  • Recapture clauses – You need to read a copy of the master lease. If it has a recapture clause then that means if a tenant wants to sublease the landlord could take back the space. In most cases the landlord won’t exercise this option. However if a large tenant in the building needs to expand OR the tenant that wants to sublease is paying a below market rate the landlord might exercise the option to keep that large tenant or take back the space because they could rent it out for a much higher rate than the existing tenant is paying. It’s important that you know the sublessors intentions AND discuss with the landlord their intentions so that you don’t spend months negotiating and then at the last minute the landlord decides to recapture the space. HOWEVER, just because they say they have no intention of doing so they could change their mind at the last minute and totally ruin your deal………..and have wasted your time.
  • Your landlord is the Sublessor – Make sure they have solid financials and operations also. You will be paying them rent and they pay the landlord. You don’t want to find out later that you paid them rent for 6 months and that they did not pay the landlord. Even if you paid they could go bankrupt and leave you hanging………and the landlord would evict you.
  • The rent will increase after the sublease expires – Let’s say you sublease an office space in a class A building. You might be able to afford that space now because it is discounted. However after that sublease expires you will now have to pay market rates, unless you decide to relocate to a less expensive building or find another sublease. Moving can be a hassle especially if you are a growing company. Just make sure that whatever commercial space you sublease that you will be able to afford the direct space lease rates so you have the option of not having to move.
  • The sublessor could lease to someone else – Just because you have agreed to terms on a proposal does not guarantee you the space. Until you have a contract signed and consented by the landlord you don’t have a deal. Another company could come along and ask for few concessions that you did or they could have better financials. Don’t get your feelings hurt, it’s business. Just find another space.

In the end it’s impossible to totally insulate yourself from risk, however you can minimize it by gathering as much information as you need to make an informed decision. If you fall in love with a particular commercial real estate sublease space just know that there are risks and no guarantees that you will get the space. The landlord could tell you they have no intentions of taking back a space and then at the last minute the Big tenant in the building decides they need to expand. Commercial real estate subleases can save you money and in some cases allow you to enjoy the flexibility of shorter term leases, however just know there are some risks that are out of your control. It’s business so don’t get your feelings hurt. If you start the process of finding space at lease 6-12 months from the time you need space then you will have plenty of time to find another space in the event your favorite sublease space does not work out.

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