Is subleasing a good idea? The answer, like most others in commercial real estate, is “it depends.” This question is not from the point of view of the existing tenant who is seeking to transfer their lease rights/interests and possession of the premises to a 3rd party, known as the sublandlord/sublessor or assignor. Rather, it comes from the perspective of the 3rd party, known as a subtenant/sublessee or assignee. For tenants, sublease/assignment rights are one of the most important afforded to them in a commercial lease because they provide a means of “getting out of their lease” when it makes economic, strategic, or practical sense to do so. Tenants are not usually, truly released from their leasehold obligations but rather are able to rent the entire premises or a portion thereof to mitigate their monetary obligations. Therefore, subleasing is always a “good idea” for the tenant even if the situation necessitating it is not.
For the potential subtenant or assignee the situation is not as clear cut and a number of factors must be considered. Subleases can be a great option for some companies but can also be fraught with danger. Before deciding if subleasing makes sense it’s important to understand the pros and cons associated with this type of leasehold interest and the associated opportunities and liabilities.
Below Market Rental Rate
Sublandlords must compete with other available spaces in the market. Many subleases are the result of economic hardship on the part of the tenant/sublandlord and, as in all things, time is money. To increase the likelihood of securing a subtenant and decrease the time to do so, many subleases are offered at below market rates. When combined with the other limiting factors associated with sublease deals, this can lead to significant differences between the sublease rental rate and market rates for comparable properties. Subleases, therefore, can present the opportunity for companies to occupy space in prime locations and with amenities that might otherwise be outside their budget.
Shorter (than market) Term
Sublease terms are limited to the remaining term left on the sublandlord’s lease. This leads to the potential for shorter than typical, market (sub)lease terms (less than 3-5 years depending on asset class). This can be a huge benefit to companies that anticipate significant short-term growth and do not want to be locked into a long-term commitment and/or take space they do not need at the time or to others that have concerns about the future of their business or the economy and prefer to limit their exposure.
Furniture, Phones, etc.
Many sublease options are “turnkey;” meaning the space comes with furniture, phones, etc., which in most cases come at no cost to the subtenant. This can significantly lower the upfront costs associated with leasing commercial space.
Shared Common Areas/Amenities
In some cases, sublandlords are willing to “share” their space; providing subtenants with access to common areas within the leased premises such as conference rooms, kitchens, reception areas, workrooms, etc. Subtenants can thus (sub)lease and pay for less square footage while still enjoying the benefit of such amenities.