In today’s economy, many tenants are downsizing and have excess space. Subleasing is an efficient way to reduce occupancy costs, but marketing that space can be a challenge.
“It’s important for tenants and brokers to do their homework and due diligence before putting space on the sublease market,” says Steven Schneider, a Vice President with the Dallas office of Grubb & Ellis Company.
Smart Business spoke with Schneider about what business owners need to consider to effectively market their space for sublease.
What should tenants do first when planning to sublease?
Before listing the space, the first step should be to review the sublease/assignment section of the master lease between the tenant and landlord. In some instances, a tenant may be required to provide written notice that it is going to market space for sublease.
There will also be language regarding landlord consent. In some instances, a landlord will not approve of a sublease to an existing tenant in the building, to a tenant with whom it is currently negotiating, or to a tenant that it does not deem creditworthy. The landlord may also have the right to recapture the space.
The bottom line is that it is imperative to have an understanding of any potential issues that might prohibit a tenant from securing consent to a potential sublease.
What are the keys to marketing your space?
Because of the supply of available sublease and direct space, you need appropriate pricing, which requires knowledge of other buildings and subleases in your submarket. Is the tenant currently paying below market, at market or above market rental rates? How long is the term? Are there other options in the existing building that are similar in size and quality? Compare the landlord’s quoted rental rate along with lease comparables for the existing building and other buildings and subleases in the area to help establish your pricing.
Sublease space is primarily going to be marketed at a discount to direct space in the building and below market for comparable buildings in the submarket. The key is to market the space at a price point that will attract interest and generate activity from the start. Knowing the market and how much to discount the space will help a tenant start saving money on rent sooner rather than later.
Because most tenants are trying to dispose of space to save money, sublease space is normally marketed on an ‘as is’ basis, which means the tenant is not willing to spend money on improvements. In these situations, it’s common for a tenant to offer abated rent to offset some of the costs for a subtenant to make the space ready for occupancy. The amount of free rent is normally based on the term of the sublease, the condition of the space and the needs of the subtenant.
What can a broker do to help market the sublease?
The broker needs to be proactive and diligent in marketing the sublease.
Assuming the landlord will consent to a sublease with an existing tenant, one of the first steps in marketing the space is to contact the other tenants contiguous to the sublease space and the rest of the tenants in the building to make them aware of this new opportunity in the building.
Brokers utilize Web-based listing services and the Internet to market the sublease listing as well as direct marketing through phone calls, e-mails and mail pieces to tenants in the submarket that fit the profile of the space or that may have an upcoming lease expiration. How can tenants add value to their sublease space?
Many tenants have excess furniture, fixtures and equipment (FF&E) that they no longer need. In a market where there is excess supply of used furniture and the value of the furniture is 10 to 20 cents on the dollar, a tenant will generate more value and increase the marketability of the space by leaving the FF&E in place. If the FF&E does have some value to a potential subtenant, you may be able to secure a higher rental rate.
These ‘plug-and-play’ scenarios are very attractive to companies that are going into their very first lease space or growing in size and ready to take that next step into larger space.
How can tenants minimize subleasing risks?
Before entering into a sublease agreement, it is important to review the financials for the entity signing the sublease. Is the company profitable? How long has it been in business? Does it have the necessary funding? Who are the investors/owners?
There is always some sort of risk when entering into a sublease but doing the necessary due diligence will lower your risk. If there are concerns about the financial stability of the company, asking for an increased security deposit, increased prepaid rent, or for personal guarantees from the principals or owners may be necessary.
Is a buyout of the master lease a feasible alternative?
Most landlords will only entertain a buyout or termination of the master lease if there is a tenant in hand to backfill the space. If the prospective subtenant is looking for a longer term than the sublease provides or the creditworthiness of the prospective subtenant is the same or better than the existing tenant, then the landlord may be willing to negotiate a buyout.
The advantage of pursuing a buyout instead of a traditional sublease is that, by terminating the master lease, the tenant avoids the risk of a subtenant not satisfying the terms of the sublease. The disadvantage is that the tenant may have to pay a negotiated lump sum cash termination fee.
