A Complete Guide to Subletting Your Office Space

When a company enters into a long-term lease agreement, there’s a certain amount of risk involved. What if your company outgrows the space you’ve leased? What if business interests shift and your company needs to relocate to a more market-friendly area? Or, worse yet, what if the company folds entirely?

Rather than paying a termination fee, which can sometimes involve a significant portion of the remaining rent obligation plus forfeiture of the security deposit, some lease agreements allow for subleasing of a commercial real estate space to offset costs and avoid penalty charges.

If your situation involves any of the above criteria, it might be time to strongly consider subleasing your office space to another company. Here’s how – and why – you should sublease your office space.

Why You Should Sublease Your Office Space

There are several reasons for businesses to sublease an office space, but most have to do with financial implications. Breaking an existing lease is a costly endeavor and can lead to legal troubles most companies would seek to avoid, so subleasing a space to a responsible suitor is often the best option. That way, a business can avoid paying termination penalties and sacrificing the costs of a security deposit, passing along these costs to a third-party. However, subleasing means taking responsibility for a subtenant and doesn’t preclude your company from being ultimately responsible for the full monthly amount due to the landlord.

Here are some common reasons companies choose to sublease:

More Space Than You Can Afford (or Use)

While it’s important to consider potential growth when entering into a commercial real estate lease, it’s also possible that your company could wind up paying for space that it doesn’t ultimately need at the time. Until that period of growth comes, it’s beneficial to consider subleasing parts of your office space in order to pay for lost overhead. Even on paper, it makes more sense to recoup your investment on unused office space rather than letting it sit empty..

The Need for Larger (or More Suitable) Space

This is the most ideal situation in which to sublet office space. If your company grows beyond its bounds and things are starting to feel cramped, it’s time to expand and move into a larger property. But breaking lease agreements can be expensive and complicated, making it more attractive for tenants to seek a subtenant to offset termination costs and provide financial flexibility when seeking a larger space.

Your Company Downsizes or Folds

Unfortunately, business realities can take hold, forcing your hand in order to offset costs when a company goes under. But if you have a provision in your lease agreement that allows subletting, you can help pay creditors with the monthly rent payments provided by a subtenant should your business fail.

Pros and Cons of Subletting an Office Space

Pros:

  • You’ll Offset Costs of Unused Office Space

The most common reason why companies sublet office space is to make the best financial sense of unused or otherwise unneeded space. After all, it’s a net loss to pay for square footage that your company simply isn’t using.

  • Flexibility in Finding Larger or More Suitable Space

If you decide your existing space isn’t suitable for the need or size of your business, subletting your old space in exchange for a larger and more efficient property allows you the flexibility in financing an expansion without breaking the terms of your existing lease agreement.

Cons:

  • Lease Terms May Restrict Your Flexibility

Depending on the terms of your lease agreement, you may only be able to lease a specific part of the building, space, or section of your office with the landlord’s approval. Ideally, a tenant would be able to sublease the entirety of the space they occupy, but that’s not always the case. Commercial rental codes, landlord preferences, and market conditions can throw a wrench in your subletting plans. Furthermore, certain lease agreements can prohibit you from subletting to companies or entities that have lower credit scores than yours, restricting you from subletting to a wide array of potential suitors.

  • Hidden Costs Can Bite You

As the original tenant, it’s ultimately your responsibility for damages to the property and any repairs needed at the end of the lease agreement. Furthermore, even if you recoup the security deposit, any further damages to the property will be on your dime, making you liable for any actions by the subtenant.

Depending on the nature of your lease agreement, you may be on the hook for any overages in utility costs incurred by the subtenant. Most lease agreements dictate specific limits in utility costs provided by the landlord; anything outside of those costs could show a stiff bill at the end of the lease agreement – and that’s on you.

How to Sublet an Office Space

Step 1: Check the Terms of Your Lease Agreement

Before you start looking for subtenants, you want to make sure you’re legally capable of subleasing the space you’re currently occupying. Most commercial lease agreements prohibit subleases outright, but those that allow subleasing require approval from the landlord before ink sets to paper.

This is also the first opportunity in which you should get your attorney involved in the process, as they’ll have better insight into your ability to sublease a space per the terms of your lease agreement.

Step 2: Search for Subtenants

Depending on the market, you’ll almost always be able to find a company looking to capitalize on a reduced lease, reduced rate sublet – but your best options might be right around the corner. Your neighbors in the building may be looking for a better option, a larger space, or an expansion opportunity, and because they’re already tenants to the same landlord, all parties might have an easier time getting what they want.

Next, your subtenants should be carefully screened and vetted before an agreement is made. Because your subtenant will be paying rent to you and not to the landlord, you’ll still be liable for the total amount of the monthly lease – no matter who’s actually paying the bill. That’s why it’s crucial that you do your due diligence in finding subtenants who are able to pay the full amount and are able to maintain the property as per the terms of your original lease agreement. In other words, it’s on you if the subtenant damages or neglects the property while subleasing from you.

Step 3: Agree on Reasonable Terms and Determine What to Charge

If your subtenant is in the same (or similar) industry as yours, you may have an easier time transitioning the property to their specifications. But if extensive renovations or upgrades are required, you’ll want to spell out who bears the costs of those improvements and who will be responsible for any stipulations in the original lease agreement should the landlord require you to restore the property to its initial condition. These can include utility costs, amenities, branding or signage, furnishings, and specialty upgrades.

Furthermore, determining costs and breakdowns of utility contributions is essential at the outset of a sublease agreement. While market conditions may suit your company favorably when considering a sublet, some lease agreements prohibit original tenants the ability to charge more than the original monthly rent amount in order to make a profit on the space itself. However, it’s common for tenants to require subtenants to pay the full amount of the original security deposit in order to protect themselves from damages incurred, which should mitigate potential risk.

Step 4: Finalize the Sublease

Once you’ve covered all your bases and consulted with both your landlord and your real estate attorney, it’s time to sign the agreement and finalize plans for your company to relocate and bring in a subtenant under your original lease agreement.

The Difference Between Sublets and Assignments

Subletting and assignments are two very different practices in commercial real estate, although they’re often confused.

Subletting involves the original tenant retaining the responsibility for the lease agreement with the landlord despite two or more parties being financially responsible for the monthly rent. Landlords tend to prefer these types of agreements due to that factor.

Assignments are more attractive to tenants, but riskier for landlords. With sublets, the responsibility for monthly payments remains with the original tenant, making them ultimately responsible for the subtenant’s contributions. With an assignment, the landlord must evaluate a new tenant, who must demonstrate financial stability and reliability in addition to the original tenant. However, assignments provide the landlord the ability to deal with only one tenant at a time, simplifying their oversight of the property and freeing them up to negotiate a new lease once the original agreement is complete.

With assignments and sublets, landlords and original tenants must consider several factors, including:

  • -Financial stability of potential new tenants
  • -Any changes in the terms of the lease agreement
  • -How much obligation the original tenant holds
  • -Costs of monthly rent and any overages to be paid to the landlord on behalf of the original tenant or subtenant

As with any legal agreement, any commercial lease agreement that prohibits subletting or assignment should stop any negotiations in its tracks. Ideally (at least in the eyes of the tenant), a lease agreement should specifically define the tenant’s ability to sublet or assign a commercial space and also define the landlord’s ability to refuse such an arrangement – and why.

Landlords often define the terms of a potential sublet or assignment using the following criteria:

  • -Retaining approval of proposed use of the leased space
  • -Legal and financial analysis of any fees incurred during the subtenant review period
  • -Business and industry review to verify potential conflicts of interest with other tenants

As long as your lease agreement allows for subletting extra – or the entirety – of your space, the decision lies between you, your landlord, and the subtenant. It’s a difficult process to filter out the appropriate subtenant, but a worthy time investment given the financial benefits to all parties. You save money on space you no longer need, the subtenant finds a suitable environment for near or below market value, and the landlord keeps collecting the monthly payment. But ensuring the situation is right for everyone is ultimately the responsibility of the original tenant, so be sure to do your homework before committing to any sublet agreement.

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Key Factors in Negotiating the Right Office Lease for Your Company

A commercial real estate lease is second only to payroll when it comes to monthly overhead for companies large and small. That’s why negotiating the best possible lease agreement for your business is critical. It’s a reliable, predictable expense that you can build into any budget and depending on the terms of your agreement, you may be able to save enough money to afford more employees, invest in substantial marketing, or simply upgrade your employees’ workspaces when an office move occurs.

But because no lease is written the same way, there are several factors a prospective tenant needs to consider before entering the negotiation phase of a commercial real estate lease agreement. Depending on the market conditions in your area, you may have more leverage than you realize and have a better position in which to negotiate more favorable terms for your company – and that’s where a tenant representation broker comes into play.

First Thing’s First: Establish Leverage

No matter the market conditions, there’s always a way to find leverage in a real estate negotiation – and don’t think your prospective landlord isn’t searching for the same thing.

Time is a major factor. Because lease negotiations can take months – even years – to realize ink on paper, it’s important to demonstrate that you’re looking at multiple properties and are ready to move soon.

Furthermore, when touring a space, it’s important to keep your thoughts and feelings between you, your team, and your representative. Showing the landlord’s broker that you’re excited about their space will only count against your prospects. According to Jason Bollhoefner, vice president at Corum Real Estate Group in Denver, “Always have a solid backup option at hand, especially in an improving real estate market. Being prepared to walk away is a very powerful aspect of successful negotiation.”

Think in Terms of Time, Not Price

Especially if you’re operating in a rapid growth industry, there’s a reasonable expectation that your company will grow at a regular pace over the terms of your lease agreement, which is why it’s important to consider a longer-term lease at a lower rate than a short-term agreement that could cost you more in the final analysis.

But because newer, growing companies can look at long-term lease agreements with a cautious eye, try negotiating for renewal options at a regular pace. Rather than opting for a four-year lease, offer the landlord a two-year commitment with two-year renewal options that give you right of first refusal to ensure you’re not locked into a space that’s either too small, too large, or simply too expensive for your needs.

There’s also something to be said for negotiating on neighboring spaces should you grow beyond your borders. If you’re a startup or small business expecting rampant growth within the next few years, but can’t afford the amount of space needed to cover that future expansion, negotiating for options on vacant space within the building could demonstrate to the landlord that you’re serious about staying with them and won’t fly the coop once your agreement is over.

Consider Your Subletting Options

Startup companies operating in volatile industries should strongly consider their options when looking at long-term lease agreements. Should your company grow beyond the capacity of the space or shutter unexpectedly, it’s worthwhile to ask a prospective landlord about the possibility of subletting an office space you’re about to occupy.

There’s also the aspect of assignment clauses, which could cause problems should your company take on new investors. Often, commercial real estate leases include clauses that alter the terms of the lease should a change in 50% or more of the company’s ownership changes – which would void the lease agreement entirely without the landlord’s prior approval. In this instance, it’s important to be as transparent as possible with a landlord and discuss your company’s opportunity for future investment to avoid any conflicts down the road.

Think About Cost of Rent and Escalations

Most commercial real estate lease agreements come with built-in annual rent increases based on the percentage increases in the Consumer Price Index for your market, leaving you on the hook for unforeseen increases on your monthly payments. However, if you negotiate for CPI rent increases on a delayed basis, you can lock in a predictable monthly rent for your company for a few years before your overhead changes. Alternatively, you could ask for a cap on the total percentage of each year’s CPI increase or a fixed increase on an annual basis, allowing you to budget accordingly year-over-year.

Be Cautious of Repair and Improvement Clauses

Commercial lease agreements sometimes speak in broad strokes, opening tenants up to unwarranted expenses at the end of the lease – especially when it comes to any repairs, improvements, or replacements of equipment that occur during the length of the agreement. You should always negotiate for terms that dictate your company will return the property in its original condition, excluding everyday wear and tear, damage from unforeseeable accidents deemed not to be the fault of the tenant, and any alterations previously approved by the landlord. You’ll also want to get documentation of any repairs, maintenance, or upgrades conducted on the property throughout the life of the lease to ensure you’re not on the hook for expenses once you move out.

Look Out for Landlord-Friendly Provisions

Form lease agreements are incredibly common in commercial real estate, making it easier for landlords to dole out blanket provisions that benefit them rather than negotiate on key factors party-to-party. Look out for the following commonly-used provisions to help make the best of your occupancy should you decide to take the lease:

Provisions About Passing Along Operating Costs

Landlords often try to put operating expenses (with or without limit) to tenants, including property taxes and any future increases, building repairs, maintenance costs, contributions to building staff payroll, and insurance premiums. Furthermore, should the landlord sell the property, they may also try to pass along the tax increases resulting from the sale to the existing tenants.

As-Is Lease Provisions

Especially common for older properties, landlords sometimes try to pass along buildings as-is to avoid responsibility for conditions that fail to meet regulatory guidelines like environmental laws or the Americans with Disabilities Act.

Landlord-Specific Protections

While it’s understandable for landlords to protect themselves against further costs, they can often go too far and cause undue strain on the tenant. Look for provisions in the lease agreement that allow the landlord to terminate the lease at their discretion, prohibit subletting, or require a personal guarantee from shareholders or principals of the company.

Before you sign a lease for any property, you’ll want to consider the factors above in addition to the overall “feel” and tenor of the landlord themselves. If they exhibit unwilling behavior or seem overly protective of their interests without considering the needs of a prospective tenant, you may want to look elsewhere. Whatever you do, don’t go it alone – a tenant representation broker and a good lawyer should be at your side during every step of the negotiation process to ensure your company is protected.

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Discovering the Hidden Costs of Leasing an Office Space

Once you’ve located your ideal space (after a lengthy search, tour, and negotiation process), the real work begins. Moving, logistics, and continuity of business are your prime concerns, but there’s more you should consider before signing the lease and securing the keys.

Hopefully, you’ve been transparent about the amount of monthly rent your company can afford, taking into account average utility costs as your business grows and you add to your headcount. That line item for rent may not be what it seems, though. Hidden or obfuscated costs of leasing an office space can cripple a young business’ budget, leaving you on the hook for an extra chunk of change that may not have been clearly communicated to you during the negotiation process.

Continue reading “Discovering the Hidden Costs of Leasing an Office Space”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

What You Need to Know Before You Sublease an Office Space

If you’ve been in the market for commercial real estate space, you know the difficulties that come with finding and securing the right space for your budget. Outside of a long-term rental commitment with a landlord, your options are limited between subleasing office space or a shared office space.

Most commercial real estate leases involve the tenant renting space from a landlord or property owner, but subleasing extra space complicates the agreement a bit. Tenants become responsible for the subtenants, meaning they pay for their space and you pass along your portion of the rent to the tenant. Prime candidates for subleasing office space include sole proprietors, freelancers, and startups seeking an affordable alternative to full-blown commercial real estate leases.

But there are plenty of aspects of an office sublease that should be taken into account before you take on someone else’s lease – and start saving a significant portion of your rent.

Continue reading “What You Need to Know Before You Sublease an Office Space”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Choosing the Right Terms: How Long of a Commercial Real Estate Lease to Sign?

As with any agreement, there are a number of important factors to consider before entering into a commercial real estate lease. Whereas a residential lease typically lasts 12 months, the commercial real estate world expects anywhere between three and 15 years. While small businesses tend to be more cautious and lean toward the shorter terms (and larger companies investing in longer-term spaces), the answer for your business may not be so clear.

Between size requirements, market conditions, and business outlook, there are many things to consider before making a decision – not to mention the location itself.

Continue reading “Choosing the Right Terms: How Long of a Commercial Real Estate Lease to Sign?”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

The Biggest Mistakes that Startups Make When Leasing Office Space

As a business grows and expands, it’s easy to begin imagining moving into a larger, more permanent space. This is especially attractive for the startup crowd, which romanticizes the “build it in your garage” mentality while striving for the authenticity of a physical, professional office.

But moving too quickly – even in the startup phase – can have serious repercussions on your business that could hinder your growth and agility for years to come. That’s why it’s so important to consider your options and avoid the pitfalls that plague startups who choose to lease a commercial office space too soon or otherwise overextend themselves in the early stages.

Continue reading “The Biggest Mistakes that Startups Make When Leasing Office Space”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

A Complete Checklist and Outline for Moving to a New Office

Office moves always start out with excitement. The thrill of a larger space, upgraded amenities, or a better location are exactly why companies expand to a new location. But after your search, endless tours, negotiations over lease agreements, and finally signing the paperwork, the actual work begins.

First thing first, you’ll need a comprehensive relocation plan, which will help guide your organization through the physical move and ensure continuity of business.

Continue reading “A Complete Checklist and Outline for Moving to a New Office”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Coworking Space vs Traditional Commercial Leases: Finding the Best Fit for Your Needs

When you’re a small business owner, you look for every possible advantage. There are no shortcuts to success, but with the dawn of shared or coworking spaces in larger cities where commercial real estate comes at a premium, it makes sense to consider your options – until you outgrow them.

Finding traditional office space isn’t a cakewalk and costs of upkeep, overhead, and utilities can shrink a small business’ already tight budget. But coworking spaces have their drawbacks, too. Reduced privacy, limited access to conference and meeting rooms, and the fact that you’re sharing with others outside of your organization may result in a credibility hit.

If you’re trying to choose between a coworking space and a traditional office lease, you’ve come to the right place. Each solution comes with pros and cons that should be closely investigated before moving forward on a new place to set up shop.

Continue reading “Coworking Space vs Traditional Commercial Leases: Finding the Best Fit for Your Needs”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Commercial Real Estate Letters of Intent: Everything You Need to Know

After you’ve done your research, worked with your tenant representation broker, participated in site tours, and figured out your budget, the perfect commercial real estate property is finally in your sights.

Unlike most residential real estate deals, commercial real estate is complex, complicated, and often progresses at a glacial pace. Existing tenants may need time to vacate. Major systems will need maintenance and upgrades. Build-out details will need to be verified and finalized. But until the ink is dry, prospective tenants don’t want to let a suitable property pass them by.

The answer? A signed Letter of Intent (LOI), declaring your formal interest in purchasing or leasing a commercial real estate property.

Continue reading “Commercial Real Estate Letters of Intent: Everything You Need to Know”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.

Exclusive Broker Agreements: What Are They and Why Do They Matter

Looking for commercial office space is a tedious process. Tenants are rarely equipped to handle the complexity and scope of the commercial real estate world, which is fraught with technical terms, lengthy negotiations, and stacks of paperwork. That’s why tenant brokers exist. With their expertise and knowledge of the local market, they provide an invaluable asset to potential tenants before, during, and throughout the length of a commercial real estate lease. And at no upfront cost to the tenant, there’s little reason not to take advantage of their experience and insights.

But once you begin your search for a reputable tenant broker, you’ll be faced with the prospect of entering an exclusive broker agreement with a commercial broker. As with any formal agreement, you’ll want to carefully weigh your options before making your decision.

Continue reading “Exclusive Broker Agreements: What Are They and Why Do They Matter”

John is the VP of Sales at OfficeSpace.com where he leads broker relations and sales. Prior to being VP of Sales, he was the Regional  Director for the company. John has over 25 years of experience working in the commercial real estate industry. Before OfficeSpace.com, John was a commercial real estate broker for the Norman Company in Seattle, WA.