Office + Industrial Subleasing Strategies

I am currently representing a technology company looking to expand their current offices into a more desirable location in downtown Denver. Because they are a start-up that's in high growth mode, they have a close eye on their burn rate and a shorter term lease is actually in their favor allowing for flexibility as the company evolves. As a result we are taking a hard look at the available sublease office space in the downtown Denver market.

I thought this would be a good opportunity to share some of my tips and thoughts on how to best negotiate a sublease and to highlight several areas to be careful with.

Why Sublease?

• Can be an opportunity to secure below market lease rates.
• The space is often furnished and wired for data and telecom.
• New business or new to a market? A sublease can be a great way to test the waters.
• Expecting growth and don't want to commit to too much space?
  

Key Terms

• Mater Landlord - The Landlord on the original lease or "Master Lease".
• Sublandlord - The Tenant that is looking to sublease out their office or industrial space.
• Subtenant - The Tenant who is assumes the lease obligations of the Sublandlord.
• Master Lease - The original lease - all terms and conditions of the sublease will be passed along to the Subtenant.
• Sublease Agreement - Outlines the agreement between the Sublandlord and Subtenant.

Sublease Strategies

• Can be an opportunity to secure lower cost space initially and simultaniously strike a direct lease for a longer term after the sublease expiration.
• The Landlord may consider a lease buyout with the existing Tenant and will strike a new direct lease with you. This typically occurs if the new tenant is stronger financially and more "credit worthy".

Common Pitfalls to Watch Out For

• Review the Master Lease carefully, the Subtenant is assumes all liability of that Lease.
• What is the extent of your required Tenant Improvements? Carefully balance that with the remaining sublease term.
• Options to Extend typically are not granted to Subtenant
• Who maintains ownership of and is responsible for the removal of any office furniture
• What is the age and condition of mechanical equipment servicing the space that the Tenant may be responsible for?
• Who is responsible for restoration of space to the original condition at the end of the lease term. Review the Master Lease carefully.

Obviously this is a very general overview of several of the terms and strategies of a commercial sublease. Please contact Sherpa Commercial real Estate with specific questions or consult you own legal or real estate adviser.

Caveat - I am not an attorney and this is not to be construed as Legal Advise. Always seek legal advice for your individual situation and transaction.

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