The Risks Associated With Subleasing Office Space…

August 5, 2015

Lance Leighton

Founder – TechOfficeSpaces.com
Corporate Managing Director, Savills Studley
New York State Licensed Real Estate Salesperson

Call 212-326-8668

Why a Tech Office Space Sublease is not Always the Best Situation for a Start-Up

One conversation seems to repeat itself time and time again with the majority of early stage TAMI companies… The tenant tells us their wish list for office space and it typically includes the following statement:

“I want to sublease incredible office space, from a TAMI firm that went out of business or outgrew their space.  Ideally the space will be furnished with desks, have technology in place, loft-like finishes… and because it is a sublease, it will be significantly cheaper than direct options”. 

It is a great description of what sounds like the ideal office space, but unfortunately, these incredible opportunities are few and far between.  Since just about every small to mid-sized technology and creative group that we meet makes the same statement, there is obviously a strong demand for this type of distressed, plug & play office space.  If there is strong demand and limited supply a) it doesn’t last very long and b) it isn’t necessarily going to be much less expensive than direct options.

Below are three reasons why subleases can be challenging for TAMI Tenants:

1)  First and foremost, the statement “I want to sublease from a TAMI firm that went out of business” is flawed because you cannot sublease from an entity that no longer exists:

The “sub” in “sublease” references the subordinate nature of the relationship between a subtenant and sublandlord.  If the entity on the original lease with the building owner (sublandlord) is no longer in business, or is in default under their lease obligations, then there is no company to sublease from.  That being said, the space that was previously occupied by the technology company that has blown up can be a great, low-cost opportunity for an incoming and opportunistic group- as it will ultimately be re-marketed on a direct basis by the overlandlord (the owner of the building).  Here at TechOfficeSpaces.com, we consistently monitor the marketplace for these types of opportunities.  When we hear about a creative company that is shutting down, rumored to be downsizing, or even outgrowing their space, we immediately contact them and/or their landlord to see if it possible to make a direct deal and then offer those spaces to our clients.  Additionally, we post those opportunities on this site – so be sure to check our blog on a regular basis.  (Looking for built and furnished sublease space? Click here for our free search.)

2)  If the tenant you are subleasing from defaults on their obligation, your tenancy is in jeopardy:

It’s hard enough to predict the future of your own business, let alone your sublandlord’s.  As a subtenant, you do not have a direct relationship with the owner of the building.  Even though you live up to your obligations and pay your rent every month to the sublandlord, what happens if they stop paying rent to the building owner?  We all learned during the last tech bubble just how quickly the world could change.  When having this conversation, our client will typically say, “if my sublandlord defaults I will just make a deal with the direct landlord”.  That is not always possible, and if it is, it will not be at the aggressive, discounted rate you made when you subleased the space in the first place.  Also, what happens if a large tenant in the building needs space?  What if the market has changed and rents are higher?  The landlord is now in the position of power and will at the very least charge market rents, if not rental rates that are slightly above market (knowing that you likely don’t want the hassle or expense of moving-out).

3)  The terms of a sublease agreement can only be as good as the lease that it is subordinate to:  

Every company has different priorities and needs that are of importance.  For example, a large tech firm might require excessive electrical power, after-hours HVAC, roof rights for technology, supplemental air in an IT room, etc.  As a subtenant, the terms that the sublandlord negotiated are the terms that a subtenant will be required to abide by.  The landlord has no obligation to provide any services to the subtenant that were not contemplated in the original lease.  Additionally, in almost all cases, expansion optionsrenewal rights and/or termination options are exclusive to the original tenant and are not transferable to a subtenant.  Lastly, sometimes the sublease and assignment provision does not allow further subleasing of the space.  That is scary.  What if you outgrow the space you are subleasing?  Without the right to further sublease the space you are a captive tenant and in a position where there is nothing you can do other than continue to pay your rent.

The above are only a few of the challenges of subleases and illustrate the reason that subleases MUST trade at a large discount to direct leases.

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