Too Much Space? Sublet, Divest or Move

Has your sales or business operations changed to need less commercial space than you signed [a lease] for? Is your rent bill using too much of your operating budget? If you face this problem, a prompt strategic approach to solving it is necessary. Look at the financial impact and legal exposure of your options. I explain below how to approach this dilemma, how to solve it and free up your operating budget.

Assess the problem. What’s causing your business to use less space than you signed for? Were signs of change let go when you signed the lease, or is this a new emerging trend likely to stick? If a percentage of staff will be let go, how would you re-seat the staff kept to free up space to divest? Is additional rent more than you expected (and planned for)?

How many years are left on your lease? If less than 4 years and space is in move-in condition, the space could be relet for a longer term at current market rate, ending your lease.

What are your space and location alternatives? Finding the right building, in the right location for your business can be challenging. The scope of Tenant Improvements to the new space will dictate the base rent and lease term. What lease term can your business accept with some uncertainty of its future? (Note: Keep the math difference in mind that less construction cost equals fewer lease years, more construction cost equals more lease years (until rent exceeds construction cost)).

Compare Lease Terms of Buildings. Key clauses to review are operating pass thru’s, expense stops and operating increases. Paying the difference between year to year operating expenses is best; paying increases over a base year gets expensive to your operating budget.

Transaction model. The most effective way to compare deals is to prepare transaction models. (Your Tenant Rep broker has software to do this.) Modeling shows the financial difference between deals, some of which may look alike in the offer.

Personal Guaranty and Good Guy clause. If there’s a default of rent payments, the person guaranteeing the lease is responsible to pay. Good Guy clause versions are a) keep the rent paid through the lease term or b) leave the space broom clean, pay all rent due through the last due date, return the keys to be legally released from further lease obligations. Work to secure (b) because it releases you from rent you will not/can not pay and gives the Landlord back a space to relet without paying to evict you.

Sublet terms. What legal rights does your Landlord have to list your space for sublet? The time frame to list affects how quickly you can dispose of the unneeded space. Remember the leasing commission [and any construction costs] you’ll pay to sublet.

Delivery of Space and Move. Sublet of the vacant space or moving should be done during the least intrusive time of your business year. Expect to take 45 days to plan the move and another 30 days to execute/close it. That time needs to be compatible with your subtenant or your new Landlord.

Sublet. Sharing up to 3,000rsf of unused space is a quick solution; costs are limited to a background check, a credit check and fees to Landlord. If you’ll be compatible sharing the common areas of the space, pursue a space share.

If you must separate the vacancy from your space, expect to pay an architect and construction costs. Only choose that option if costs are dramatically less than your potential moving costs, future additional rent and escalated rent you’ll collect from the subtenant. Always review at least the two most recent years of signed financial statements from the Subenant and talk to 2-3 creditors to ensure they can afford to pay you their rent.

Divest. Sometimes, there’s a market for your vacant space to the Landlord, either in whole or as part of an adjacent space. However the market exists, hire a Tenant Rep broker and Tenant Rep attorney for a consulting fee to ensure your lease is amended with less space to bill for with your interests in mind.

I trust this post has been a simple read for you and helpful if you’re faced with this issue. I’ve helped companies deal with this issue in the past. If BREG can help you, please click “Request A Consultation” link in the upper right of the screen. Enter “Sublet, Divest or Move” in the subject line; please include your name, email address and telephone number in the message body; I reply within 24 hours. Thanks for reading and listening. ###

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