Monthly Archives: June 2012


TO SUBLEASE OR NOT TO SUBLEASE?

The moment has come. For months, you’ve been doing all kinds of creative things with that extra office space. Maybe you had your firm’s holiday reception back there, or maybe you started holding yoga classes at lunchtime. But now you have to face the facts: You don’t need that extra space. Whether it’s the result of downsizing, restructuring, or implementing a telecommuting policy, it’s a millstone, so what are you going to do about it?

If the rent’s fairly low, the space fairly small, and the time left on the lease fairly short, you’re going to have a hard time subleasing this extra space out.  You could try to buy it out – offer your landlord a cash settlement in exchange for being released from your lease. Or, if you’d like the space recaptured by your landlord, you can hire a brokerage professional to offer it at market rates in hopes of finding a long-term tenant who would then negotiate directly with the landlord thereby relieving you of your remaining obligation.

But, maybe you’re left with a long-term lease on a sizable space that’s eating up a significant amount in rent, and you really need to offset these financial losses. In this case, it makes sense to hire a brokerage professional to sublease out this space.

Notice that we said offset the losses. While it’s possible you’ll break even, it isn’t likely.  And, don’t head into subleasing expecting to make a profit. For one thing, your own lease probably has a shared profit clause, ensuring that any income you might make from subleasing will be shared with your landlord. For another, sublease rents are nearly always lower than direct rents. That’s partly because being a sublessee carries some inconveniences and risk and the lower rents compensate for these. But it’s also due to the uncomfortable fact that generally, the firm seeking to sublet the space is the one who needs the deal more, particularly in the current market.

What if you decide subleasing is the best option?

If you decide that subleasing is the right move for your firm, there are a few things you need to consider. First, get your technical details straight. How much space do you want to sublease, how is it configured, and when will it be available? These may seem like elementary questions, but some would-be sublessors cause problems for themselves by trying to leave these questions open until they see what kind of prospective subtenants come along. You’re much better off if you start out by deciding just what space you have to spare, when you’ll be out of it and how the rest of your operations can operate optimally without it.

Next, you need to ask yourself: how marketable is my space? If there’s no room in the market for your kind of space, better to find that out now. Or, if the type of space you have is the hottest thing going, you want to know that now too – before you start quoting rates. Your brokerage professional should do a lot of work in the research and planning phase of the assignment.  What’s the average size of the space currently being subleased in your market? How many other spaces like yours are on the market? How fast are they being leased, and what rents are they commanding? Understand how long it will take and the expected cost recovery, run a cost recovery analysis to be sure the numbers are in line with what you expect from subleasing.

Now it’s time to market your space. First, make your space as attractive as possible. Start with the basics, such as shampooing the carpets, touching up paint on the walls if necessary, and make any necessary minor repairs.  Think about leaving the furniture and all the fixtures that will make the sublessor’s job of moving in to this space easy and quick.

Set a rental rate and concession package you’re willing to offer to attract the “right subtenant”. Sublet spaces have to be priced to move – period. In most circumstances, you’ll need to offer a discount of 20 to 75 percent off your current lease rate in order to attract a sublessor. This will be dictated by the research your brokerage professional does in the planning stage of the assignment. Be sure all of necessary due diligence is done prior to setting a rent and be prepared to be flexible. A start-up with little to no reoccurring revenue and a small bank account is more risky as a subtenant than a well-capitalized company with a foundation of clients and reoccurring revenue.

Finally, put that space on the market and be sure the brokerage professional you’ve hired actively pursues all the active tenants in the market. It isn’t good enough to simply list a sublease on the commercial MLS and wait for the phone to ring. Your brokerage professional should be making calls on your behalf and reporting on a weekly basis their activity and the results of those activities.

Subleasing can be tricky to get right.

Be sure you understand exactly what you want to achieve – and that it is achievable – before you bring your space to the market. And most importantly, hire your brokerage professional wisely. We are not all created equal


OFFICE LEASE ACCOUNTING RULES ON THE WAY

“Lease accounting is one of those things that drive some analysts up a wall, and fixing it has long been on the list of things the accounting rule makers should do. But when they tried, people were furious, and the rule makers went back to the drawing board.

Today the Financial Accounting Standards Board, which sets American rules, and the International Accounting Standards Board said they had reached agreement on a new approach. We’ll see how it flies.” Says Floyd Norris in his article in the New York Times.

Read the Full Article Here