If you need a commercial space for your business, but the idea of purchasing your own space or entering into a long-term lease feels like too much of a commitment, subleasing can be a great alternative. But before you sign on the dotted line, consider the following pros and cons of subleasing commercial real estate.
What Is a Sublease?
A sublease is a standalone agreement between the current tenant of a commercial space and another party who takes over their lease. When you sublease a commercial space, you become the subtenant, as you are renting space from the current tenant, not the building owner.
The original tenant may choose to sublease for many reasons. For instance: perhaps they have more space than they need, they need the income to pay their rent or other costs of doing business, or they moved out of the space but are still under contract for it.
It’s important to note that subleasing laws vary by state, so it’s important to check landlord-tenant laws in your area and have a realtor by your side who has experience with commercial subleases. It’s also crucial to read your sublease agreement thoroughly, as well as the lease the original tenant has with the property owner or manager. If the tenant won’t show you their original lease, that’s a red flag — you’ll be better off moving on to a different space.
Pros of Subleasing Commercial Real Estate
Subleasing offers a number of advantages, especially for smaller businesses or those just starting out. Here are a few of the pros of subleasing:
Lower, More Predictable Costs
A sublease almost always offers cheaper rent than a direct lease. In some cases, you may even have the potential for under-market rents. Since the original tenant maintains responsibility for their lease, they may be willing to sublease at a lower rent to offset their costs. In addition, most subleased spaces come fully built out, so assuming the space suits your needs as is, you could save on costs for building out the space.
In most cases, while you will be responsible for repairing any damages you cause, the original tenant or landlord will be required to repair and maintain common areas. Review the lease held by the original tenant to see who is responsible for maintenance, but typically, subleases are fully-serviced leases with a flat monthly rent and no unpredictable fees or add-ons.
Flexibility
Subleasing may allow for the flexibility of a shorter lease term. Typically, the original tenant is already part of the way through their lease when they decide to sublease, so you simply take over what remains of the lease term. This flexibility is ideal for companies in more volatile industries or those who are unsure of what the future holds for their business in the post-COVID era.
Simpler Lease
Subleases are generally less complicated than traditional commercial leases, with fewer strings attached. But while it’s true that subleases are generally simpler and more straightforward, we should note that they are still legally binding contracts that are contingent on the original lease. Always carefully review any lease before you sign.
Access to Common Areas and Other Amenities
Subleased spaces are typically part of a larger building. They will often have access to reception areas, conference rooms, storage, or other shared space included in the lease for free or a reduced cost. You may also be able to negotiate access to office equipment like photocopiers, faxes, and so on.
Opportunities for Networking
Subleasing in a space with others in the same industry can create networking opportunities. With similar — but non-competing — businesses nearby, you have the potential to get business referrals, share resources, cross-promote one another’s businesses, or simply have peers to talk shop with.
Cons of Subleasing Commercial Real Estate
Though subleasing offers significant benefits, there are a few potential negatives you should be aware of.
Risk of Original Tenant Defaulting
This is possibly the most significant risk of a subleasing agreement. If the original tenant defaults on their lease, you could end up losing your space…even if you’ve been faithfully paying your rent all along.
You can mitigate this risk by asking the landlord to sign a recognition agreement — where they would honor your sublease even if the original tenant defaults. Or, try to include in your sublease rights to recover costs and damages if you are evicted because the original tenant defaults.
Limited Use of Property
With a sublease, you could be limited in how you can use the property. For instance, you may have limited freedom to customize the space to suit your brand or your needs. Avoid any issues with this by asking for clarity from the original tenant regarding how much control you have over the space. But if you have very specific requirements for how your space is set up, a sublease may not be a good fit for you.
A Tenant Improvement Allowance is Less Likely
In a subleasing situation, you’re unlikely to have an adequate tenant improvement allowance, as you’re dealing with the tenant, not the landlord, of the space. This can be an issue if the decorating tastes of the original tenant or building owner are not compatible with your business. If you need to adjust the floor plan or make other changes to the space, you’ll likely have to pay for some or all of that cost.
Unfavorable Terms Passed On to You
If the original tenant negotiated a bad deal with their landlord, they may try to pass those terms on to you, including fees or higher rent than the space is worth. Similarly, if there are specific terms you want in your sublease, but the original lease doesn’t allow for those terms, you’ll be out of luck. Generally speaking, if it’s not allowed in the original lease, the tenant can’t offer it in the sublease.
In addition, since you’re taking over the remainder of an existing lease from the original tenant, you may not be able to extend the lease term beyond the existing term. Make sure to thoroughly read both your sublease and the original lease and compare your terms with that of similar spaces in your area.
Maintenance Service Delays
If you need repairs or other maintenance services provided by the landlord, you may have to go through the original tenant rather than going directly to the landlord. This could cause delays in problems being addressed, meaning more headaches for you. It could also create legal complications in resolving any problems that arise.
Enlist a ResComPros Real Estate Agent for Help Finding and Negotiating Your Commercial Space
Despite the negatives, subleasing can be an excellent opportunity to get the space you need at a lower cost and with greater flexibility than a typical commercial lease. Just be sure to have a pro — such as a lawyer or a real estate agent — read through your sublease agreement before you sign.
At ResComPros, we can help you find the right commercial space for your business and negotiate a leasing agreement that meets your needs. Contact us today to start your search!