Know Details to Capture Sublease Opportunities
Looking for new offices or other facilities for your business? Whether your need is for expansion or you are looking for your first space, sublease facilities are and always have been a viable option. Sublease space represents facilities offered by other businesses that, for a variety of reasons, find such space in excess of their current needs.
Typically, technology companies find they have overestimated their space needs because anticipated expansion did not occur, or any of a hundred possible economic or business calculations simply did not materialize. They find themselves locked into excess leased space they don't need that represents an often expensive drain on resources.
For both overall space available and for the subcategory of sublease space, Silicon Valley is no different than any other market - perhaps just more so. Availability is a constantly changing picture, subject to economic shifts and the realities and perceptions of those businesses needing and supplying commercial real estate space.
Our data indicates that for the last five years, the amount of sublease space on the market has varied from a high of 44% of total space - the situation in 2002 during a time of corporate downsizing, buyouts and general consolidation - to a current low of 21%, reflecting economic expansion and buoyant expectations.
Because of the obvious pressure on businesses needing to sublease excess space, such facilities generally provide very competitive rates and sometimes unusual opportunities and therefore should not be overlooked. At the same time, subleases do require careful attention to the details and documents used, to be sure you get what you expected.
Unlike direct-lease transactions of a lessor and lessee, a sublease involves three parties: the master landlord, the lessor and the sublessor. All parties have their own competitive interests in the sublease negotiations. As brokers representing the tenant, we always recommend that our client engage the services of an attorney to review the master lease and sublease documents to assure their own interests and needs are met.
As brokers having negotiated numerous subleases, we have found that several issues consistently surface during discussions that should be reviewed carefully by the tenant. First is to thoroughly review and understand the master lease, which will continue to rule your occupancy. It may be, for example, you who were verbally assured the lease expiration date was fi ve years hence, when in fact the lease says three years. There may be restrictions on use of the building, which would impact your intended business use. If you later find out about these potential limitations, which are locked into the master lease and cannot easily be changed, any bargain may be problematic.
In reviewing the master lease, you should be alert to several other typical issues. For example, in case of default, make sure the lessor cannot terminate the lease so long as you continue to pay the rent to the lessor. You will want to be sure that as a sublessee you have the right to sublease your space should your own situation change. Finally, you will want to be sure that when you surrender the premises at the end of your sublease, you are clear about your responsibility of returning the space to its original condition.
These cautionary notes notwithstanding, as you begin exploring the market with your broker, the inclusion of subleased space could present some intriguing opportunities.
June 2008 Commercial Edition Issue