When You Should Sublease Your Space Out

When You Should Sublease Your Space Out
While every company hopes that the space they lease will serve their needs for the entire lease period and beyond, this won't always be the case. Your business could grow, or shrink, or get shut down, or get moved to another market. In all of these cases, you could end up with an inflexible lease that leaves you financially responsible for a space that doesn't work for your business anymore. For many businesses, choosing to sublease out their unused space is the best solution.

At this point, you usually have three choices (since defaulting on your lease agreement really isn't a choice):

Keep paying your lease. If you do this, you end up with all or almost all of your occupancy costs still on your books, but you are at least freed up of having to bear the additional costs of operating the location.
Buy out your lease. Some landlords will allow you to prepay your lease -- sometimes at a discount -- to let you get out of responsibility for it today. If you have a long time left on the lease, though, this can be a very expensive option.
Sublease out your space. If your lease allows it, you may be able to put someone else in your space, have them pay you rent, and then continue paying your rent to your landlord. Sometimes, the sublease payments will even be enough to cover your entire rental payment.

If the sublease option sounds like it could be a fit for one of your unused spaces, the first thing to do is to abstract your lease. Look to see how much term is left -- if it's too short, you might not be able to find a sub-tenant. Then, look to see what rights your landlord gives you. If you don't have language that allows you to do a sublease, you might not be able to put someone else in your space.

Assuming that you are allowed to find a subtenant, the process is much like leasing out any other space. Usually, you will find a leasing agent to present your unused space to the market. Potential subtenants will tour the space and, hopefully, make offers.

Bear in mind that the cost of any concessions to the subtenant like free rent or money towards their tenant improvements will come out of your pocket. Usually, though, subtenants don't expect too much. Also, it's wise to be prepared for the rent they pay you to be less than your rent. For many companies in a situation where they need to sublease, getting 70 percent of their costs for an unused space covered by a new tenant is much better than having 0 percent covered. Finally, remember that your landlord will usually have to approve the sublease.

If you have unused space, talk to your existing commercial real estate broker. He or she can help you determine if it is a good candidate for a sublease.