Subleasing, Subtenants, and Sub-Optimal Lease Durations
When looking for short-term space, a sublessor’s interests compete against the interest of its potential landlord.
I’ve been working with a client who has been seeking a lease for a short term (i.e. under two years). The best possible scenario is a sublease from a tenant who has the extra space on a short-term basis. For the sublessor, it is found money, and for the subtenant, it gives them the short-term space they need. Additionally, the subtenant does not have to carry the burden of the liability that comes with a long-term arrangement.
We found a space that worked for my client, but the lease had many years left on it. A case where there is a disparity between the term desired (less than 2 years) and the term that the tenant had remaining (over 6 years) presents a very difficult gap to bridge. In addition, the landlord is a third party in the deal and usually has options to take the space back—and landlords do recapture space in a tight market. As a broker, we have to determine the likelihood of successfully closing the deal for the subtenant.
If the deal is too good to be true, it may not happen. I was representing another tenant and was negotiating a sublease, and all parties agreed on the terms…until the landlord said no. The owner took the space back and approached my client with an offer to lease the space, but for a much higher rent.
The creditworthiness of a subtenant and the financial health of the tenant can both influence the landlord’s decision to accept or reject the sublease. A financially weak tenant and strong subtenant may cause the landlord to consider “taking back” the space and leasing it directly to the subtenant. In this case the subtenant may still enjoy a discounted rent, the usual case in a sublease. Because the landlord extracts the difference between the rent they are receiving from the tenant and the lower subtenant rent as a fee to release the tenant from the lease. In some instances when the tenant’s rent is substantially below market the landlord may opt to take back the space and re-market it. This practice is uncommon, but it does happen.
As a subtenant, you have to understand where the market is, what you’re paying, what the landlord’s incentives are, what the tenant’s incentives are, and what you are trying to accomplish as a subtenant.
For my subtenant, the disparity between the sublease term they wanted and the balance of the tenant’s term were too large. It was a gap that could not be bridged. The subtenant was able to renew in their current space for the term they needed.
To learn more about how Mohr Partners can help you in your search for an ideal space, contact me.
George E. Grace
G.E. Grace & Company, Inc.
232 Madison Avenue
New York, NY 10016
646-312-6800