Is Subleasing Commercial Space Right for Your Business?

Is Subleasing Commercial Space Right for Your Business?

By Laura Frenkel, Owner and Principal Broker of VIA Commercial Real Estate

A commercial sublease can be an opportunity to get a great space at a lower rent. But before you commit, you need to understand whether the savings will still make sense after you account for improvements, the remaining lease term, and what happens next.

When I help business owners evaluate a sublease, we look beyond the advertised rent. The goal is to find a space that supports the business now and gives it a workable path forward.

What Is a Commercial Sublease?

A sublease generally allows your business to occupy space leased by another tenant. You enter into an agreement with that tenant, often called the sublandlord, rather than leasing directly from the property owner. The original lease remains in place, and the sublease must fit within its requirements.

Businesses offer space for sublease for many reasons. They may be growing, downsizing, relocating, or closing. Their needs have changed, but they still have time remaining on their lease.

That can create an opportunity for another business—but it is important to understand the terms and the circumstances before deciding whether it is the right fit.

Why Subleases Can Offer Lower Rent

A tenant trying to leave a space may be focused on reducing its remaining financial obligation. Receiving some rent from another business can be better than continuing to pay for space it no longer uses.

That motivation can create room to negotiate.

I have seen tenants offer substantial rent reductions, free rent, or other concessions to secure a subtenant. In some situations, the discount can be significant.

However, an attractive rental rate is only one part of the decision. You also need to consider what it will cost to prepare the space for your business and how long you can use it.

Tenant Improvement Allowances Can Change the Math

One of the biggest differences between a sublease and a direct landlord lease is the potential availability of tenant improvement dollars.

In a direct lease, a landlord may agree to contribute toward improvements that make the space work for your business. That could include flooring, paint, layout changes, or more extensive construction, depending on the negotiated agreement.

Those contributions can be harder to obtain in a sublease. The existing tenant may be trying to reduce expenses and may have limited cash available to fund your improvements. It may be more willing to offer lower rent or free rent instead.

That can work well if the space is already close to what you need.

But if you need substantial modifications, the upfront construction costs could outweigh the rental savings. You may also have fewer years in the space over which to spread those costs.

Compare the total cost of each option: rent, improvements, available incentives, and the length of time you expect to occupy the space.

A direct lease with a higher rental rate may still make more financial sense if the landlord contributes meaningfully toward the work you need.

Know What Happens When the Sublease Ends

A sublease is generally limited by the time remaining on the original tenant’s lease. You might find a space with one, two, or three years left—or even less.

That shorter commitment can be helpful for some businesses. But if you intend to stay for the long term, you need to look beyond the initial deal.

Do not assume you can remain in the space or continue paying the same discounted rent when the sublease ends. Your ability to stay may require a new agreement with the landlord, and the rental rate could be considerably different.

Before committing, consider:

• Whether a direct lease with the landlord can be discussed before you move in.
• What rent your business could afford after the sublease ends.
• Whether the space supports your longer-term growth.
• What another move would cost if staying is not an option.

A short-term discount can lose its value if it leads to an unaffordable renewal or another expensive relocation.

Find Out Why the Current Tenant Is Leaving

A business leaving a space does not automatically mean something is wrong with the location. It may have outgrown the premises, changed its operations, or faced circumstances unrelated to the property.

But sometimes the location itself contributes to the decision.

Limited visibility, difficult access, building problems, parking challenges, or nearby construction can affect how well a space serves a business.

If those issues affected the current tenant, could they affect you too?

Ask why the space is being offered for sublease, and investigate the conditions that matter to your operation. A location that works for one type of business may be a poor fit for another.

The goal is to understand whether you are stepping into an opportunity or inheriting a problem that lower rent will not solve.

There May Be Room to Negotiate

Sublease terms are worth negotiating. Depending on the circumstances, the existing tenant may be willing to discuss rent reductions, free rent, timing, or leaving useful furniture and fixtures.

At the same time, make sure you understand the original lease requirements, any necessary landlord consent, and which costs and obligations your business will take on.

A discounted rate is most useful when the full agreement supports your needs.

Look at the Whole Picture Before You Decide

A sublease can be a strong option when the space fits your business, the savings are meaningful, and the remaining term aligns with your plans.

It deserves a closer look when you need extensive improvements, want a long-term home, or have unanswered questions about why the current tenant is leaving.

Before signing, understand what it will cost to move in, what it will cost to operate there, and what your options will be when the sublease ends.

I help business owners throughout the Denver metro area evaluate leasing and purchasing options for office, retail, and industrial space. That includes comparing subleases with direct landlord leases so you can choose the space that makes sense for your business.

Considering a commercial sublease? Visit VIA Commercial Real Estate to learn more about working together.