Q: We are looking for space to lease for our company. What is absolutely the best way to get a great deal?
A: In an open market, great deals generally result from a transaction with a highly motivated landlord, or a tenant who is anxious to sublease their space. Subleases are analogous to the bargain bin in a retail store – you may not find the size or color you want, but if you can compromise, the result can be a great bargain that is substantially below retail prices.
A prime tenant who is trying to sublease space has two pressures to make a deal. First, this tenant is expending money every month to pay rent, whether occupying the space or not. Second, the lease asset itself is literally wasting away and becoming less valuable every month, until final disposal can only be achieved at “fire-sale” prices. The prime tenant who is trying to sublease space always has to measure an offer against the potential exposure of additional expense.
Let’s look at an example of this pressure. In order to terminate a lease, it is not unusual for a prime tenant to be willing to pay a lump cash payment to the landlord of fifty cents on the dollar for the remaining lease obligation. This also eliminates any contingent liability they may have for rent payments upon the default of a sublessee. It illustrates the fact that most prime tenants understand how important it is to get the job done quickly. This is one area where the prospective subtenant truly has leverage. You can and should take advantage of this fact.
The disadvantage of subleases is that it may be hard to find exactly what you need. Paying market rent often allows you to have your space custom built to suit, in a location of your choosing and delivered when you need it. Like the retail bargain bin, subleases are many times “as you find them.” The prime tenant may not be willing to divide the space, or invest heavily in a build-out. It is certainly possible, and worth investigating, to find a reasonable match and take advantage of the situation. Our firm exclusively represented an insurance benefits company for the acquisition of class A office space in Nassau County. We were fortunate to find and negotiate an attractive five-year sublease from a tenant that was more than 20% below the landlord’s asking rent for similar space. And in this case, as with many subleases, we were also able to negotiate a very attractive deal with the prime tenant to sell our client the existing office furnishings and the telephone system.
In some cases, there are ways to negotiate around what appear to be insurmountable problems. If you have found space that is acceptable, but are confronted with an unacceptable three-year term, it may be possible to negotiate a new lease with the landlord. The landlord may lower your rent on a new lease in exchange for a cash payment from the prime tenant to terminate the existing lease. You may also be able to extend a sublease with a landlord. In this case, you would occupy the space for three years under the sublease, after which your occupancy would be under the terms of a new lease with the landlord that is negotiated today.
Make sure that your broker is considering sublease possibilities and take the time to inspect any candidates. A truly great deal may result from a little detective work and creativity.
David Hunt, MCR, CCIM, SIOR is the president of Hunt Construction Services, Inc. and Hunt Corporate Services, Inc., Plainview, N.Y.