Friday, November 15th, 2019 November15th2019

Sell for More Trivia: What is the difference between a lease and a sublease?

Published on November 15th, 2019

Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.

 

Let’s discuss from the perspective of a potential tenant…

Leases

Leases are negotiated directly with the owner of a parcel of commercial real estate. That’s why they’re sometimes referred to as direct leases.

Normally your conversations will be through your commercial real estate broker.  The deal you get depends on the landlord’s motivation, competition in the market and your broker’s skill.

Your broker will work with the landlord to craft a negotiated Lease Proposal which will outline your:

Rent (monthly payment amount)

Term (number of years)

Bumps (increases in rent throughout the term)

Concessions (free aka abated rent)

Tenant improvements (build-out or allowance)

Early termination rights (not very common)

Lease extension rights through an option to renew, right of first refusal, or right of first offer

Right to purchase (not very common)

Once you’ve agreed to the major terms, you and the owner will sign a lease, pay deposits and secure insurance.

Subleases

Sometimes a business signs a long term lease and then something changes…a decline in sales…the company is acquired…they move their manufacturing to a low labor cost country…or they have a falling out with their landlord.

They are locked into a long term lease…so now what?  The answer:  Sublease the space to another business.

As the potential tenant, a sublease allows you to occupy the space for the remainder of the already negotiated lease term.  You won’t have much flexibility.

With a sublease the primary motivation is to stem the bleeding.  Excess space wastes money.  Consequently, a different dynamic unfolds compared to a direct lease.  Also, another layer of decision makers will be involved.

Remember, a lease is in place with a landlord and a tenant. Now the tenant becomes a de facto sub-landlord and you are the sub-tenant.

All parties…master landlord, sub-landlord, and sub-tenant (you)…must agree and all must approve.

As the potential sub-tenant, you’re motivated to sign a sublease to receive a below market rental rate in exchange for taking a space with layout and lease terms that may not be perfect for your business.

Subleases are complex so be sure to get your attorney involved.  And know that you’ve got some risk.  If your “landlord” stiffs the owner…it may get messy and your sublease may be in jeopardy.

In the end, the rent savings may make it worth it.

 


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About Beau Beach, CCIM

Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.

Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee, South Florida and Chicago markets.

He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.

Beau can be reached at 800-721-3287, click to schedule a call or Beau@BeachwoodSells.com