• Specify the term of the lease (e.g. 5 years and six months).
• Lease Commencement Date:  This date may be different than the date the lease is executed.  For example the lease is executed February 23 of 2009 but the Lease Commencement Date is September 1, 2009.
• Rent Commencement Date:  The Lease and Rent Commencement Dates are different when the landlord give the tenant “free rent’ in increments of whole months.  In the above example if the tenant has two months free rent then the Rent Commencement Date would November 1, 2009.  Landlords sometimes like to give 1/2 month free rent instead of a whole month free rent.  The landlord above could have offered four months free rent at 1/2 rent.
• The Lease Commencement Date may be triggered by “Substantial Completion” of construction of the Premises, obtaining a certificate of occupancy, completion of installation of tenant’s signage, building systems are operational or any number of other triggers.
• Tenants should match the expiration of the term of their existing lease with the Lease Commencement of the new lease.
• The Lease or Rent Commencement Dates should start on a business day, preferably a Monday, and not a Friday.
• In in separate section of the LOI there should be a section titled “Access to Premises”.   The tenant should have access to the premises before the construction is completed (Search “Access to Premises”).
• Most tenants schedule the move into their new space over a weekend so they can use as many elevators as possible and not interrupt the other tenants in the building (Search “Moving”)

• Description of the space (building address, floor and suite #) and floor plan (attached as an exhibit).
• Number of rentable square feet in the Premises and the Building.
• Method of measuring the rentable square feet in the Premises.

Businesses with excess space have several options based on market conditions and their lease rights.  A business could assign the entire lease, sublease a portion or the entire space to another company or buy out of the lease.  This article will focus on subleasing from the perspective of one company subleasing space to another company.  Subleasing can be complicated, frustrating and disappointing if you sublease to the wrong company.

Businesses are advised to work with real estate professionals who are knowledgeable of real estate market conditions and able to navigate through the maze of a lease and sublease.   Businesses should leverage their time focusing on running their company and let the professionals help you make good decisions.

A sublease is an agreement between a tenant (the “sublandlord”) and another business as the subtenant to occupy all or a portion of the tenant’s space.   The tenant is liable to its landlord for its lease while the subtenant becomes liable to the tenant, its sublandlord.  If you plan to sublease your entire space through the end of your lease term, assigning the lease may be preferable by both parties.  An assignment does not relieve the tenant from its lease liabilities and obligations unless the landlord agrees to do so.   Your company remains responsible for the entire assigned lease even when the new business taking over the lease, the assignee, does not fully perform its lease obligations.

A tenant should negotiate the maximum flexibility in their lease to sublease all or a portion of space with minimal interference from the landlord.  We refer to this as “controlling the space”.  Conversely, the landlord wants to control space in “their” building to stabilize the tenant base which enhances the long-term viability of the lease and the investment value of the building.

When you make the decision to sublease space first and foremost review your lease to determine your company’s lease obligations and approvals required.  We will review your lease as part of our value-added services.  When hired, we will then develop a marketing plan to sublease the space according to your company’s business strategy and real estate needs.

Your company cannot sublease to just any company.   Your lease will likely not allow you to sublease to an existing or prospective tenant in the building [this is potential competition with your landlord’s vacant space], a government agency or a business with an incompatible use.    Make it easy for your landlord to approve the sublease.  Use the landlord’s sublease form to save valuable time and money towards obtaining the landlord’s approval.   If your landlord does not have a sublease form either ask us or your real estate attorney and one of us can provide you one.   Tenants should require the subtenant to provide financial statements for the past two years and leasing references to assess risk and determine the amount of the security deposit.   The security deposit analysis should weigh credit risk, the impact on your company’s cash flow and market conditions.

Many tenants and subtenants are under the impression once the sublease agreement is signed the subtenant can move in.  However, most, if not all leases, do not allow the tenant to sublease space without the landlord’s written approval.  In some instances, subleases over a certain size may require consent from the landlord’s lender. The landlord’s approval should be no more than 30 days.   The subtenant can only move in after: (i) The landlord approves the subtenant’s use and credit; (ii) The landlord has approved the final draft of the negotiated sublease; (iii) The tenant and subtenant have signed the sublease and; (iv) The landlord has signed what is commonly referred to as the “consent to sublease” document.

The landlord may have the right to “recapture” your space and/or terminate your lease once you send notice of your intent to sublease the space.  Landlords typically exercise a recapture right in a hot real estate market when your space can be re-leased quickly and at a significantly higher rental rate than your current rental rate.  This higher rental rate generates higher property revenues and net operating income which in turn increases the value of the property.   This recapture scenario could also work in your favor if you must vacate the space to expand or downsize.  Tenants can sometimes have the best of both worlds if they have negotiated a right to rescind the notice to sublease in the event the landlord exercises its recapture right.  Now you have a lot more control over your space.

As a future sublandlord your space should be in its most marketable condition to generate the most interest given your financial resources.  For example, the rent should be attractive and the space should be in good condition, well lighted and clean.   A sublandlord should adjust its expectations depending on market demand and supply dynamics for both direct and sublease space in your submarket.  Several factors typically affect the price of sublease space and the time to lease it with some more important than others.  Important factors include rental rates on comparable direct and sublet spaces in the building and submarket, size of the space, available or remaining term on your lease, space configuration and features (offices with windows, a conference room and kitchen), building location and elevator identity to name a few.

Subleasing efforts may be significantly impacted by the amount of cash available to fund tenant improvements.  Offer free rent so the subtenant can fund their own tenant improvements to close the deal.  Tenants must be prepared to reduce the rental rate by 10% to 60% below their current rental rate.  As a general rule the less time left on the lease the lower the rental rate paid by the subtenant.  When market demand is low it is better to make a “deal” today, generate income and mitigate your company’s risk than wait for the “perfect” deal.

A subleasing strategy will depend on your company’s business goals and cash needs.  A full floor tenant with 25,000 square feet may have the cash available to demise the space into smaller spaces with each having its own conference room and kitchenette.  These smaller spaces may be more attractive to a larger universe of subtenants.  Alternatively, it may be more economical to vacate your entire space and wait for one subtenant rather than investing cash into a space you will no longer need.  There are creative ways to fund tenant improvements if the landlord is open to negotiating a direct deal with the subtenant after both the sublease and your lease expire.  Remember, the landlord wants to know “what’s in it for me!”  Will the landlord benefit by securing a stronger credit tenant and/or increasing the subtenant’s rental rate to market rates?  Marketing time can often be reduced by offering “plug and play” space that is fully furnished with a phone system, cabling, internet access, etc.  Such “plug and play” space often generates higher rental rates because the subtenant will save time and money.

There are other monetary issues to consider when subleasing.  One of the most important is to pass through your share of the building’s operating costs directly to the subtenant.

What happens if the market rent is higher than the tenant’s in-place rent?  Most leases give the tenant the right to share net profits from subleasing efforts.  The split is typically 50% to the landlord after subtracting subleasing costs (e.g. tenant improvements, lease commissions, free rent, moving costs and legal fees).

Leasing costs are one of the highest costs a business will incur along with payroll and benefits.  Payroll and benefits include fixed and variable components whereas leasing costs are fixed and increase annually.  Well negotiated sublease language in your original lease will provide you flexibility and options for an uncomplicated exit from your space while a poorly negotiated lease will be imprinted in your mind forever.

We will guide you through the leasing process, help leverage your time, work to reduce costs and position your company to make prudent real estate decisions consistent with business goals and space needs.  We will act as your real estate advisor in the traditional brokerage role.  Contact us any time to learn more about our value-added services, request references or just ask any leasing questions.

Let’s quantify the” increase” in leasing costs  to the fictitious company Great Pacific Capital (“GPC”) if it does NOT hire a broker when it renews its lease for another five years.  GPC leases 5,000 square feet in a typical class B office building in Northern Virginia.  GPC is paying a $26.50/sf rental rate and the lease expires November 30, 2010.  The market rental rate for renewing leases for this and competing buildings, assuming a “good” credit tenant, is approximately $23.00/sf based on a five year lease with 3.0% annual increases, a $20.00/sf tenant improvement allowance and two months free rent.   Does GPC know what “market” terms and conditions are?   Highly unlikely unless they have hired a broker!

GPC initiates contact with its landlord to renew their lease.  The landlord and landlord’s broker are salivating because GPC has not hired a broker.   The landlord’s broker will tell your company it will pay a lower rental rate, or pass the savings to your company, if you do not hire a broker.  The landlord’s broker informs GPC they can renew their lease at the current rental rate of $26.50/sf and the space will be repainted and re-carpeted at a value of $7.50/sf.   After two months of intense negotiations GPC and the landlord agree to a $25.00/sf rental rate with 3.0% annual increases over a five year term with a $10.00/sf tenant improvement allowance and one month free rent.   GPC is now bragging about the great deal they negotiated with their landlord.   Why not!  GPC’s rental rate will be $1.50/sf lower ($26,500 in savings over 5 years) and will receive a concession package valued at approximately $60,400 which includes a tenant improvement allowance and free rent.

Landlords do not pass their savings to tenants.  Over the five year term GPC is going to pay $53,000 (8.7%) more rent than “market” rent and receive $60,400 less in “market” concessions.  GPC has been “taken” for almost $113,500 in lease value.   How does GPC’s owner feel now?    If GPC does not pay its lawyer or accountant a premium for their services then why should it pay its landlord a premium for leasing space?   The author worked as an asset manager for building owners and was responsible for negotiating and approving leases as well as developing and executing property level budgets, among many other duties.   Lease commissions were always budgeted to be paid on lease renewals and new leases to pay the brokers representing those tenants!  What motivates each party and what are the benefits received?   The landlord’s broker is motivated to lease the space quickly at the highest rental rate and without a tenant’s broker to maximize their lease commission.

The lease commission earned by the landlord’s broker doubles to about 4.0% from 2.0% if GPC does not hire a broker.  The landlord is motivated to achieve the highest rental rates and minimize capital costs (lease commissions, tenant improvements and free rent) to maximize the property’s investment return.   Landlords do not just lower the rental rate for a lease renewal.  Some might.  What are the benefits, if any, to GPC? None! Keep in mind these concepts also apply to tenants negotiating a lease when relocating to another building or expanding within their existing building.

Rent, the tenant improvement allowance and free rent are by far the largest and most important economic considerations in a lease negotiation.  There are however numerous other monetary lease considerations that should be addressed in any lease negotiation.  If not addressed, a company may end up paying higher operating expenses or incurring unnecessary, higher or landlord profit-driven fees.   For example, GPC should negotiate to reset the base year upon its renewal and require the landlord to pay for all costs to move furniture so the space can be painted and re-carpeted.

Many tenants miss this costly requirement when reviewing language on their own.   Other examples include landlords passing through capital improvement costs; administrative fees on services provided; above-market insurance coverage for a given use; landlords passing through costs for code issues existing prior to lease commencement; and landlord requiring expensive audited financial statements.

Terminations

Expansion

Right of First Offer

Right of First Refusal

Offices:List the number of offices and sizes if applicable, number of offices requiring windows;

Conference Rooms:

Size, #, seating capacity, windows, glass, adjacent to kitchen, video, screen, projection, data, telephone, table features, lighting, HVAC