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You’ve
opted to lease the new spot and postpone ownership. You’ll encounter two
leasing scenarios once you scour the market for suitable addresses - leases
and subleases. So what are the differences? Indulge me while I describe them.
Leases are negotiated directly with the owner of a parcel of
commercial real estate. Therefore - they are referred to as direct leases.
Normally - your initial conversations will be through your commercial real
estate professional. The deal you get depends upon the landlord’s motivation,
competition in the market and the skill with which your broker volleys. She
will work with the owner’s rep to craft your agreement. Outlined will be a
monthly payment amount - rent, number of years - term, increases in rent
throughout the term - bumps, and concessions - free or abated rent,
refurbishment, and extra stuff - tenant improvements. An early termination
right, extension rights through an option to renew, right of first refusal, or
right of first offer to purchase may also be included. Once you reach a pact -
you and the owner will sign a lease, you’ll deposit the requested amounts and
secure insurance. Now your company can live in the new location for the agreed
upon period - let’s assume five years.
But
during the lease term - something untoward occurs - a decline in sales, someone
acquires your company, you decide to move your manufacturing function to China,
or California imposes a huge levy on your product - which dictates a move
out-of-state. You find yourself with a glut of space - for which you’ve
committed! Now what? Well, those circumstances, dear readers create subleases.
A
sublease is akin to a remnant sale at your favorite carpet retailer. A full
roll of flooring is not available - so you get to pick from what’s left.
Because a finite amount remains - little flexibility exists. If the scrap fits
your area - great! You benefit. But if you’ve a larger area to cover - you’re
hosed. Also, the smaller the amount of over run- the fewer takers. Now a price
discount must be employed to liquidate. Ouch.
With
a sublease - the primary motivation is to stem the bleeding. Excess space
wastes rent payments. The thought of providing any concessions runs contrary to
a desire to move-on. Consequently - a different dynamic unfolds compared to a
direct lease. Plus - 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 you - sub-tenant must agree and all must
approve.
So
with the descriptions of leases and subleases as a backdrop - how should you
proceed?
Consider all your alternatives. If you need
a ton of abated rent, extensive tenant improvements, or a 10 year term, a
direct lease might be your best bet. Conversely - absent these requirements - a
sublease can provide you with an adequate solution.
Seek counsel. Leases are complex. Subleases are
uber complex. They are not for the squeamish. If your “landlord” stiffs the
owner - your sublease is in jeopardy. You’ll need two sets of approvals. Plan
on extended time frames to get all resolved. We recently encountered a sublease
that took ninety days to get the nod!
Allen
C. Buchanan, SIOR, is
a principal with Lee & Associates Commercial Real Estate Services in
Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.
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