What the Rolling Stones can teach you about subleasing office space

The impact of work-from-home policies has become undeniable. Every day the benefits of physical proximity are questioned. Every day the need for office space is reassessed.

Not every company has acted. Some have implemented temporary remote work strategies while they observe how the new office-work standards take shape. Others have already decided to reduce their footprints. For them, flexible work is sustainable.

The result is that many now need to dispose of unneeded office leases. Anyone who has worked in corporate real estate knows this can be a daunting task—particularly in a market with declining demand.

If you find yourself in this position, and you are not sure what to do, I say let the Rolling Stones be your guide.

War, children, it’s just a shot away. When a project starts to go bad, the blame game often begins. Sometimes a disagreement on strategy triggers the conflict, but more often it’s a simple lack of communication. Now more than ever you must manage expectations.

In times of expansion there is more optimism and less scrutiny. But when contraction is necessary, attitudes change. In truth, companies don’t lose money when they sublease. They lose it when they take too much space at sky-high rents with enormous CapEx. The contraction simply reveals the mistake. But no one understands or admits that. You will simply be expected to solve the problem.

"When a project starts to go bad, the blame game often begins."

Have the difficult conversations at the start and you will keep the peace as you go, not only with your team but also with your superiors. Question all assumptions and establish common ground. Initiate a timeline, create a realistic financial analysis, and ask for the budget you need.

Under my Thumb. You cannot complete a sublease without your landlord’s cooperation. Therefore, you need to know how much control your landlord has. Start with a thorough lease review. Look for key terms: a termination option, recapture rights, lease rate constraints, sign restrictions, consent requirements.

If there is a termination option, that may solve your problem immediately. Conversely, recapture rights can complicate your project marketing. Some tenants are wary of time spent on a negotiation when a landlord may simply recapture the space.

If your lease prohibits a sublease asking rate below the rate for direct space, go to market unpriced.

Know your landlord’s consent requirements. For example, the time allowed to render a decision, and if consent is deemed granted after the response period ends.

Let your landlord know your intent to sublease. Pursue a lease buyout if possible.

Gimme Shelter. Effective sublease marketing is about options. Demising is expensive but so is paying for empty space. Create multiple floor plans of various sizes. Consider including furniture, telecom, and AV equipment.

If you plan to remain in a portion, assess the needs of a new tenant. Key components of an office space—signage, bathrooms, the main entrance, the kitchen—must be kept, shared, or given. Your goal is to attract a new tenant. Remember that when you make those choices.

Prepare the space well. Tenants want and need to imagine their business operations. Walking into a mess is not conducive.

Market aggressively, offer incentives, and keep an open mind about deal structure. Offer free rent to tenants and bonus commissions to brokers. Consider a shorter term than your expiration date. Provide a TI allowance. Absorb OpEx increases.

Can’t you hear me knocking. Listen to prospective tenants. If you hear certain complaints repeatedly, consider changes.

If they say it’s in poor condition, paint the walls, improve the furniture arrangement, and remove office junk: dead printers, monitors, empty server racks.

If many want plug and play, create that in part of your space as an example and offer to provide it everywhere.

If most don’t like the floor plan, then examine a modification. Although expensive, if a change would make the difference, it’s worthwhile.

If the issue is location, then review your marketing material. When Jerry Brown was mayor of Oakland, he loved to brag, “Oakland is closer to Downtown San Francisco than San Francisco.” Show prospects the true distance to amenities.

You can’t always get what you want. Everyone wants full cost recovery, but it usually doesn’t happen. Sublease space must be discounted.

Subtenants have reduced ability to negotiate important terms, which are mostly governed by your existing lease. They must accept your current lease expiration date or something sooner. A tenant improvement allowance is unlikely. Subtenants typically can’t alter signage rights, parking spaces, holdover rent, the SNDA, or renewal and expansion rights.

They have no direct relationship with the landlord. Many tenants believe they receive better service when they do business with a landlord directly.            

They can be evicted if you default. Typically, the landlord is not obligated to honor the sublease in the event of a master-lease default.

But if try you sometimes, you get what you need. Eventually you will get an offer. When it arrives, you will have three ways to make a deal: an assignment, a sublease, or a termination.

"If your tenant and landlord prefer a direct lease, then you have leverage."

An assignment is when a tenant assumes your current lease as is. Unless you’re in a hot market, assignments are rare.

If you sublease, you will make up the rent shortfall—the difference between the rent you pay and the rent you receive. That means you will lose money, but it will be less than your loss on empty space.

If your tenant prefers to lease directly from the landlord, you can complete a lease termination. Such a deal cannot be completed without your cooperation. Therefore, you have leverage. How much depends on how attractive the new tenant is—its financial strength and the term of the proposed lease.

For most companies, survival depends on financial and operational rigor. If a project like this lands on your desk, deepen your knowledge and elevate your skill set.

That way, when your boss says, “Can you handle this?”

You can say, “Start me up!”