Negotiating the thicket that surrounds sublease of office space

In November of 2007 we had over 140,000 square feet of office space for sublease in the South Meadows submarket, which represents nearly a 12 percent sub-vacancy level. Based upon this figure, I thought it worthwhile to discuss some of the issues regarding subleasing.

Sub-leasing space is the most difficult aspect of commercial real estate. In fact, based upon a study in the Bay Area, 25 to 50 percent of space offered for sublease is never actually subleased.

The first issue is that you are dealing with three parties as opposed to two in a normal lease transaction. Both the sub-landlord and the master landlord have to approve the tenant for the space. This can cause time delays, which is problematic if the sub-tenant has a time constraint.

The next issue is that many of the lease terms are already defined, limiting the sub-tenant and sub-landlord's ability to negotiate. The term of the lease, the size of the suite, insurance requirements, the use, and many other terms are defined by the master lease. This makes it difficult to make a negotiated agreement all parties can live with.

One of the largest issues is the term remaining on the master lease. If the term is too short, the sub-tenant will want to negotiate an extension with the master landlord at the inception of the sublease or face moving their staff at the sublease expiration. A longer term is actually better for subleasing.

The next hurdle to cross is the interior build-out of the suite. Ideally, the subtenant will take the suite as-is. However, if the space requires modifications, the sub-landlord will have to swallow hard as this will eat into any future cost savings of subleasing. In addition, if the suite size is to be reduced, an architect will need to be consulted to insure fire codes are met for exiting purposes. Lastly, many leases require the sub-landlord to restore the suite to the pre-existing condition at the termination of the lease.

Also, not all rights in the lease are transferable to the sub-tenant. Many rights such as signage, expansion, and extension may be considered personal to the primary tenant only.

Sub-landlords also suffer from not having the same marketing exposure as the master landlord. Very few landlords will allow a sub-lease broker to have a sign outside the building. This is especially true if the landlord has competing space in the building. Landlords don't like to compete against space in their own building, especially if they are already getting rent on that space. In addition, most brokers earn more on a direct lease, since the terms are generally longer.

But all is not lost. Sublease space generally offers a huge price concession to existing direct lease space. This is offered to offset the issues mentioned above. In many cases, this may be enough incentive to make tenants take notice and forgo some of the flexibility of a direct lease.

The key to subleasing is to be flexible, don't hold out for the last penny, and make a deal when one is presented. The first offer you receive is in most cases your best option.

Tim Ruffin is senior vice president and managing partner in the Reno office of Colliers International. Contact him at

823-4670 or TRuffin@colliersreno.com.