Steve Marsh rejected subleasing for a different reason. The founder of Smarsh, a San Francisco firm that archives e-mails and instant messages for financial companies, pursued several sublease opportunities while hunting for space for a branch office in New York City this past June. But he was put off for security reasons. Because his computer systems house sensitive client information, it was unacceptable to him that sublessors couldn't tell him exactly who would have access to his space.
With these concerns duly noted, it's fair to say that subleasing has worked out great for some people. Two years ago, when there was less commercial space on the market, Justin Abernathy moved his direct marketing company, SureClick Promotions, to a brownstone on the outskirts of Washington, D.C. Having outgrown the space, he recently took over another company's lease for a 4,600-square-foot furnished office downtown. All it needed was a little repainting. Abernathy pays $8 less per square foot than what the tenant is charged. He's already hired five new employees who wouldn't have fit in the old space. And he only has an 18-month commitment, with an option to sign a longer lease later. "For me that was better than signing a five- or a 10-year lease because I don't know if we'll need this much space five years from now," he says.
I have empty space. Should I sublease it to someone?
Unless a lease specifies criteria for subletting, it is usually forbidden except at the landlord's whim. If you are in the process of moving and would like to sublease all or part of your new space, negotiate subleasing terms like any other. Most landlords will demand the right to review the credit and financial standing of the subtenant, as well as a final right of approval. In return for that, negotiate a short approval time and specify that failure to respond will be considered approval. You should also make sure there are no restrictions that hinder your ability to market the space or discount the rent if necessary.
In terms of contracts, you'll want to sign one with the sublessee, and it's also possible your landlord will require a sublease consent document signed by all three parties, defining rights and responsibilities. As far as finding the right subtenant, Abernathy, who has leased part of his office in the past, says, "It's like looking for a new roommate in college. You have to find one that you will get along with and will be a good fit with your company's culture."
How long a lease should I sign?
Ten years, if you can swing it. "We think that in five years, prices will be back up again, so it's best to lock in the low rates for as long as you can," says Bill Goade, chairman of Boston-based CRESA Partners, another national commercial real estate brokerage that represents tenants. Ironically, Goade, who leased new space in June, was himself unable to persuade his landlord to commit to more than a seven-year deal. Still, he went ahead with the lease because it meant moving into a Class A waterfront office overlooking the harbor for "basically the same price" as the Class B space CRESA had called home for 14 years.
How does this figure into my taxes?
The Internal Revenue Service requires that tenant improvements, broker's commissions, and legal fees be amortized over 39 years, even though most leases have a much shorter lifespan of 5, 7, or 10 years. "It's kind of a glitch in the tax law," says Arthur Koplowitz, partner at New York City accounting firm Weinick Sanders Leventhal & Co. After your lease is up -- or if you terminate it -- you have to write off the remaining expenses all at once. Suffice it to say, this is illogical and unfair, but sometimes you can use it to help balance out the upfront expenses that can't immediately be written off if you move to a new space. Some furniture, fixtures, machinery, and equipment (up to $100,000) can be written off right away with a Section 179 deduction. Otherwise, those expenses must be amortized over seven years.
Do I really need to consult a lawyer?
Yes. Even after you've reviewed the lease yourself, have a lawyer look it over because it's often the most glazed-eye-inducing portions that matter. The fine print usually includes tenant and landlord responsibilities in the event of fire, casualties, or other damage. Sometimes, important tenant protections are omitted. Consider Brett Hobson, CEO of Comfort Experts, a firm in Fort Worth, Texas, that installs and repairs air conditioners. His office is near train tracks. On January 30, at 7:20 a.m., a freight train derailed and slammed into the back of the 6,000-square-foot commercial space he leases. Hobson is thankful that none of his employees, some of whom normally work at that hour, was present when the train hit. But he cannot fathom that, because of ambiguity in his lease, he is still locked into the agreement, and he continues to pay rent on the unusable space. And that's on top of the $1.5 million to $2 million he lost in damage and missed sales.
More prosaic incidents can also result in steep losses. In recent years, for example, some unlucky California business owners discovered that, during repeated power outages, their landlords were under no contractual obligation to supply a generator or provide a rent abatement even if the building went dark for days on end.
