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    What is a Sublease?  Mark Casey - Tenant Wisdom

 

Ryan Beckenhauer [00:00:05 ] Hello, my name is Ryan Beckenhauer, and you are listening to The Boulder Business podcast. Today we are here with Mark Casey, the managing commercial broker at Tenant Wisdom.

 

Mark Casey [00:00:16 ] Mark has over 30 years of experience specializing in commercial tenant/buyer representation and subleasing. How are you doing this morning, Mark?

 

Mark Casey [00:00:24 ] I'm doing well. Ryan, it's great to be here on this sunny day in Boulder, Colorado.

 

Ryan Beckenhauer [00:00:29 ] It's beautiful. Well, let's get right into it. So today's episode is going to be about subletting. So, what is a sublease and how common are they in a standard commercial lease agreement?

 

Mark Casey [00:00:39 ] Well, the easiest way to think about a sublease, is that kind of an indirect lease in that instead of leasing the space directly from the landlord who is typically but not always the owner of the property, you're actually leasing it from the tenant in that space. So there's another party involved which adds a little complexity, but it can be very manageable and it can be very good for all parties involved.

 

Ryan Beckenhauer [00:01:10 ] When it comes to something business owners should be aware of, you know, when they're looking over the subletting lease agreement front from the sub lessor or the original tenant, you know, what are some things that, you know, they might want to watch out for or maybe pay more closer attention to?

 

Mark Casey [00:01:25 ] So because I represent and tenants and subtenants, I'll speak from that perspective first. One of the reasons why subleasing could say office space right now, although it can be industrial, retail space as well, and people have experience subleasing apartments. It's just not my specialty. But in terms of the somebody from the space office space, let's say the advantage to the tenant in the space is that very often they're able to let go of and either extend the cash outflow or actually increase their cash inflow through subleasing all or a portion of the space that they have no longer need from the and we call that person the sub landlord who is leasing that space to the subtenant. For the subtenant, there is the opportunity to frequently lease space on a on a shorter term than they could with a direct lease and very often at a better rate than they could. The landlord actually potentially can win, too, because very often the subtenant stays in the space beyond the subleased term. And so the landlord can get access to a new tenant and avoid a vacancy that they might have otherwise.

 

Ryan Beckenhauer [00:03:04 ] That's actually a great segment into the next question I wanted to ask you. So you talked about, you know, some of the complexities that come along with this type of lease. What are some of those pros and maybe a couple of cons of subletting? I know you mentioned a few in the last question, but.

 

Mark Casey [00:03:20 ] So, you know, one of the very important things is to be aware of. First of all, it requires the landlord's approval, I've never seen a commercial lease yet that didn't require the landlord's written approval in order to do a sublease. Very often, language is added in the says things like landlord cannot unreasonably withhold approval of a sublease, which is a good thing for a to get the tenant when they're leasing the space from the landlord. But it still requires that approval from the landlord. Another very important factor is because there is this additional party involved, let's say, on the sub tenant in this case and I'm leasing from who we're calling the sub landlord. If they had sub landlord should fail to perform in the significant requirements of their performance as they continue to pay the rent. If they fail to perform on that, the sub tenant can lose their rights to the space. For that reason, it's very important that these sub tenant do their due diligence on the sub landlord. While, the sub landlord is doing their due diligence on the sub tenant, and I should say that a savvy landlord is going to be doing their due diligence on the sub tenant as well.

 

Ryan Beckenhauer [00:04:58 ] They definitely seem like they can get a little complex. Well, when it when it comes to finding, you know, maybe the right amount of square footage I'm using the term Goldilocks for just a lack of a better word but you know something that's not too small. You know where they're going to grow quickly or to big, where they're paying for square footage maybe they aren't necessarily using. What is the best way to find out that space?

 

Mark Casey [00:05:21 ] Well, that's a very good question, because one thing can pretty much count on is that whatever space amount of space that a tenant leases over the course of one to three years or longer, their needs are going to be changing. And that's so. It's dynamic and that their needs are dynamic in that way. So what we've tried to do is to do a needs analysis on the front end before we even go out and look at space to determine both what the tenant needs on the beginning of the lease, as well as what they're going to be down the road. And so we try to build in our flexibility within that. That might include things like rights over adjoining space, which have given the ability to expand sometimes to try to build in termination clauses should the tenants needs change dramatically. So those are some of the things that we build in. But it all begins on the front end with just a conversation about getting to know the business, the goals, the budget and what they're looking to do. Now, I'd be remiss to mention the obvious here with respect back to the current environment, with the pandemic we're in, which has changed things very significantly, certainly on the retail and restaurant and but also on the office end because companies are not using office users in particular. Many are not using offices in the same way that they did just even a few months ago. And so because that's because more companies are embracing the option of work from home. And they decided, for example, Twitter has decided that their employees can continue to work from home indefinitely even after the safety concerns pass. So that's one of the complicating factors that I would say overall has tended to be on the office side cause companies to take a look at their office needs and to reduce the amount of office their using, not in all cases, but in some cases perhaps they have all hands on deck meetings once a week. And beyond that, many of the people are working remotely and plan to continue that path.

 

Ryan Beckenhauer [00:07:58 ] Yeah, it does seem like the landscape has changed dramatically and I would have never thought, you know, three months ago to your point that that we'd be here, to circle back to the due diligence of the subtenant, is it common for the subtenant to ask to see the original lease, or is that something that maybe doesn't happen?

 

Mark Casey [00:08:19 ] It does and really should happen as part of the process, because what the subtenant is agreeing to do in the sublease is to abide by the terms of the lease and the rules and regulations associated with it. So it's actually critical that the subtenant carefully look at that and typically they want to have their legal counsel looking at it as well. So that's a very important part of it. And they really can't do that without examining the underlying lease. Now, typically, that is not the first thing that they do. First, usually they look at the space and see how that functions before starting to get into the needs of what the actual lease looks like. But that's very important. And one of the things that can happen under certain circumstances, usually this would be where you've got a sub tenant who is strong financially or stronger than the tenant or someone or they'd be leasing from. And in that case, sometimes what can happen is that the sub tenant can actually do a direct lease with the landlord, which would allow the primary tenant or the sublandlord, in this case, out of their obligations. And that can be very attractive for the tenant to just kind of wash their hands of it and not be on the hook for whether the subtenant performs or not. So that's one of the cool things about a sublease, it can actually turn into an assignment where the primary tenant is, it is able to wash their hands, as I said, or terminate the underlying lease and the landlord and the new tenant or subtenant do a new lease. And you might ask, why would the landlord want to do that? Well, the advantage to them is that particularly if it's a tenant who strong financially, if they end up in a stronger position with this new tenant than they would have been staying on with their current tenant.

 

Ryan Beckenhauer [00:10:49 ] That's interesting. I mean, it sounds like it could be a three way win there for everybody.

 

Mark Casey [00:10:54 ] Well, it certainly could and that's why it's so important to do that. Do the due diligence there you know like in anything, there are things, times when it doesn't work out so well. And in that case, it can be where the subtenants use, all of a s