What is the Cost of Subleasing Your Space?
The Cost to Rent Office Space Out to Another Tenant
Subleasing is a great option for businesses who find themselves unhappy with their space. Whether you want to expand and relocate or you have too much space, letting another business use your space and pay some of your rent may be a great cost-saving option.
Particularly with the widespread adoption of remote working, many companies are realizing they have more space than they need.
While it may seem like a win-win situation to sublet some or all of your excess space, there are costs associated with subleasing. These include marketing costs, attorney fees, and brokerage fees, among others. It is important to have a clear picture of the potential costs and overall return on your sublease before putting your space on the market.
Marketing Costs
If you want other businesses to be able to find your space, you will have to put some money into marketing. The range of what you can spend is wide depending on the level of investment you want to make.
Paying for promoted online listings is a simple and cost-effective way to get your space in front of potential subtenants. But you may also want to invest in designing a brochure, having professional photos taken of the space, or even hosting an event to get brokers and potential prospects into the space. The total cost depends on your desired level of investment.
If you are working with a broker to sublease your space, some of these costs can be minimized by their firm’s internal team. Often a brokerage team will post the listing on their subscription database, take professional photos of the space, and design and distribute a marketing brochure to their network.
Brokerage Fees
Working with a brokerage team also means they will need to be compensated for their work. This will definitely increase the reach of your marketing efforts but comes with an additional cost.
Brokerage fees for a sublease listing vary by market and brokerage firm, so it is important to understand your financial obligation to the brokerage if they find a subtenant for you. Fees in the Minneapolis-St. Paul market are typically $1.50 - $2.00 per square foot of subleased space for each year of term in the sublease. For example, if a brokerage team found a company to sublease your 5,000 square foot space for three years, the business listing the space would owe a brokerage team $22,500 - $30,000 in fees once a sublease is signed.
Landlord Sublease Review
Most, if not all, sublease and assignment provisions in a lease require the prime landlord’s approval before a business can sublease their space.
There may be a cost associated with the landlord review. It varies between landlords and different lease documents, so be sure to review your lease language around Subletting and Assignment to verify if you will need to pay your landlord to review and approve potential subtenants.
Legal Fees
As we’ve said before, lease documents are legally binding contracts between a landlord and a tenant, so it is always important to have an attorney review a lease before execution. The same goes for a sublease document. The business listing the sublease is typically responsible for drafting the sublease document.
Recovery will not be 100%
It is important for businesses to understand that the cost recovery of subleasing your space will not be 100% for several reasons. The first reason is all the costs and fees noted above. Paying for marketing, brokerage fees, and attorneys will add up and reduce the overall recovery from the subtenant income.
Second, the rate you can charge a subtenant for your space will be lower than what you are paying for your lease. Subleased space is rented at a lower rate than direct space to entice potential tenants to take your space at a lower cost than finding their own direct space.
You are still responsible for rent payments
Even if you find a subtenant to occupy your space, you are still legally obligated to continue paying rent. Finding a subtenant will help offset your rental costs, but the original financial obligation of your original lease are still in full effect.
Considering the additional costs of a sublease, many companies still find subleasing their space an advantageous solution for excess or unwanted space. There is still potential for significant cost recovery in allowing another business to occupy your company’s space and take on some of the rental responsibility.
If you would like to talk about your options to sublease your space, reach out to a Rokos broker!
We can help outline the additional costs and expected financial recovery for your space.
Rokos Advisors is a Minneapolis – St. Paul based commercial real estate firm specializing in helping businesses find the perfect office or industrial space for their company.