I was sitting at GCUC 2016 in Los Angeles when I heard a famous coworking co-founder recommend that all new operators “never sublease.” This surprised me. Coworking, like executive suites, need great real estate deals to generate better operational margins and increased revenue. So why recommend that operators steer clear of subleases, the vehicle for so many great deals in markets all over the country?
That co-founder wasn’t wrong in suggesting that inexperienced folks should avoid subleases. There are far more variables to account for if you do sublease. If you don’t know what to watch for a sublease could be disastrous. But, in the following bullets we will address how to account for these variables as a coworking operator and how to open yourself to this source of great deals.
- Do your best to evaluate the creditworthiness of the Sublessor (person subleasing the space). If the sublessor is a startup or a company with volatile cash flow and the deal is “below market” if they default on their remaining lease obligation you will be out of a space.
- Keep in mind that your sublease will only be as good as the terms in the Sublessor’s Master Lease. If there are unfavorable terms in the Master Lease, you as a subleasee will be stuck with those same obligations which may include huge operating expense pass-throughs, overly onerous default provisions, Building Standard Hours that don’t work for coworking, or worse.
- Have a dialogue with the building owners early on to establish that relationship. The owner may be willing to release the sublessor to do a direct deal with you. You don’t want to be in a sublease for several years and then not have the option to stay (or to stay at a good rate) after the sublease term is over. Having a dialogue with ownership and be prepared to try and do a lease extension with the real building owners early on to start to build that relationship with them. This will also make ownership aware of your need to be on the lookout for growth opportunities.
- Look for adjacent expansion space early. One major problem with subleasing is you can get “stuck” in a certain size space with no means to grow. All operators should look for openings in adjacent spaces or ask the building owners when neighboring tenants leases expire so you can have firm options to take additional space if you need it to grow to meet consumer demand.
- Make sure the space is super close in look/feel to what you want. If you want something completely different it may be cheaper to start with a “blank canvas” and build out shell space. The advantage of an ideal sublease is it should ideally require far less work to build out.
In short, subleases can be dangerous. Getting them right means doing a ton of due diligence up front. But, as many smart operators have discovered, never say never to subleases. They may be your saving grace if you get a home run deal.