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Like it or not, after a comprehensive commercial lease analysis, you will likely find that your ability to sublet your space comes with quite a few restrictions. A common constraint is the is lack of ability to profit from being a sub-landlord - no sublet profits.
But what if you signed a lease in a tenant’s market and rates have since soared? Wouldn’t it be great to turn the lease into an asset?
The trouble is that this is typically an item that landlords do not want to concede to in a lease and you have bigger issues to deal with – see our post on that.
Instead, why don’t you create a win-win with the landlord? If you cannot profit from subletting then you will just end up marketing your space at a breakeven number.
For example, if the market rents are $22 net rent per square foot and you are paying $15, then you will market your space at $15, will likely lease the space quickly, and you would be happy breaking even.
It would be great to be able to profit from subletting and perhaps you could capture $18-$20 per square foot, but if all the profits have to be turned over to the landlord you would never strive for those rates. You are always better off marketing the space at break-even and find a subtenant sooner than later.
The win-win proposition is to ask the landlord to be a 50/50 partner in the profit from subleasing. It represents found money for both of you.
In the above example if you capture a $20 rental rate:
1. Your subtenant finds space at below market rental rates.
2. You take home $2.50 per square foot per year for the balance of the sublease.
3. The landlord also takes in $2.50 per square foot per year for the balance of the term.
You are still in control of the price and therefore the time on the market. If your objective is to lease the space quickly and move on with life you can forgo the upside potential and market the space at a basement bargain price of $15.
If you have more time and patience you can ask for the higher price which would not have been an option for you if you had simply signed the landlord’s lease without modifying the profit clause.
There is a secondary benefit for the landlord, and that is that you are not incentivized to try to capture a rental rate as close to true market as possible. When your subtenant reaches the end of the term the negotiation for renewal will likely be a smoother between the landlord and your subtenant as there will be less “sticker shock” on the renewal rate moving forward.
For Your Negotiation…
It is best to discuss this clause at the stage of the offer to lease or letter of intent. Lead with just the ability to profit from subletting, that way 100% of the profits will go to you, but if the landlord does not agree, then compromise with the 50/50 arrangement.
Here is a sample clause:
The Landlord agrees that the Tenant shall be have the right to profit from subletting.
If the landlord is not in agreement, then you can use something like this:
The Landlord and Tenant agree to share 50/50 in any profits from subleasing, after the deduction of real estate brokerage commissions.