Direct Lease vs Sublease Space: What You Need to Know

When it comes to leasing space, the market generally offers two different types of space — direct lease space and sublease space. While the perception might be that direct lease space is more expensive and more stable while sublease space is less expensive but shorter-term in nature, the realities on the ground may be different. Having an expert in your corner to help you understand the differences between the two types of space can increase the likelihood that your business finds the right option for its needs.

Direct Lease Space

Traditional space is referred to as direct lease space because you lease it directly from the owner of the building.  Most of the spaces that you see for lease in most markets are direct space.

Since you’re dealing with the ownership and, along with them, are the only parties on the lease, you’re able to negotiate whatever terms both you and the owner find acceptable. This means that you can choose a rental price to suit your collective needs, a lease term that works for both of you, and you may be able to collect concessions, usually in the form of rent abatements or tenant improvement allowances. At the same time, you may be able to negotiate renewal options that let you extend your lease with pre-determined terms. In other words, you can get whatever you can negotiate.

Sublease Space

Sublease space comes on the market when an existing direct tenant doesn’t want or need their leased office or other space anymore. To help recoup the cost, they try to find someone else to occupy that space for them. The subtenant signs a sublease and pays the original tenant, who then uses that money to pay their original lease payments to the landlord.

Once you’re in the space, being a subtenant feels a lot like being a regular tenant, with one big difference. Instead of being able to negotiate a lease that suits your needs, everything that you’re able to do is governed by the original lease. So, if the original lease has only 18 months of term remaining, you can technically only stay for no more than 18 months. The original tenant probably got all of the tenant improvement money, as well, so if you want changes to the space, you can’t look to the landlord to help you pay for them.

Choosing the Right Space for Your Business

If you want a traditional tenancy experience, direct space is probably best for you. You get long-term control over the space, and since most landlords will also contribute some funds towards the cost of configuring your space, you also get to customize it.  Furthermore, many buildings — especially newly constructed properties — are only available on the direct market.

Sublease space, on the other hand, offers two key benefits in every market. Usually, since you’re taking over the remainder of a lease, it gives you the opportunity to make a short-term commitment to the space. Additionally, since the original tenant is usually highly motivated to find someone to pay SOME rent, you can typically save some money relative to direct space. Keep in mind, as well, that once you’re in as a subtenant, there is no reason that you couldn’t stay in the space by executing a direct lease with the landlord once the original lease expires. Finally, sublease space might be the only way that you can get into a full building or submarket.

What’s the right type of space for your business? As you’ve probably picked up, it depends on many different factors.  The key is to focus on where you want to be, what you want to spend, and how long you want to stay. Once you’ve defined those aspects of your tenancy, your tenant representative can then search the market to find the right space — direct or sublease — to meet your business’s needs.

Originally published on September 9, 2020 by our good friends and colleagues at iOptimizeRealty. The original post can be found HERE.