When its time to move on: How to get out of your office lease in NYC
SPACES COMMERCIAL REAL ESTATE
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About Office Leases
Office leases are contracts that provide tenants with use of office space for a period of time for a fee (rent). Office leases are usually inflexible and have very defined terms for lease termination- typically lease expiration driven. While signing a long term lease provides a tenant with certainty by ensuring they don’t get pushed out of a space or building, and stability by keeping them insulated from market fluctuations, it also comes with a price for those firms whose space needs change over time.
There are many reasons for a private equity firm, hedge fund, or family office to want to exit their office lease including changes in headcount, upgrading to a higher end space, increasing operational efficiency, cost reduction, or moving to another market.
Below are several strategies that Spaces Commercial Real Estate has implemented to help our clients exit thier lease including a lease termination, subleasing, landlord negotiation, and lease renegotiation.
Please note that each situation is unique and we encourage you to consult with a professional before taking any advice.
Solutions
Exercise your option to terminate:
Most tenants sign a lease and file it away without knowing all of the lease provisions. Unbeknownst to many, their lease may provide them with an easy no headache option to terminate the lease. Typically these termination options are one-time options to terminate at a specific date and under certain conditions. Lease language can include: “Tenant shall have the one time right to terminate this Lease upon the 36th month of the Lease Term by providing Landlord with 180 days notice and a termination penalty equal to unamortized transaction costs.” The more important aspects to consider are the notice date and the cost associated with the termination option. If the costs associated with the lease termination exceed the costs to sublease or the notice period has passed then it could make more sense to pursue another avenue. Options to terminate are the cleanest, but not necessarily the most economical, way for a firm to exit their lease. Click here to schedule a free no obligation lease review.
Pro Tip
Negotiating a longer lease term with a termination option provides tenants with the flexibility of the a shorter lease term with the increased leasing concessions of a longer lease term including increased free rent and tenant improvement allowance.
Sublease your space:
Next to a lease termination, subleasing or assigning an office lease provides the most flexibility to pursue whichever direction you choose for your next office space. Once the space is subleased or assigned, you can move to another space within the same building, to another building in the market, to another country, or close the office altogether. The costs for subleasing space are typically high in a down market (more competition for tenants yielding a lower rental rate) and low in a rising market (higher demand for office space yielding a higher rental rate). Things to consider when subleasing space are the cost of down time while marketing the space, transaction costs, credit risk of the subtenant, and profit or loss on the rent differential.
Connect with Spaces Commercial Real Estate to determine the value of your office space on the sublease market or discuss subleasing your space.
Negotiate with your landlord:
Depending on the situation in the building, the landlord might be interested in working with you to terminate your existing lease and downsize or grow you within the building or the landlord’s broader portfolio of buildings. Alternatively, there may be another tenant on the floor interested in growing and your space is the last puzzle piece for the landlord to accomplish their goal. The most important factor to a successful negotiating is to understand the landlord’s strategy for the building and portfolio as well as market dynamics prior to discussions with the landlord.
Success Story
Spaces Commercial’s team recognized an opportunity for our client to turn their office lease from a liability into an asset, negotiating a seven figure payment from one of NYC’s largest landlord to move from a building that they were looking to reposition, to one of their premiere assets that they were looking to quickly fill.
Renegotiate your lease:
After understanding the building dynamics and landlord’s goals there may be opportunity to accomplish a rent reduction regardless of lease expiration. For example. when a landlord has a loan coming due within the next year or two, they’ll typically look to shore up long term tenancy to maximize the building value. This is an opportunity to trade longer lease term for rent concessions including a base rent reduction, reset of base years, additional free rent, and tenant improvement allowances.
Even if the landlord doesn’t have a near term debt expiration, by outlining the landlord’s cost to retenant the space after your lease expiration you can establish what their bottom line in a negotiation should be. The landlord’s cost should include tenant improvement allowances, free rent, and most importantly their downtime to market, demolish, and rebuild the space for a prospective tenant.
Success Story
Spaces Commercial Real Estate successfully represented a firm looking to downsize from 10,000 RSF to 5,000 RSF. Understanding the landlord’s debt structure within its portfolio of properties, we were able to negotiate for the tenant to move from 10,000 RSF in the landlord’s FiDi building to 5,000 RSF in the landlord’s Plaza District building providing an immediate rent relief and helping the tenant achieve its objective of moving uptown and to a higher grade building.
Pursue all of the above:
The most prudent option would be to explore all of the above options simultaneously to ensure the quickest and most favorable result.
Spaces Commercial has been providing businesses New York, New Jersey, and Miami with customized real estate solutions for their office space for over 25 years. Schedule a call with one of our team members to discuss how we can work with your business to find a solution for your office space.