Subleasing is one avenue to make adjustments mid-lease. If you find you need to move to a larger facility before your lease is up, then it is worth exploring the sublease market. If you are looking at downsizing, you might sublease or space, or if possible, you might be able to sublease a portion of the area that you no longer utilize. By subleasing out the unused space, you save the cost of moving.
With one of my aftermarket automotive distributor clients, we leased 91,000 SF of a warehouse. When the US went through a trade war with China that led to dramatic tariff increases, it affected my client profoundly. We lost one customer and were going to have to reduce your footprint by half. The problem was that rent had been compounding for the past four years by 8%. That meant that we would have to pay for the cost of relocating, overlap facilities, pay double rent for one of these months, and the result would be that are monthly rent only decreased by 25%.
We decided to sublease out a portion of our warehouse at the new higher market rate. With every square foot that we subleased, we made a profit that subsidized the space we kept. We took this idea and built-in flexibility by finding a short-term tenant that would lease the space one year at a time so that we could utilize the warehouse space again if we ever needed it back.
There are security and utility considerations to take into account when subleasing a portion of your warehouse. Just because you want to split the warehouse in half doesn’t mean that utilities divide equally, and the security systems, key card access, restrooms, office space, forklift charging stations, sprinkler systems, all warrant assessment. You can demarcate the sublessee’s space by building a fire-rated wall, installing a chain-link fence, drawing a line on the ground, or just giving them a certain space in between columns.
To deal with this challenge, we qualify each potential tenant’s specific operational use until we find the right fit. With my aftermarket automotive distributor client, we found an artificial turf company that stored extra heavy turf rolls that had zero theft concerns. We were able to adjust our security system to allow for a different security zone. We provided the tenant with our wireless network and then only allowed them to use the space during business hours when we were present.
Another client of mine is in the jewelry manufacturing business. When this company was right sizing in advance of an acquisition, the CEO asked me how he could make use of the excess space he had on hand. When it came to the jewelry business, there was an entirely different security concern because his products were highly valuable and incredibly small. We had to worry about shrinkage. Another challenge here was the orientation of the loading docks. We would have to share loading docks with any prospective subtenant.
The solution we figured out together was to create a shared loading area. This shared loading area allowed both groups to utilize the same docks. When they unloaded products, the speed bay would be open for both groups. Either company could unlock and slide open their sliding fence door to ship and receive as needed.
We then installed a 14′ link fence with plastic privacy slats some 200′ down the middle of the warehouse so that the new tenant would have their own space and would not have any idea of what was going on in the warehouse’s jewelry manufacturing side. The tenant provided shared security cameras and guards. In this case, we found the right tenant that stored building materials there but only needed to access the warehouse three times a week. This solution resulted in a win-win outcome for my client and his new tenant.
Blend & Extend
Another adjustment we make during market fluctuations is called the Blend and Extend. We use this tool mostly when the market is going down however during the pandemic we found more uses for this concept. The idea here is that in a descending market, you want rent relief, and the landlord wants occupancy. The reason you want rent relief is that a descending market usually means decreasing revenue, GDP, and the need for lower overhead. On the other hand, the landlord wants occupancy to preserve cash flow and, in many instances, preserve their lender’s confidence in the landlord’s ability to pay back their loan.
In this instance, if you know that you are in a stable position in which you will be remaining in the property for years to come, you can take advantage of this opportunity to negotiate an extension of the lease with a reduced rent that is effective immediately. The key word here is immediately. Not at the end of the lease or end of the year but at the first of the next month. This can provide immediate relief for people.
An offshoot of this idea is an early renewal. Along the same lines of the blend and extend, there may be times when you know that you need to remain in the building for years longer than the time that you have left on your lease, but your actual lease expiration date isn’t for two years. You may need to renew it early to secure financing, or sell the company, or just to be conservative and lock in the next lease rate before further escalations. In an environment where lease rates are increasing, you may be able to negotiate tomorrow’s price today in exchange for more term to your lease.
I was able to do just that for a distribution company I work for in Charlotte, NC. In this instance, we had a different landlord than who initially leased us the warehouse property eight years ago. This new landlord had a long-term plan to hold this building in their portfolio. We had one year left but recently went through some staffing changes that would cause our growth plans to morph into rebuilding plans. We negotiated a modest future rent increase in a market that was on fire with new development and set to rise dramatically. We then were able to get the landlord to replace several interior and exterior doors and upgrade all the warehouse lighting to modern LED motion sensor lights at the time of signing. Win-win for both parties.