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Tenants finding choice sublease opportunities.

In today's market, tenants are realizing some of the best deals available in a decade or more. Base rents are off by 20 percent or more in the past year and workletters have increased to $50-60 per square foot, along with other concessions. Some of the most attractive deals can be found in the sublease market. The recession has forced business consolidations and put huge amounts of sublease space on the market. Today over 6.5 million square feet is available in Manhattan through sublease (17.4 percent of the total available space).

Often companies wanting to unload excess space can be much more willing to lower rents to move supply than a property owner. A case in point: at a Fifth Avenue office building completed within the last few years, a trading company leased 10,000 square feet for 12 years at $32 per square foot. The sub-landlord is an offshore financial institution which signed a lease two years ago at $55 per square foot.

There are a number of attractive features to sublease space. Subleases can accommodate short term requirements from a few months to a few years. In some instances, long term leases are also available, enabling tenants to lock in attractive lease terms. In Manhattan, sublease space is available in blocks ranging from a few hundred square feet to more than 200,000 square feet.

Secondly, especially in today's weak market, many subleases can be converted to a direct lease once the sublease expires - saving relocation costs while capitalizing on the terrific values available in today's market.

The economics of sublease space are often compelling. Free rent up to three years and work letters up to $60 per square feet can be negotiated from motivated sublandlords. Also, fully furnished officers are also often available.

Tenants should also be aware of potential pitfalls when negotiating a sublease. Among these is the subtenant/property owner relationship. In most cases, the sublease does not relieve the original tenant of the obligation to make lease payments to the property owner.

Consequently, the subtenant has no formal relationship with the property owner, so all subtenant service requests-/complaints/payments must be handled by the company from which it is subleasing space. Depending on the relationship among the various parties, certain requests could be delayed.

Additionally, except for certain circumstances, the property owner has no obligation to honor a sublease commitment in the event the sublandlord defaults under the lease. It is thus important to determine whether the sublandlord is in good financial health before starting negotiations.

Also, subtenants should request a "non-disturbance" agreement from the property owner to honor the terms of the sublease in the event of the sublandlord defaulting - although many property owners will not sign these clauses.

In today's weak market, the time frame for deals like this can be condensed from six-to-twelve months to one-to-two months.
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Title Annotation:Review and Forecast, Section I; office leasing, New York, New York
Author:Swerdlow, Steven A.
Publication:Real Estate Weekly
Date:Jun 24, 1992
Previous Article:Midtown owners struggle to keep leasing stable.
Next Article:Recessionary woes take us back to basics.

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