A sublease is a legal document that permits a tenant (e.g. lessee), who currently leases office space directly from a landlord (e.g. lessor), to enter into a separate agreement with another company (e.g. subtenant/sublessee) to occupy the tenant's office space. The lessee, therefore, not only remains the lessee, but also becomes the sublessor/sublandlord, as they are not only leasing the property, but also subleasing it simultaneously. For example, if a company leases an office space directly from a landlord, the lessor, and subsequently outgrows the office, then the company can sublease their existing office space to another company, the subtenant, and enter into a new lease for a larger office space, thereby hedging their real estate exposure.
Who pays the real estate fee?
In commercial office leasing in Manhattan, the real estate commission is almost always paid by the landlord. The commission details are predetermined by a listing agreement between the landlord and their broker, based on the broker's rates. However, there is often another real estate broker involved, a tenant representative. If a tenant representative brings a prospective tenant to the landlord's space and a lease is ultimately signed, then a portion of the landlord's broker's commission is split with the tenant representative. In layman's terms, if you are a company in search of office space in Manhattan you most-likely will not pay the real estate fee, the landlord will.
However, in the case of office sublets, the commission is not paid by the landlord. In most cases the current tenant who wishes to sublease their space - known as the 'sub-landlord' - pays the real estate fee to the broker with whom they enter into a listing agreement. As before, if a tenant representative brings a 'sub-tenant' to the 'sub-landlord's' space and a lease is ultimately signed, then a portion of the sub-landlord's broker's commission is paid to the broker representing the sub-tenant ...confused yet?
What is a Good-Guy Guarantee? And will I have to sign one?
An officer of your company will likely be required to sign a Good-Guy Guarantee ("GGG"). A 'GGG' is a limited personal guarantee, a legal document which becomes an exhibit to the lease or sublease. An officer of the company must personally guarantee that the rent will be paid. If the company can't pay the rent, the officer is agreeing to be a "good guy" and vacate the space. Therefore, if the tenant is in financial trouble and needs to break their lease, the officer is held personally liable for all rent until the space is surrendered to the landlord. When the keys are returned to the landlord and all back rent is paid, the officer is, at this point, released from all personal liability. There is usually a notice period for exercising the Good-Guy Guarantee. For example, the tenant might be required to notify the landlord of their intent to exercise the Good-Guy Guarantee 3 or 4 months in advance of moving out, and therefore responsible for all rent until that point. If the GGG is exercised, the security deposit is generally not returned. Since the Good-Guy Guarantee is a legal document prepared by an attorney, they differ slightly from each other.
What is a 'Loss Factor'?
Commercial landlords in New York City use "rentable" square footage as the unit of measurement for office space. This "rentable" measurement contains a proportionate share of square footage in common areas such as hallways, lobbies, restrooms and elevator vestibules. By comparison the "usable" square footage is more useful to the tenant and is the measurements of the demised space from wall to wall. Therefore, the usable square footage is always smaller than rentable square footage. The difference between the two is called a loss factor.
Loss factors tend to be greater for space on divided floors and less for full floor spaces. As a rule of thumb, New York City loss factors are generally between 25% and 40%.
How do I compute the 'Loss Factor'?
Rentable Area minus Usable Area divided by Rentable Area: (5,000-3,500) = 1,500/5,000 = 30%
What is an escalation?
Escalations are annual rent increases added to the base rent to keep pace with inflation. The escalation is negotiated with the landlord, but is typically around 3% per year. Fixed annual rental rates are rare, and typically only occur in short-term leases. Note that escalations are compounded every year, regardless of any additional bumps in rent price.
Who pays the real estate taxes?
It depends, but in the vast majority of office leases the landlord pays the taxes. However, the tenant is responsible for their proportionate share of the annual tax increases. For example, if a tenant occupies 20% of a building and the tax bill increases from $50,000 to $53,000, then the increase is $3000. Since the tenant occupies 20% of the building they would pay an additional $600 per year, which can be paid in one lump sum or amortized into the montly rent.
What's the difference between "direct" and "sublet" office space?
When a company signs a lease for "direct space", they enter into an agreement with the landlord's company. The majority of office leases in NYC are direct leases, meaning, signed directly with the landlord of the building. However, what happens if your company outgrows the office space and needs to move? You guessed it! - you sublease the space to another tenant. Before signing a direct lease, make sure the landlord is granting you the right to sublet. Most do, as it's a fairly standard lease provision. Unlike a lease for direct space, the two parties who sign the sublease agreement are the existing tenant and the new tenant, i.e. the subtenant. Note that the landlord will most-likely have to give consent and approval for the new subtenant, prior to the execution of a sublease agreement. Another caveat is the landlord could have the right to recapture the office space and lease it to a tenant of their choosing, usually at a higher price.
How is electrical usage calculated?
There are 3 common ways a company can be charged for electrical usage in NYC, which way yours will be charged will depend on the specific building. Arguably the most cost effective is “direct electric”. Like your home, this means that you have your own electric meter and ConEdison mails you a bill.
The second way is referred to a “sub-metered” electric, which often means two different things. Say there are 4 similar-sized companies occupying 1 floor of a building and there is 1 electric meter for the entire floor. Each tenant would be responsible for 25% of the total electric bill. The landlord often will adjust the percentage depending on your company’s electric usage. The second, and better, scenario is that you could have an individual meter for your office space which feeds to a master meter in the building. The landlord usually charges an administrative fee to cover costs associated with billing and collection for sub-metered electric.
The third common way electric is charged in NYC is per square foot. For average office users the cost will be between $3 and $3.50 per square foot. To calculate the monthly bill multiply your “rentable” square footage by the cost and divide by 12.
What is a business center?
A business center is a type of office space serviced by a company who manages professional, turn-key office space with flexible lease terms. Sometimes referred to as executive office suites, these are private offices, often furnished, with shared use of conference rooms, IT/copy machines, kitchen and reception services. Business centers are ideal for companies who require office space for 1-year or less.