Direct Lease vs. Sublease of Commercial Office Space
[{"id": "c5aldgz", "text": "I know this is spam,  but  it is kinda an interesting discussion.  Commercial leases are... draconian.  as far as I can tell, getting out of a commercial lease is far more difficult than selling a place you own;  I mean, when you sell, you figure you lose 6% or whatever... but when you lease?  you are in for the whole goddamn 3 years, and if you happen to buy right before the (local) economy takes a dump?  you are stuck with making 3 years of rent payments (and in the current market? at least for the places where I've done the math?  3 years of rent is quite often more than 6% of the asking price for a building.) ", "replies": [{"id": "c5chor8", "text": "Commercial leases are how leases should be; a true contract, not the one-sided \"tenant's rights\" BS that a lot of municipalities have. Of course I understand that landlords can do a lot of shitty things that can be dangerous to tenants, but a lot of tenant's use these laws to abuse the system. \n\nThe trick with commercial leases is to use good brokers and lawyers who will hammer out a lease and terms favorable to their client.", "replies": [{"id": "c5cn88p", "text": "I mean, the things that have \"burned\" me before don't have anything to do with the landlord surprising me, or with me not understanding the contract.    I'm talking about, you know, I decide to expand my business in one direction, I lease some infrastructure, and the business fails.   Subleasing is harder than it sounds, and in my industry, nobody even pretends to try to get someone else to take the space and your lease.  A lease is properly looked at as a up-front lump sum in exchange for the use of some space for a pre-defined period of time,\nplus a loan, from the same entity, that allows you to pay back that lump sum over the time you stay.\n\nNow, nearly all my leases are data centre space and bandwidth, but we're approaching a hundred grand a year in total lease value (and I'm kinda working on doing more of the data center stuff myself, and turning this into a commercial real-estate lease, though I'm probably at least 5 years out from being able to run anything like a reasonable small data centre myself, capital and skill wise)  \n\nAll the lawyers I've talked to seem to think all this is completely standard, and I've talked to several, even a few that are familiar with this market.  (and lawyers that know anything about my market are ridiculously expensive.) \n\nBut yeah, I guess what I'm asking is \"why do people lease instead of buying?\"  because, like I said, it seems that your liability in the lease (e.g. if it turns out you can't use the building you lease after all and you have to pay for it anyhow) is larger than the risk you take with buying (e.g. that you have to pay someone to turn around and sell the building.)  \n\nOne answer, of course, is creditworthiness.   While leases don't seem to be any easier to get out of than loans,  I have no problem getting people to give me very expensive leases, even giving the leases directly to my corp with no personal co-sign, while the bank won't loan my company anything without a personal co-sign, and even then the credit limit seems to be limited by my personal credit.", "replies": [{"id": "c5cp29r", "text": "Again, the specific terms of a lease can help you out of these situations. For example, a properly negotiated termination agreement can make all the difference if you are foundering after the 3rd year of a 5 year lease and need to get out of it. I know how hard subleasing is, I do it for a living. Generally getting out of the lease for 50% of the remaining value is considered a home run. I understand the tribulations of that activity. The point is to negotiate a lease to avoid getting into the situation where you have to sublease.\n\nThere are a plethora of reasons why one might lease rather than buy. Often times leasing it a lot cheaper if you are not planning on being there for an extended period of time. If you know you need the flexibility to close the operation after 5 years, then why would you buy and lock all that capital up in a building? Sure you might need a 3 month security deposit for a lease, but that's better than 30-50% of the value of the building for a loan. There are also certain accounting advantages to a lease (which are about to change, but that's another story) that can make a lot of financial sense.\n\nHowever, that's not to say that buying doesn't make sense sometimes as well. If you know you plan on being there for 30 years and don't think you'll outgrow the space, then hell yeah you should buy it. But again, it all depends on circumstance.\n\nYou might be surprised to find that the most credit-worthy tenants lease space almost 70-80% of the time. That's because they see the benefits of flexibility to their business case and have the weight to throw around to secure favorable lease terms. \n\nFinally, I'm very familiar with data centers and that is a completely different beast from 99% of commercial leasing. The behavior of that market is extremely bizarre. I used to work for a company that had one of the fastest connections on the West Coast in One Wilshire in LA. Something like 182 strands of fiber right into the Quest Fiber Loop. Anyhow, they got it on a cheap sublease from some company that went bust in the tech bubble and sat on it for years using it for hosting. When their lease expired in 2009 and they couldn't find another Tenant willing to buy the data center improvements off them as part of a deal for a new lease and the Landlord wouldn't give them anything for it, they pulled all the fiber. Tens of millions of dollars in value destroyed because they'd rather trash it than let someone else get it for free and profit from it. One of the fastest data center locations on earth and they essentially just threw it away. Strange market indeed.", "replies": [{"id": "c5cr3cu", "text": "&gt;Again, the specific terms of a lease can help you out of these situations. For example, a properly negotiated termination agreement can make all the difference if you are foundering after the 3rd year of a 5 year lease and need to get out of it. \n\nYeah, that's the sort of thing I'm interested in... but every time I've talked to a potential landlord about it, \"nope\" was the answer.   On the other hand, I haven't seriously negotiated commercial real-estate deals with dollar values near my data center space leases, so I imagine that makes a big difference (and I imagine that getting a professional negotiator could also make a difference, though I've yet to do that successfully.)  \n\n&gt;Generally getting out of the lease for 50% of the remaining value is considered a home run. \n\nOuch.    So that's what you try to negotiate?  a \"if I break the lease early I only pay you half the remaining value of the lease\" deal?   or are you saying that without the agreement, recovering half the value through subleasing or something is pretty good?\n\nMy only personal experience with this was as a subletter;   A buddy of mine had a lease on a warehouse, under two grand a month, so not really big money or anything.   Hobby use.     But then he lost his job, couldn't pay for it, and I sublet a portion as a workshop.     It was a great deal for me.   Anyhow, I considered assuming the lease and did some research, and decided against it, as I didn't need two grand in warehouse space, and the cost per squarefoot was high for if not the comparable area, the area I was willing to drive to,  so I didn't think subletting profitably would be easy.   \n\nWe all ended up moving out and the landlord had someone new in there in a month, but I think that was only because it was obvious that my friend didn't have the money to pay him back meanwhile.     Certainly I've never seen anyone let out of a datacenter lease like that.  \n\nI did try to negotiate a deal where I'd assume the lease, with the provision that I'd just pay him for two more months after I vacate or something if I were to break the lease... he wouldn't go for it, even though it'd leave him no worse off than he was then, with a lessee that couldn't pay, and it'd save him the effort of cleaning the place up and renting it out, at least for a while. (I was okay taking it as-is where-is)   \n\nThat's my big worry with the lease;  I mean,  Renting places is work;  and it makes sense that he'd charge more if he had to do that work every 6 months rather than ever 5 years.   If the landlord thinks he can get money out of me, what incentive does he have to rent the place out to someone else and let me off the hook?   Hell, what incentive does he have to not say 'Oh, rents have gone up!'  and want more money for the next guy? I mean, as long as he can get payments out of me, my assumption is that I'd be continuing to make payments until the lease expired.   \n\n&gt;There are a plethora of reasons why one might lease rather than buy. Often times leasing it a lot cheaper if you are not planning on being there for an extended period of time. If you know you need the flexibility to close the operation after 5 years, then why would you buy and lock all that capital up in a building? Sure you might need a 3 month security deposit for a lease, but that's better than 30-50% of the value of the building for a loan. There are also certain accounting advantages to a lease (which are about to change, but that's another story) that can make a lot of financial sense.\n\n\nMy point with the buying vs. renting was that if it costs you 6% to sell the place, eh, that's less, quite often, than you will have to pay to get out of a lease 3 years early, so if you have a low cost of capital, it seems like owning is cheaper and more flexible.    Also, as you mentioned in the data centre, improvements.    First, if you own, you can do whatever you want to the place (well, you have to get city approval, still, but the landlord doesn't need to be consulted.)   Next?   you get to keep those improvements.   My local computer club rents from the same landlord, and right after they signed a long lease on two more warehouses, the city came down on them and said they had to spend like a quarter million on upgrades.    I mean, it's a well-known computer club in silicon valley;  I bet they'll come up with the money, but I'd bet my eyeteeth that next time the lease is up for renewal, the price will go up to whatever market price is for facilities with those upgrades.    They just gave the landlord a gift.   \n\nOn the other hand, *I* don't have a low cost of capital, so you have a good point that if immobilising a large chunk of money for the duration of your stay is expensive, then you might be better off leasing.   \n\nAlso, 30-50% down for a commercial real-estate loan, still?     I mean, you'd know better than I would, I'm not saying you are wrong, but I thought that 50% down was an anomaly caused by the financial problems of a few years back, and I thought that sort of thing had faded.  Somewhat disappointing, as I'm looking to get myself a industrial condo or small warehouse here in santa clara.  ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]