A client recently introduced me to a CFO who was facing a particularly serious problem. His company was locked into a long-term lease but was only utilizing 60% of their space. They were hemorrhaging cash due to the bullish hiring projections - not an uncommon situation likely familiar to many high-growth companies.
The CFO had assumed that his only viable option was to sublease the excess space. While there were certain advantages to this strategy, it didn't make sense given the nuances of his company's situation. Instead, we embarked on a low-risk, high-reward negotiation that resulted in a far more favorable outcome.
Viewed simply, an office lease should function as a pure asset with a fixed valuation. And given the proper alignment of a number of key variables, that office lease can be 'sold' back to a landlord in exchange for compensation and/or a termination of the obligation, provided the process is managed carefully with an experienced advisor.
Examples over the last few years include: Deutsch Advertising convincing Google to buy them out of their lease at 111 Eighth Ave for $5M+ and ESRT terminating a portion of Li & Fung's space at The Empire State Building to accommodate expansion for LinkedIn.
Now back to my client. After an extended negotiation, I was able to secure a modest buyout offer from the landlord. Since the CFO's company was paying below-market rents and the building was 100% leased, the landlord was eager to re-lease their space and capture some of the market upside. The buyout deal allowed the tenant to right-size into a smaller more efficient footprint that significantly reduced their burn and allowed them to survive the scare.
While the above buyout resolved favorably for the CFO’s company, the strategy isn't always so successful. Landlords are most incentivized to buyout tenant leases when their buildings are in competitive markets or markets with constrained supply of desirable space.
Building owners are also sometimes eager to create larger blocks of space to accommodate well-established companies seeking a large footprint in one building. This is especially applicable in particularly low vacancy markets like Midtown South Manhattan, Orange County, West Los Angeles and Seattle.
In all cases, the opinion of a market expert is needed to fully evaluate the feasibility of such a buyout strategy. We are happy to provide a diligent evaluation should a tenant find themselves unhappily 'locked' into a long-term lease.