Written by Mike Kriel, CEO of Launch Workplaces
Have you ever heard of an operator doing a management agreement on a sublease space?
Neither had I, and then we did one.
Here’s how it happened, and why it worked for us, the tenant, and the landlord.
A Tenant Approached Us About Their Sublease, Not a Landlord About Their Building
Recently, a group approached us and asked if we’d come out, look at their building, and walk their floor.
I did some homework before I visited. The demographics, competition, and location looked good. So, I went.
About twenty minutes into the meeting, I started asking my usual general questions. One of them was, “How long have you owned the building?” And they said, “We don’t own the building. We’re the tenant.”
That was not the conversation I thought I was walking into.
They’d had the space listed as a sublease for a while, without any interest. Rather than sitting on it and hoping, they got creative. They went looking for a flexible operator and found us.
Signing a Management Agreement on a Sublease Meant Getting the Building Owner to Approve It
I’ve been in this industry for over a decade, and I’ve never heard of anyone doing a management agreement on a sublease.
I’m sure someone has. I just haven’t come across it.
The general issues are straightforward.
A sublease needs the owner’s approval, and you typically negotiate a management agreement directly with the party that controls the building. You don’t usually have a middle layer between you and the person who has to sign off.
But once I understood the setup, we decided to try something:
We’d sign a regular management agreement with the tenant, then submit it to the owner as the basis of a sublease agreement.
The tenant took the concept to the owner, ran it by them, and came back saying the owner was willing to look at it.
That was the first sign this deal had a chance.
The Landlord Asked for Our Balance Sheet and a History of the Business, Which No Landlord Has Ever Asked For
We finished our due diligence and put together our normal package:
- Opening costs
- Pro formas
- Absorption schedules
We followed the same 12-point criteria we run on any deal.
Then we connected with the owner through the tenant, and the owner had some questions I’d never fielded on a regular management agreement.
Mostly, they wanted proof:
They wanted to see how long we’d been in business. They asked for a look at our balance sheet, which is something I’ve never handed over to anyone on a management agreement deal. It made sense in context. They weren’t just approving a sublease. They were approving an operator to run a coworking business inside their building for the next several years.
We shared our history. We gave them details on our locations, the amount of space we manage, and how those spaces perform. We provided the balance sheet. Within a day, they came back and said, “Yeah, go for it.”
A few things worked in our favor:
- The tenant had already gone to the sublease market and gotten no traction, so the owner knew a conventional path wasn’t available
- The management agreement structure was familiar enough that the owner could evaluate it on its own merits
- Launch has been operating for over ten years, which showed up on paper
- The balance sheet gave them comfort that we weren’t buried in long-term liabilities, because we don’t sign leases
- There’s enough term left on the sublease to make the deal worth everyone’s time
The lease has seven years remaining on a ten-year deal. That was the first number I asked for once I understood we were talking about a sublease. If the answer had been eighteen months, I would have politely walked away.
The Tenant Wasn’t Chasing Profit, They Just Wanted Their Monthly Rent Reduced
This is where the deal really pulled away from a standard management agreement conversation.
Usually, when I’m talking to a building owner, the underlying question is, “How much money can you make me?” That’s a fair question, and it’s the one I know how to answer.
The tenant on this deal wasn’t asking that question. They weren’t looking for a big return. They were asking, “Can you help us offset some of the rent we owe?”
Their fee to the owner escalates three percent a year, and they’re locked in on that. So the definition of a win for them is simple. If they’re paying ten thousand dollars a month in rent and we can get that number down to nine thousand for the next sixty months, they’re grateful.
Their yardstick is different. Every dollar we shave off their monthly obligation counts as a win, even if the coworking business itself never runs at peak profitability. It’s a different mindset with different targets, but the paperwork and the process on our side don’t change.
Instead of Adding to the Space, We’re Removing the Existing Tenant’s Branding
There’s one more piece worth mentioning. The tenant isn’t fully vacating. They’re keeping about twenty-five percent of the space, and we’re filling in around them.
That changes the buildout conversation too. On most launches, we’re adding branding, adding signage, adding fixtures. On this one, we’re doing the opposite. Their reception has awards on the walls, plaques, and pictures of past projects. All of it has to come down. Nail holes get patched. A Launch sign goes up.
We’ve walked the space twice, tagging things that need to be removed. It’s the strangest pre-opening exercise I’ve done in years, and it’s kind of fun.
I’m Not Going to Start Chasing Sublease Deals, But I’ll Take the Meeting if One Comes to Me
I’ve never made a cold call on a sublease space. I’ve never told a broker, “Send me your subleases.” I’m not about to start.
Subleases come with obvious limitations. The lease has an end date, so unless there’s meaningful term left, the math doesn’t work. You still have to build it out, clean it up, modify the space, and fill it. That all takes time, and time is what you don’t have when the underlying lease is winding down.
I’m not changing my model. But if a tenant approaches me the way this one did, with a good building in a good location and enough term to make it viable, I’ll take the meeting.
This one surprised me. It took a couple of extra steps and a bit more time. It made me rethink some of my assumptions about how these deals can get structured, which is a related conversation to the one I had recently about why management agreements don’t have to be ten-year deals. Both come back to the same underlying point: creative structures work when the right people sit down and talk about them.
Maybe there’s a version of this deal sitting in your building right now that you haven’t considered.
If you’ve done a management agreement on a sublease, I’d like to hear about it. Send me a note on LinkedIn.
For more on how flexible office space can work in your building, download our free ebook, The Commercial Landlord’s Guide to Flexible Office Space.
You can also catch the full Flex in Five series on YouTube for more conversations like this one.
