LEASE AGREEMENT REFERENCE GUIDE 1490: THE CORPORATE TENANT'S ASSIGNMENT AND SUBLEASE STRATEGY $24.95
THE CORPORATE TENANT’S ASSIGNMENT AND SUBLEASE STRATEGY
Corporate America’s appetite for commercial real estate assets comes and goes, and this LARG concerns the periods when it is mostly going. Take, for example, Bell Atlantic Corp., the Philadelphia based baby bell. Some time ago, that company announced the sale of its real estate development arm to a management group financed by Lazard Freres for about $300 million. The sale included fifty-six office and industrial buildings in the middle Atlantic states comprising about 4.1 million square feet. Bell Atlantic was on the prowl for cash after deciding to gobble up Nynex for $32 billion. Bell Atlantic thus joined the parade of large companies liquidating some or all of their real estate holdings in order to invest the proceeds in their core businesses or to return the cash to shareholders.
Many corporate behemoths acquired large real estate portfolios during the 1970’s and 1980’s. Such assets were ideal for sopping up excess corporate cash flow, and the companies snapped up some real bargains during periods of real estate weakness. Back then, real estate assets were cheaper and looked like pretty good investments. In some cases corporate buyers just bought an empty office building when they needed some space. Why be a tenant and lease space when you can buy the building and fill it up with your own operations?
During the last several years, companies like Mobil, Chevron, Exxon, and Sears, Roebuck and others have put heavy blocks of commercial real estate on the block and cashed out. Even companies that never had separate property development arms per se—like US West and Pacific Telesis—sold off lots of commercial properties.
No doubt there are lots of good business reasons for this ongoing divestiture of corporate real estate. First among them is the flood of cash currently sloshing around the country looking to buy bricks and mortar to plug into into real estate investment trusts. Despite ostensible good business sense, these things do run in cycles, and when one big company does something, all the others wonder if they should be doing it too.
Getting Rid of Surplus Leased Space
As far as disposing of excess corporate real estate is concerned, once the board votes to dump the stuff, it will generally be gone yesterday. It doesn’t matter if the decision involves a bulk sale like Bell Atlantic’s, or the elimination of a single leased corporate regional operations center.
With corporate real estate owned outright, the disposition process is fairly simplesell the assets and maybe lease part of them back. With corporate space leased from a third party landlord, there are only three ways to get rid of it:
If the large corporate tenant was smart enough (and had the leverage) to insist upon broad assignment rights when the lease was negotiated, the assignment or sublease route will probably be the most economical way to dispose of unwanted space, assuming there is a market for it. If the sophisticated corporate user is taking all of the space in a building, it can take one of two approaches with the assignment and sublease clause when the lease is negotiated to give itself an escape hatch: