Whatever your political leanings, the fact remains that this is a whole bunch of commercial leases, in locations across all 50 US states and other territories (except American Samoa). Catchy headline aside, what actually happened to those commercial real estate leases, and what does this mean for the average commercial real estate tenant and landlord?

First, the information publicly available isn’t entirely complete. Some locations don’t have the square footage of a particular lease listed, or the measurements are really small (like 115 sq ft). The price per square foot swings wildly, in the low-single dollar-range per square foot to over $250 per square foot in Manhattan.

Next, while it seems like a big number, the 748 commercial leases represented approximately 1/10 of all the active federal commercial leases. Interestingly enough, it seems that 89% of the leases were at a point where the government could end them before the expiration date. So 615 leases were terminated early, and an additional 22 seem to have expired, and were not renewed.

Analysis – What this means for Commercial Lease Tenancies

The word “terminated” is being used very broadly, as well. Leases tend to have a natural end point, known as “expiration”. The lease, if not renewed, ends, the tenant moves out and the landlord looks for a new occupant. Sometimes, the landlord and tenant will negotiate for an opportunity to allow the tenant to exit the lease before the expiration date. This is often referred to as an early termination right, which the tenant can exercise, if it meets all of the criteria. The tenant usually has to be in occupancy for some amount of time, and there’s often a payment, or “termination penalty” as part of the early exit. Finally, a true termination is when there is no right to end the lease before the term, but the parties negotiate (and the tenant will usually pay a fee) to end the lease early.

Landlords lease commercial space to tenants because they expect to be paid for it. Whole businesses revolve around the cash flow tenant occupants provide. The landlord can perform its obligations more consistently when it can predict its income, and when a tenant stops paying, or exits the location, the landlord has to adjust its expectations accordingly.

Business needs can change for a tenant as well, and the tenant might anticipate it needs to exit the location before the expiration of the lease. The parties can negotiate to let the tenant leave the space early, under certain conditions, and it’s almost always for a fee. Remember, termination here means that the government had the right to end the lease early, it was not an expired lease or something DOGE did unilaterally. Research has not been able to determine if there were fees paid for these early terminations, or the cost.

Landlords have expenses that they need to cover, and they rent spaces to tenants anticipating the income stream to cover those expenses. After all, where else are they going to get the money? There are upfront costs, like advertising, brokerage commissions, repairs and alterations to the space to make it suitable for the tenant, legal fees, etc. The landlord often wants to recoup those costs, or at least the unamortized portion of the cost.

Landlords will usually roll these up-front costs into the cost of the rent, and then spread it out over the length of the lease term. If the lease is terminated early, the landlord hasn’t recovered all of the costs, so then it’s a calculation of how much of those costs were already paid and how much are remaining. Money in the future is always worth more than money is now, so sometimes the costs will be discounted to the then-current value at the time of termination. The tenant pays back landlord for its sunk costs in getting the space ready for the tenant, which were not fully recouped in rent payments, and the lease ends early.

Landlords will often require an additional payment penalty, for the inconvenience and business interruption of allowing the tenant to exit the lease earlier than the expiration date. It’s usually tied to the length of the lease and how much of the term is left, as well as how fast a landlord thinks it can get a new tenant in the space. It’s usually less expensive for the tenant to pay the penalty, and the unamortized payments, then to stay in a lease and pay for it for the rest of the term. There are a lot of reasons- a contract could end and not be renewed, employees shift to hybrid working models and less space is needed, etc. The reason doesn’t really matter, but the cost does. The tenant will have to decide if paying a lot of money at once is better than paying a whole lot of money over the length of the lease.

Some leases have other conditions , such as a requirement that the location be open and occupied. If a tenant has to pay for employees, utilities, insurance, etc., for a space, in addition to rent, it might be more cost-effective to come up with a lump sum payment to terminate the lease early, instead of paying those additional costs that come with keeping the lease in place.

Hopefully the government did the cost-benefit analysis to determine the cost of terminating the leases early instead of paying rent through the expiration dates. Discussion of what to do with employees and equipment used in the operation of the governmental operations is beyond the scope of this post, so I hope that they covered that as well. As a real estate attorney, I work with a lot of non-governmental tenants who want to discuss what getting out of their lease early would look like. I explain the process and help strategize at the beginning of the lease, or if we have to, in the middle. Send me a message and let’s discuss your commercial lease situation and if a termination is the right thing for your business.