By LOIS WEISS

March 25, 2009 -- With sublease space pushing toward 3 percent of the available office market, beautifully outfitted former financial-services space is taking a toll on local rents.

David Dusek, senior managing director of the tenant rep brokerage Studley, said smaller companies are taking advantage of subleases because the terms are now way below what is being paid to the building owner.

"It's effectively 50 cents on the dollar to what the sub-landlord is paying," said Dusek, who repped Ironshore in two sublease deals we reported last week at 55 Broadway.

Grubb & Ellis reported yesterday that sublets account for nearly 30 percent of the available space in the market and that rents fell $15 a foot in 2008 to $54.20 per foot.

While the average sublet asking rent is $51.98 a foot vs. the average asking rent of $69 a foot, the taking rents can be 35 percent less than asking rents.

Cushman & Wakefield said Manhattan has 25 blocks of 250,000 contiguous feet available.

Meanwhile, a recent report by Tenantwise claims that the government's Troubled Asset Relief Program is contributing to falling office rents by effectively subsidizing the financial companies that have the space to spare and enabling them to charge less than what would other wise make the market.

"If they didn't have the TARP behind them they wouldn't have the money to offer outsize work letters" said M. Meyers Mermel, CEO of Tenantwise and a competing building owner.

To sweeten the sublease deals, TARP-funded work letters being offered to tenants range from $100 to $200 per foot, up from a "regular" $45 to $55 a foot.

As a result, Mermel said it is "having a depressing effect on what tenants will pay."