The recent global recession has had a dramatic impact on the local real estate industry and in most markets has triggered at least a 20 percent drop in rental rates. Unfortunately since average lease terms tend to be five to seven years, many users of space executed leases prior to the beginning of the recession and are currently locked into monthly rental payments that are significantly above today’s market rates. However, if certain factors are in alignment, there is a solution to this problem that can add value to both the tenant and the landlord.
Blend and Extend is a term used to describe a tactic in which a lease is renegotiated prior to the expiration date. The typical tradeoff is that the tenant extends the lease a number of years in exchange for an immediate rent reduction. The landlord gets the additional certainty of having a tenant longer-term (in markets where tenants are hard to come by) and the tenant saves money.
As an example consider Tenant Z, a 10,000 square foot office user. In 2007, they signed a seven year lease in a Class A Oakbrook office building for $25,000 per month. Current market for this space is $20,000 per month. A blend and extend transaction could involve an immediate reduction of rent to $21,000 (a negotiated amount greater than market but less than the current obligation) per month in exchange for extending the lease for an additional three years (until 2017).
The tenant saves $4,000 per month for the remaining period of his current lease – total of $72,000 – and has locked in rent at the bottom of the market for an additional three years beyond the initial expiration date. The landlord, on the other hand, has gained income stability out beyond the point in time when the market will most likely have recovered and has avoided the cost of trying to find another tenant at the completion of the initial rental period.
Does your organization fit any of the following criteria?
Sound like it could be a fit? A blend and extend transaction is a complicated structure and negotiation and should be done with the assistance of a commercial real estate professional.
Call SCGroup Real Estate (630-805-0497) to evaluate whether it can work for your organization.
