How to Renegotiate a Lease with Above-Market Rental Rates

Real Estate Services for the Middle Market – August 2012

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?

• At least 3,500 SF
• At least 18 months left in a lease
• Willingness to commit to a building (not necessarily a specific space) for 3 to 5 more years
• Flexible landlord
• Reasonably good credit (including timely past payments of rent)

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 (630-474-9417) to evaluate whether it can work for your organization.

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We are located in Downers Grove, Illinois, and licensed in both Illinois and Indiana. Our attorneys are happy to meet with you at our office or any other location convenient to you in order to work to accomplish your legal goals. Our team has expertise in many areas of law including but not limited to bankruptcy law, business and corporate representation, civil litigation, criminal defense, estate planning, family law and real estate law.

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View from the Street

The building blocks of any economic recovery start with small and middle market businesses – the primary drivers of the US economy.  Our team of professionals talks with businesses in this category every day and the feedback we get indicates real signs of improvement at the grass roots level. 

Many of the global and domestic economic indicators are sending an unclear and inconsistent message. Our non-scientific view of the market is that while still cautious, our clients are regaining confidence in their businesses. While they realize that it may be a bumpy ride for a while, they can see the light at the end of the tunnel and are mostly convinced that it’s not an oncoming train. Anecdotal examples include:

1. A machine shop near O’Hare moving from 10,000 to 20,000 square feet.
2. A logistics provider in DuPage County doubling its size.
3. A steel recycler creating a new product and building a 25,000 square foot building in Indiana.
4. A strength training facility doubling in size.
5. A craft beer brewery opening up a new facility in Naperville.
6. Several lawyers moving out of home offices into leased space.

Recent Case Studies

• SCGroup Real Estate helped one of our clients reduce square footage by 25% and rental rate by $3.50 per square foot as well as receive seven months free rent on a five year lease – total savings will be in excess of $60,000.
   
• SCGroup Real Estate assisted a tenant renew its lease at a rental rate more than one-third lower than the lease they signed seven years ago.
   
• A medical office user took advantage of a distressed sale opportunity and purchased an 8,000 square foot office building in which to locate its western suburban headquarters.  Real estate related costs will drop significantly.