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Using the “blend and extend” strategy, tenants trade an early renewal and extended lease length for more favorable lease terms (e.g., lower rent rate, additional capital improvements, fewer rentable square feet). A successfully executed blend and extend results in immediately reduced real estate costs. In the right market conditions, a tenant can negotiate a blend and extend several years before its current contract expires.
Higher vacancy rates motivate landlords to consider blend and extend leases to ensure occupancy in a tenant’s market. Landlords may prefer to delay an expiration date to mitigate risk in their property portfolio, or to get better terms on a property loan or sale. A landlord may also recognize its tenant’s economic distress and accept lower rates over an extended new period rather than risk forcing the tenant to break the contract.
Imagine a 20,000 square foot tenant with 30 months left on its lease, currently paying $30 per square foot in a market where the rent rate has dropped to $25 per square foot. If that tenant extended its lease for an additional 24 months at the new $25 per square foot, then the new average, or blended, rent rate would be $27.50 per square foot. The landlord may accept a new rent rate of $27.50 for the next five years, or decrease the rent to $25 for two and a half years and then increase the rent back to $30 for the remaining two and half years. Such a rent reduction would result in an immediate savings of $50,000 to $100,000 a year.
There are many variations on how a blend and extend may be negotiated, depending on the tenant’s priorities. Tenants may seek additional tenant improvement dollars, lower costs, or some combination of the two. The successful execution of a blend and extend depends heavily on market conditions and landlord sentiment. Blend and extend negotiations are particularly challenging, and tenants who choose to engage in them should retain a qualified tenant representation broker with the technical skills and experience to do the job.
At Golden Group Real Estate, we specialize in tenant representation real estate services for office space users in the Chicago area, helping local business owners find office space and negotiate lease and purchase agreements. We never represent landlords, so we are prepared to negotiate aggressively on behalf of our tenant clients.
For more on Golden Group Real Estate, read about our real estate services. Let us know if we can help you find office space for rent or buildings for sale. Call us at (630) 805-2463, email us at email@example.com, or enter your office space search criteria below.
May 7, 2018
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