Blend and Extend
With the Portland commercial real estate market is such disequilibrium, tenants are uncertain what they should do. One great strategy to consider is a Blend and Extend.
In commercial real estate, Blend and Extend refers to a lease restructuring strategy where tenants and landlords renegotiate the terms of an existing lease before its expiration. The goal is to create mutually beneficial terms that address both parties' needs. Here's how it works and why it might be advantageous:
What Is Blend and Extend?
Blend: The current rental rate is adjusted, often blended with market rates, to create a more favorable or sustainable rate for the tenant.
Extend: In exchange for the adjusted rate, the tenant agrees to extend the lease term, providing the landlord with a longer commitment.
This strategy is particularly useful in fluctuating market conditions where rental rates have dropped or when a tenant wants to secure long-term stability.
Benefits of Blend and Extend for Tenants
1. Lower Costs: If market rates have decreased, tenants can negotiate a blended rate that lowers their rent.
2. Stability: Extending the lease ensures continuity of operations without the need to relocate.
3. Cash Flow Management: The new agreement might include concessions like rent abatements or reduced rates for the extension period, improving cash flow.
4. Custom Improvements: Tenants might negotiate additional tenant improvement allowances as part of the new terms.
Benefits for Landlords
1. Occupancy Assurance: By securing an extended lease, landlords reduce the risk of vacancy and maintain a steady income stream.
2. Long-Term Value: The extended commitment can enhance the property\u2019s value, especially for investors or refinancing purposes.
3. Tenant Retention: This strategy helps landlords retain reliable tenants who might otherwise relocate at the end of their lease.
4. Immediate Income: A blended rate might still exceed the current market rate, providing landlords with more revenue than a new lease at lower rates.
When Does Blend and Extend Make Sense?
Market Downturns: When rental rates are lower than the tenants existing lease rate, tenants can negotiate a reduced rent in exchange for an extended term.
Upcoming Lease Expirations: Tenants nearing the end of their lease may want to avoid market uncertainty or relocation costs by locking in favorable terms early.
Landlord Retention Goals: Landlords seeking to stabilize occupancy rates may initiate discussions to secure a longer commitment.
Potential Drawbacks
Long-Term Commitment: Tenants may find it challenging to commit to an extended lease if their business needs could change.
Reduced Flexibility: Landlords lock in a lower rental rate for a longer term, which could be disadvantageous if the market improves significantly.
Conclusion
A Blend and Extend strategy can be a win-win for landlords and tenants when structured thoughtfully. Tenants gain cost savings and stability, while landlords secure longer-term occupancy. It's essential to work with a knowledgeable commercial real estate professional to ensure the terms align with your business goals and market conditions.
If a Blend and Extend seems like something your company would be interested in exploring please feel free to give us a call!