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Blend and Extend.
Are you waiting until the Last Minute?
Presented by Jackson Cross
Many organizations that lease office facilities believe that they need not worry about their lease expiration until the end of the term. That may have been true years ago, but in today’s ever-changing market, things have changed quite a bit.
The fact is that many tenants in today’s market are paying rents that were completed as a part of late 1990’s transactions. Times were great for landlords, and the tenants paid. Modern day quoted rates are often 10 to 15 percent lower. For example, in Center City Philadelphia it is not uncommon for a tenant to have a lease that expires in two to four years with a rental rate in the mid $20 per square foot. However, class A market rates in properties such as 2 Penn Center, 10 Penn Center, and 1 Penn Center are closer to $20 per square foot. So, how does a tenant that has considerable time left on an above market lease take advantage of today’s aggressive rental rates?
This is where the trends of today’s market benefit a tenant. Today, the rumblings of large potential vacancies are making landlords in each building want to lease space now. Landlords believe it is better to currently fill a building with aggressive rents, than to wait and potentially compete with the likes of Center Square (looking at the loss of Comcast) and 10 Penn Center (360,000 SF vacant). Thus, enter the concept of “Blend and Extend.”
What sounds like a dance move is actually a term used by brokers to describe the notion that tenants can renegotiate leases which have considerable term left, while lowering their overall average rental rate. The process is rather complicated, but can best be described as follows:
If a tenant has 36 months left on a lease, with payments at $24.00/sf/yr increasing by $0.50/sf/yr, they will pay an average of $24.50 for the next 36 months, as well as accrued operating expenses from the original base year. The landlord however, in three years, could either renew the tenant or be faced with vacancy, lost rent and money spent on fixing the space for the new tenant. Jackson Cross has been successful in approaching landlords and convincing them to offer tenants reduced rental rates (the “blend” part of the equation) in exchange for added term that commences at the expiration of the current lease (the “extend” part of the equation). Thus, the landlord need not worry about losing a tenant and being faced with vacancy. The Tenant is able to immediately reduce lease expenditures, often saving up to 25 percent on rent payments.
This is a basic look at what can become a very complex negotiation. But, if handled correctly, it is most certainly a “win-win” situation. Call us today to see if the Blend and Extend fits your business, and how we can develop a plan of action.
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