So you're locked into a lease and find yourself paying above market. What can you do? We recommend signing what we call a blend and extend lease, which true to its name involves extending your lease at a rate that blends your current rate with the market value to immediately lower what you currently pay. Here's how it works:
Blend and Extend
In exchange for signing a longer-term lease, you receive all the benefits of a new lease:
(a) multiple months of free rent now
(b) real estate taxes reset to $0; depending on your building and how many years into your lease you are, this can have a hugely favorable impact on your bottom line
(c) favorable base rent relative to what you currently pay: to determine the ‘right’ base rent adjustment, we look at the rent you’re currently paying vs. market value based on recent comps
Example: if you have a lease expiration coming up in the next 3 years, we believe you could viably approach your Landlord with the following blend and extend scenario: you will extend your lease past its existing expiration if they agree to reduce your rent by 10%-20%, provide you with several months of free rent that you can use now, and reset your real estate taxes back to $0 with a new base year.
This is a win-win for both tenant and landlord. For you as the tenant, it’s a win because it lowers your immediate costs and helps you conserve cash, especially given COVID-19 and its effect on the NYC market. For the landlord, it’s a win for two reasons. (1) they haven’t forfeited any money – they’ve just re-structured when they’ll get it and (2) they have secured a long-term lease with an existing tenant.
This is extremely valuable to a landlord because banks and other lending institutions value buildings based on net operating income over time. If a building has leases expiring in less than 5 years, banks are likely to discount that portion of the operating income has a tenant; on the flip side, when a building has tenants in place for longer terms, lenders feel secure and buildings are valued at higher numbers, which allows landlords to make money re-financing the asset or modifying the loan agreements. The key for landlords in doing this successfully is to have fully occupied buildings with long terms leases.
Will landlords always work with tenants in this way? Of course not. But it is worth a conversation when it’s a mutually beneficial solution. Blend and extend can solve for both parties’ wishes under circumstances like COVID-19 that create a gap between what you’re currently paying and the new market value of your space along with an immediate need for cash from the tenant’s perspective, and create fear of vacancy and its consequences from the landlord’s perspective.
The best way to understand how a blend and extend scenario compares to your as-is scenario is to see an analysis. Reach out to us here to have a conversation about blend and extend as it applies to you, and we’ll be happy to send you this analysis.