COVID-19's impacts on the economy are affecting most businesses. While there are a few winners, many companies find themselves facing reduced revenues and an uncertain future. Some costs -- like travel and staffing -- can be cut relatively quickly. Others -- like those represented by long-term contracts like real estate leases -- are harder to trim. However, because many landlords understand the challenge that their tenants face -- and don't necessarily want to create a long-term hit to their building for what is hopefully a short-term problem -- a blend-and-extend strategy might allow you to better manage your real estate expenditures.
Understanding Blend & Extend
A blend & extend strategy involves both you and your landlord giving something up. In return for your landlord giving you some rent relief in the near term, you agree to extend your stay in the building. For instance, if your lease is 18 months from renewal, you might agree to sign a five year renewal option today. This would turn you from a tenant with a year-and-a-half left to one that will be staying for the next six years -- and then some. In exchange for this, your landlord could allow you to pay less rent (or no rent) for a period of time. They might also give you some money to retrofit your space to make it suitable for your new, longer term. The blending comes in because they blend your short-term rent abatement either into higher rent over the remainder of your lease or into the total return they get by not having you move out.
Blend & Extend for Landlords
When you sign a lease, you're locked into its terms, right? While it might be possible to find a loophole or make a force majeure claim to get some wiggle room, most commercial leases are relatively cut and dry from a legal perspective. From a business perspective, though, leases carry one huge risk for landlords -- the risk that you move out. Vacancy is extremely expensive and, barring special circumstances, most landlords would rather have space filled than empty.
A blend and extend scenario eliminates two types of vacancy risk for a landlord. First, by helping you solve a short-term cashflow issue by saving you money, they increase the likelihood that your business will continue operating and paying rent. Second, because they push the risk of vacancy much further into the future, they also increase the landlord's income from the building. Since the value of a commercial building gets tied to its income, avoiding income can also increase their equity in the property. These reasons are why a blend & extend scenario can be attractive to landlords.
Blend & Extend for Tenants
Blending and extending your lease can be a smart strategy for you, as well. The key to a successful transaction is that your space has to be priced well and to suit your needs. If it's a good space at a good price and you would renew it anyway, blending and extending lets you essentially get paid for executing a contract that you already planned to sign. Furthermore, because of the uncertainty surrounding the COVID crisis and the willingness of many landlords to work with their tenants, you might be able to negotiate better terms or concessions with a blend & extend than you would be willing to negotiate when your lease expires in a, potentially, better economy.
Negotiating a Blend & Extend Agreement
A successful blend & extend agreement negotiation starts with market expertise. You have to know where your space sits in the market, what the landlord needs, and what terms are being offered in other buildings both for new leases and for blend & extend arrangements. Then, you have to have the right skills to successfully consummate the negotiation process. Working with a tenant representative who has the knowledge and skill set is the key to maximizing your results from this process.