By Graham Summers
Jones Lang LaSalle
Three years ago, when the market was hitting rock bottom, a concept was re-introduced in an effort to increase value for landlords and decrease occupancy costs for tenants.
The transaction structure, referred to in the industry as the “blend and extend”, involved a tenant renewing its office lease typically 12-24 months prior to expiration, in exchange for concessions from the landlord. In exchange for those concessions, the landlord required the tenant to add three to 10 years of additional lease term, beyond the existing expiration. The benefits or concessions the tenant would attempt to obtain included:
- Rental rate reduction
- Footprint reduction, or expansion if necessary
- Tenant improvement (a.k.a. TI) allowance
- Operating expense base year reset
- Renewal/termination/expansion options
There are several reasons landlords let tenants “off the hook” in advance of expiration, but almost every time it was in an effort to increase building valuation with added lease term. Refer to John Robinson’s “Capital Markets 101” blog entry for more details, but the gist is that any lease term expiring in less than two years does not increase the value of a building.
Well, the market has rebounded, so the “blend and extend” era is over, right?
No – there are still a handful of landlords in Indianapolis that will gladly entertain providing considerable concessions in exchange for securing a credit Tenant for the long term. It is situational, as it depends on the credit and condition of the building owner. Often times, buildings in a state of receivership are prime for this opportunity. Either way, if your lease expires in the next two years, it’s probably a conversation worth having with your real estate representative.