Blend and Extend Amendments in Commercial Leasing
In commercial leasing, a blend and extend amendment is allows a tenant to extend their lease and negotiate a new rate, merging, or “blending” the new and old rents. During periods of particularly high vacancy, commercial landlords will often offer agree to a blend and extend amendment that lowers a tenant’s rent, in order to keep their property occupied for an extended period of time. In some situations, a blend and extend amendment can also include other tenant concessions, such as a contraction option, which permits a tenant to reduce the amount of space they lease in order to reduce their monthly rent.
How Blend and Extend Amendments Work in Practice
For example, let’s say that an office tenant with a 5-year lease has 2 remaining years on their lease. They are currently paying $50/psf per year for a 5,000 sq.ft. office, or $250,000 year. However, due to increased vacancies in the area, average office rents have declined to $40/psf. The landlord may agree to “blend and extend” their lease for 5 years, allowing them to pay an intermediate rate of $45/psf for the remaining 2 years of the current lease, and allowing them to pay the current market rate of $40/psf for the next 5 years of the lease.
In this scenario, the tenant would save $25,000/year over the two remaining years of their lease (a total of $50,000), while locking another 5 years at the present rate. Generally, a landlord will not offer this unless they believe that rents are going to stay the same or fall over the remainder of the extended leasing period. However, this is not the only situation in which a blend and extend amendment may be used.
Blend and Extend and Lease Expiration Schedules
Even if vacancy rates are not particularly high, landlords may benefit from a blend and extend if many of their tenant’s leases are expiring at the same time. A blend and extend can push back some of those lease expiration dates by a few years, significantly reducing risk for landlords, even if they do end up accepting slightly less in monthly rent. By staggering the expiration dates for leases in a property, landlords can make a attempt to ensure that a building never falls below a reasonable occupancy level.