Today’s rates for a wide range of commercial property and loan types.
Check Today's Rates →
Blend and Extend Amendments in Commercial Real Estate
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.
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.
Questions? Fill out the form below to speak with a commercial mortgage specialist.
Related Questions
What is a blend and extend amendment in commercial real estate?
A blend and extend amendment in commercial real estate is a way for tenants 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.
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.
What are the benefits of a blend and extend amendment?
The benefits of a blend and extend amendment include:
- Lowering a tenant's rent during periods of high vacancy,
- Including other tenant concessions such as a contraction option,
- Staggering the expiration dates for leases in a property, and
- Reducing risk for landlords.
Source: www.commercialrealestate.loans/commercial-real-estate-glossary/blend-and-extend-amendments
What are the risks associated with a blend and extend amendment?
The main risk associated with a blend and extend amendment is that the landlord may end up accepting slightly less in monthly rent. Additionally, if many of the tenant’s leases are expiring at the same time, the landlord may be taking on more risk by pushing back some of those lease expiration dates. By staggering the expiration dates for leases in a property, landlords can make an attempt to ensure that a building never falls below a reasonable occupancy level.
How does a blend and extend amendment affect the loan terms?
A blend and extend amendment can affect loan terms in a few ways. First, it can reduce the risk for the lender by pushing back the lease expiration dates for tenants, which can help ensure that the building never falls below a reasonable occupancy level. Second, it can reduce the monthly rent, which can reduce the amount of income the lender can expect from the property. Finally, it can also include other tenant concessions, such as a contraction option, which can further reduce the amount of income the lender can expect from the property.
What are the key considerations when negotiating a blend and extend amendment?
When negotiating a blend and extend amendment, key considerations include the tenant's current rent rate, the length of the extension, and any other tenant concessions that may be included. For landlords, the key considerations are the tenant's current rent rate, the length of the extension, and the ability to stagger lease expiration dates to reduce risk.