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Why Commercial Tenants Should Restructure Their Lease Now!

Market conditions in virtually every market across the country are in rough shape. Vacancy rates continue to climb as businesses close their doors and rental rates continue to drop.

Landlords are in a tough spot right now. Many landlords, big & small, purchased their properties with the expectation that rents would continue to climb which would in turn increase the value of their property and they would simply refinance their mortgage before the maturity of their loan was due. Well, the opposite has happened, rental rates are dropping and so is the value of their property. Many landlords will be faced with a serious problem and will likely need to rework the terms of their loans with their banks if possible.

To do so, landlords need to tell a compelling story to their lender. If that story is that they currently have a low vacancy at their property their banks are probably more likely to work with them to find a reasonable solution. In other words, if you are a tenant your landlord more than likely desperately needs to keep you in the building.

Don’t get me wrong, I’m not saying because the market is down you’re entitled to restructure your lease. After all you did sign a binding lease with your landlord. And if the scenario was flipped and you had signed a long term lease in a market like today and 2 years from now your landlord came to you and wanted more rent because the market was better you would lose your mind. What I am saying, is that if your company is fairly stable and you can foresee the business making it through this recession it makes good business sense to try to negotiate a “blend and extend” type lease restructuring.

What is “blend and extend”? There are many ways to do it but basically you extend the term of the lease in exchange for lowing the rent. For example, let’s say you had 1 year left on your lease and you were paying well over the current market rents. You or your commercial real estate broker would negotiate with your landlord to extend your lease for an additional 5 year term in exchange for lowering your base rent to a rate more in line with the current market. In many cases this is a win-win. You’re able to reduce your rent which goes straight to your bottom line and your landlord locks you in for another 5 years and does not have to worry about trying to find a new tenant in this market.

For more detailed information consult your commercial real estate broker or feel free to give us a call. We would welcome the opportunity to work with you.