How to Save Real Money on Occupancy Costs

Lease Re-structuring 101

Whether it’s a pandemic or a recession, occupancy costs are one of those expenses that affect the bottom line. Unquestionably, the pandemic has affected everyone. For almost all businesses, this has meant months of reduced revenue. As we move forward recovery is on the way, perhaps not next month but it is coming.

So now businesses must find ways to cut expenses to make it through the uncertainty. Tenants do not want to break their leases. Viable businesses are now more valuable tenants than ever and landlords definitely do not want leases to be terminated. One strategy is a classic real estate approach of lease restructuring, also known as “Blend & Extend.”

So what exactly is Blend & Extend?

Basically, it is a mutual renegotiation of the material, financial terms of a lease - most prevalent in a down market. The landlord offers concessions and in return the tenant commits to extend their occupancy. The most prevalent are abated (free) rent, additional tenant improvement monies and downsizing space. Now for the details; This approach gives the business reduced occupancy costs and typically amortizes them over the newly extended term of the lease.

Whether your company occupies office, industrial or retail space, the Blend & Extend strategy is one of the best tools to reduce occupancy costs. However, it is not a simple negotiation. In most cases the landlord will need some time to be convinced and that is where a commercial real estate broker comes into play. They act as an advisor and are key to a successful negotiation.

It is a delicate balance even though neither party, the landlord nor the tenant, want to terminate the lease. A tenant’s broker plays an advisory role to make sure their landlord understands what the tenant needs and more importantly, why they need it.

This pandemic is going to change the way businesses use commercial real estate. I strongly believe that downsizing can be the best outcome for viable tenants looking into the future. Considering that so many employees have adapted to working from home, I expect more and more companies will ultimately need less space.

Whatever your company’s future holds, be sure to consult with a commercial real estate advisor. Our team is standing by, ready to strategize with you. Let’s work together and find a way to reduce your occupancy costs as we look to the future.