The recent global recession has had a dramatic impact on the local real estate industry and in most markets has triggered at least a 20 percent drop in rental rates. Unfortunately since average lease terms tend to be five to seven years, many users of space executed leases prior to the beginning of the recession and are currently locked into monthly rental payments that are significantly above today’s market rates. However, if certain factors are in alignment, there is a solution to this problem that can add value to both the tenant and the landlord.
Blend and Extend is a term used to describe a tactic in which a lease is renegotiated prior to the expiration date. The typical tradeoff is that the tenant extends the lease a number of years in exchange for an immediate rent reduction. The landlord gets the additional certainty of having a tenant longer-term (in markets where tenants are hard to come by) and the tenant saves money.
As an example consider Tenant Z, a 10,000 square foot office user. In 2007, they signed a seven year lease in a Class A Oakbrook office building for $25,000 per month. Current market for this space is $20,000 per month. A blend and extend transaction could involve an immediate reduction of rent to $21,000 (a negotiated amount greater than market but less than the current obligation) per month in exchange for extending the lease for an additional three years (until 2017).
The tenant saves $4,000 per month for the remaining period of his current lease – total of $72,000 – and has locked in rent at the bottom of the market for an additional three years beyond the initial expiration date. The landlord, on the other hand, has gained income stability out beyond the point in time when the market will most likely have recovered and has avoided the cost of trying to find another tenant at the completion of the initial rental period.
Does your organization fit any of the following criteria?
Sound like it could be a fit? A blend and extend transaction is a complicated structure and negotiation and should be done with the assistance of a commercial real estate professional.
Example: Social Services Agency
Example: Instrument Testing Facility
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The city of Chicago through its Small Business Improvement Fund (SBIF) assists small businesses in their efforts to remain viable by providing financial assistance for their building renovation and infrastructure costs. Program participants can receive reimbursement grants of up to $150,000.
Over the last few years I’ve actively monitored what businesses have applied, the number of times they’ve applied, the types of businesses applying (i.e. retail, professional services, manufacturing, etc.), scope of work being performed through the grant, and grant awards. It doesn’t appear many manufacturing property owners and users of space leverage this incredible resource.
The eligibility requirements for industrial properties is the applicant cannot have more than 100 full time equivalent employees. The other property types have sales history, sales projection, and networth ceilings; however, this is not the case for industrial property. The maximum grant award is $150,000, doesn’t need to be repaid, and companies can apply on multiple occasions up the maximum grant award. Once a company reaches the maximum grant award amount if they wait 3 years then their eligible to apply for further funding.
Some eligible expenses for a SBIF grant include, but are not limited to:
Beyond the abovementioned list, grantees been approved for implementing cost saving measures such as the installation of renewable energy systems–solar panels, geothermal, lighting retrofit, etc.
Every month the organization administering the SBIF program on behalf of the city of Chicago selects 10 to 12 TIF Districts throughout the entire city that will accept applications for a one month period. Almost every TIF District will open its application acceptance period at least once a year. In some instances, the administrator has opened the application period within certain districts in consecutive months. Using this information manufacturing companies can begin taking a strategic, proactive approach towards addressing the hidden and not so hidden facility issues.
In summary, I view SBIF as a viable financial solution being underutilized by smaller Chicago based manufacturing companies that either own their space or lease space. In other words, if your manufacturing company has 100 FTE employees or less, could you utilize a $150,000 grant to modernize or improve your manufacturing facility?
Some businesses have special office requirements that can make or break a real estate deal. Business owners should consult their tenant representation commercial real estate broker to identify these special requirements early on in the process. Below are some requirements to review with your tenant rep broker.
Back-up Power
Some businesses need an extra guarantee against power failure. For example, a surgeon who does procedures in his office may be limited to properties with a back-up power source to provide uninterrupted electricity.
Unusual and/or Expensive Build Out Requirements
If extra or unusual build out is required, office users will have to demonstrate their credit worthiness; landlords will seek to recoup their added investment through higher rents and a longer lease term. For example, a photographer may need extra plumbing and ventilation for a darkroom.
Soundproofing
Good sound insulation can be essential for some tenants, especially those in industries that deal with confidential information. Such tenants should test for soundproofing before they sign a contract.
Technological Capacity
If you are touring the market, you should retain a tenant representation commercial real estate broker to help you decide which properties are the best fit and to guide you through the relocation/renewal process.
Contact Us – For any of your commercial real estate needs.
Steve Stoner, Managing Partner
SCGroup Real Estate
sstoner@scgroupre.com
630-805-0497
