From Blend and Extend to End and Extend

The so called “blend and extend” deal structure has a number of applications, among them a scenario in which a landlord might account for a downward adjustment to a tenant’s rent by amortizing the value of the adjustment with interest into a new term.  Say, for example, a tenant has 3 years remaining on a lease and the market value for the space has dropped from $75/sf to $60/sf.  The landlord would adjust the rate to market ($60/sf) and spread the $15/sf differential over the new term.  If the interest rate were 8%, and the term 7-years, this would add $2.80/sf to the rent. 
 
These days, a new type of transaction has entered the market.  We call it the “End and Extend”.  This is when the landlord outright forgives the rent differential in exchange for extended term.  To be sure, landlords are (generally) slow to make this adjustment.  It does not feel good to forgive rent.  So why are they doing it?  Because it creates a better outcome than the alternative. 
 
The value of forgiven rent is a concession, no different than other concessions the landlord would have to make in negotiating a new lease for the space (e.g., if the existing tenant vacates).  Hence, this value should be thought of from the perspective of how it compares to the other concessions.  A $15/sf/year rent forgiveness over 3 years equates to a total concession of $45/sf.  When packaged with other market concessions, like free rent and (possibly tenant improvement allowance), the landlord is faced with a total cost to make the transaction. How does it compare?  Today, landlords face the prospect of significant downtime to market vacant space (this can be upwards of 2 years), and if they do new construction, it will be very expensive (tenant improvement allowances for new deals are often in the $150/sf+ range).  Indeed, the value of the forgiven rent (the “end”) may compare favorably to the alternative. 
 
The key to a successful End and Extend transaction lies in a strategic approach, informed by market knowledge.  If your lease rate is materially above market, and the space works well such that you would look favorably on extension, now may be the right time to consider the End and Extend.