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So you signed your office lease at the top of the market — you’re paying a small fortune in rent, but your space is only worth a fraction of what you’re paying. What can you do to lessen your financial burden? Blend and extend. And here's how it works:

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Let’s say you’re paying $70/s.f. and you have two years left on your lease. But in today’s market your space is worth $50/s.f. You’re $20/s.f over market. You want some relief and you want it now.

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Here’s an approach that works for many tenants:

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You have two years left on your lease commitment. You are paying $20/s.f. above the market for each of these years. That’s $40/s.f. in total over market (20 times 2).

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Now, if you extend your lease out an extra ten years and do it now, you tell the landlord you want to create a blended rate of old and new. The way this works is you divide the $40/s.f. that you are over market into the new ten year term. Or in other words divide 40 by 10 and you get 4.

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If you did not have the old $70/s.f. commitment you could make a deal at $50/s.f. But since the landlord is not going to just forgive that high rent, you will agree to blend in the overage and instead of paying $50/s.f. you will pay $54, but it will start immediately.

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This is a win-win for both tenant and landlord. For the tenant it’s a win because it lowers your immediate costs. That $16/s.f. savings can go into your business or into your pocket.

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For the landlord, it’s a win for two reasons. One, they have not forfeited any money – they’ve just re-structured when they’ll get it. And two, they have secured a long-term lease with an existing tenant.

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This is extremely valuable to a landlord because banks and other lending institutions value buildings based on net operating income over time. If a building has leases expiring in less than 5 years, banks are likely to discount that portion of the operating income. However, if a building has a tenant in place for ten years or more, lenders feel secure and buildings are valued at higher numbers.

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Many landlords make a lot of their money not through collecting rent or selling their buildings, but rather by re-financing the asset or modifying the loan agreements. The key for landlords in doing this successfully is to have fully occupied buildings with long terms leases.

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Will landlords always work with tenants in this way? Of course not. But it is worth a shot because MANY will. Keep in mind this only works if there’s a significant delta between what you are paying and what the market will bear. According to Co-Star Group (a national independent tracking agency) office rents in NYC have dropped 42% from the highs in 2007. However, in the past few quarters, rents have started to inch back up.

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From a tenant perspective, this signals a time sensitive opportunity to lock in a great rate before the market fully recovers.

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