Business owners who are searching for office space for rent have quite a few options available to them. Long-term leases, annual leases and month-to-month options are the most common types of leases. With that said, most leases are longer-term in the 3-7 year range, and they reflect the market conditions that were in effect at the start of the lease term. So, what happens when a company's need for office space changes midway into its lease term? or what happens when market conditions change dramatically, but the company still has considerable time left in its lease term? Is he stuck? The short answer is: not necessarily. A relatively new type of lease has emerged which business owners have found to be advantageous to their leasing situation, and that is the blend and extend lease. These leases relate to tenants and landlords who are in a current lease relationship, and want to extend the lease for an additional term while in the midst of their current lease. When a blend and extend lease is initiated, the parties also get to alter the terms of the lease which is an additional benefit to such a lease. The following will highlight more information regarding the blend and extend office lease and cite the various pros and cons of such an office space rental agreement.
The term venture leasing describes the leasing of equipment to pre-profit, start-ups funded by venture capital investors. These companies usually have negative cash flow and rely on additional equity rounds to fulfill their business plans. Venture leasing allows growing start-ups to acquire needed operating equipment while conserving expensive venture development capital. Equipment financed by venture leases usually includes essentials such as computers, laboratory equipment, test equipment, furniture, manufacturing and production equipment, and other equipment to automate the office. Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership.
There are many benefits on both sides of the lease relationship associated with an office space blend and extend lease. The landlord favors a blend and extend lease as it guarantees them that their office space will not be vacant for long periods of time. In today's economy, office rental demand is on shaky ground as are many other business-related aspects and the landlord can have peace of mind knowing that its tenant will be in the office space for years to come. This will increase the chances that the landlord can cover the mortgage payment every month and not have to worry about paying a real estate agent to find replacement tenants for them.
Leasing companies do frequently (usually quarterly) send equipment vendors a list of their lease portfolios with that leasing company in hopes the vendor will upgrade the customer's equipment and extend the customer's leasing relationship with the leasing company. If the equipment vendor is paying attention to their customer base, they will notify you of the approaching lease expiration (and try to upgrade your equipment). If an equipment lease renews, this makes it very difficult (read expensive) for a competing equipment vendor to economically upgrade the equipment before the expiration of the renewal term. This strategy was constructed intentionally to give the incumbent equipment vendor (and leasing company) a financial advantage in upgrading the equipment before the expiration of the renewal lease term. A lease renewal limits your options, which is never good for you. Only the incumbent equipment vendor who agrees to use the same leasing company can upgrade equipment on a renewed lease without penalty. Any other combination of equipment vendor and/or leasing company will have to pay the remaining payments of the renewed lease term (usually 12 months).
After determining that the management team and venture capital investors are qualified, venture lessors evaluate the start-up's business model and the market potential. Since most venture lessors are not technology specialists - able to assess products, technology, patents, business processes and the like - they rely greatly on the thorough due diligence of experienced venture capitalists. But the experienced venture lessor does undertake an independent evaluation of the business plan and conducts careful due diligence to understand its content. Here, the lessor generally attempts to understand and concur with the business model. Questions to be answered include: Is the business model sensible? How large is the market for the prospect's services or products? Are the income projections realistic? Is pricing of the product or service sensible? How much cash is on hand and how long will it last according to the projections? When is the next equity round needed? Are the key people needed execute the business plan in place? These and similar questions help determine whether the business model is reasonable. Satisfied that the business model is sound, the venture lessor's greatest concern is whether the start-up has sufficient liquidity or cash on hand to support a significant portion of the lease term. If the venture fails to raise additional capital or runs out of cash, the lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases. What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
When all is said and done, a blend and extend lease can often be a good option for both landlord and tenant to consider. If the landlord/tenant relationship is a good one and the office building location works well for the tenant, then there really is no reason to ignore the blend and extend lease option. Even with the few potential negatives listed above, the pros often times outweigh the cons of this type of lease. A blend and extend office lease ensures that the office property remains rented and the tenant gets a better deal than it had previously. It is easy to see why blend and extend leases are becoming much more common in the commercial real estate market-place.
The term venture leasing describes the leasing of equipment to pre-profit, start-ups funded by venture capital investors. These companies usually have negative cash flow and rely on additional equity rounds to fulfill their business plans. Venture leasing allows growing start-ups to acquire needed operating equipment while conserving expensive venture development capital. Equipment financed by venture leases usually includes essentials such as computers, laboratory equipment, test equipment, furniture, manufacturing and production equipment, and other equipment to automate the office. Venture leasing enjoys many advantages over traditional venture capital and bank financing. Financing new ventures can be a high risk business. Venture capitalists generally demand sizeable equity stakes in the companies they finance to compensate for this risk. They typically seek investment returns of at least 35% - 50% on their unsecured, non-amortizing equity investments. An IPO or other sale of their equity position within three to six years of investing offers them the best avenue to capture this return. Many venture capitalists require board representation, specific exit time frames and/or investor rights to force a 'liquidity' event. In comparison, venture leasing has none of these drawbacks. Venture lessors typically seek an annual return in the 14% - 20% range. These transactions usually amortize monthly in two to four years and are secured by the underlying assets. Although the risk to the venture lessor is also high, this risk is mitigated by requiring collateral and structuring a transaction that amortizes. By using venture leasing and venture capital together, the savvy entrepreneur lowers the venture's overall capital cost, builds enterprise value faster and preserves ownership.
There are many benefits on both sides of the lease relationship associated with an office space blend and extend lease. The landlord favors a blend and extend lease as it guarantees them that their office space will not be vacant for long periods of time. In today's economy, office rental demand is on shaky ground as are many other business-related aspects and the landlord can have peace of mind knowing that its tenant will be in the office space for years to come. This will increase the chances that the landlord can cover the mortgage payment every month and not have to worry about paying a real estate agent to find replacement tenants for them.
Leasing companies do frequently (usually quarterly) send equipment vendors a list of their lease portfolios with that leasing company in hopes the vendor will upgrade the customer's equipment and extend the customer's leasing relationship with the leasing company. If the equipment vendor is paying attention to their customer base, they will notify you of the approaching lease expiration (and try to upgrade your equipment). If an equipment lease renews, this makes it very difficult (read expensive) for a competing equipment vendor to economically upgrade the equipment before the expiration of the renewal term. This strategy was constructed intentionally to give the incumbent equipment vendor (and leasing company) a financial advantage in upgrading the equipment before the expiration of the renewal lease term. A lease renewal limits your options, which is never good for you. Only the incumbent equipment vendor who agrees to use the same leasing company can upgrade equipment on a renewed lease without penalty. Any other combination of equipment vendor and/or leasing company will have to pay the remaining payments of the renewed lease term (usually 12 months).
After determining that the management team and venture capital investors are qualified, venture lessors evaluate the start-up's business model and the market potential. Since most venture lessors are not technology specialists - able to assess products, technology, patents, business processes and the like - they rely greatly on the thorough due diligence of experienced venture capitalists. But the experienced venture lessor does undertake an independent evaluation of the business plan and conducts careful due diligence to understand its content. Here, the lessor generally attempts to understand and concur with the business model. Questions to be answered include: Is the business model sensible? How large is the market for the prospect's services or products? Are the income projections realistic? Is pricing of the product or service sensible? How much cash is on hand and how long will it last according to the projections? When is the next equity round needed? Are the key people needed execute the business plan in place? These and similar questions help determine whether the business model is reasonable. Satisfied that the business model is sound, the venture lessor's greatest concern is whether the start-up has sufficient liquidity or cash on hand to support a significant portion of the lease term. If the venture fails to raise additional capital or runs out of cash, the lessor is not likely to collect further lease payments. To mitigate this risk, most experienced venture lessors pursue start-ups with at least nine months of cash or sufficient liquid assets to service a substantial portion of their leases. What determines venture lease pricing and how does a prospective lessee get the best deal? First, make sure you are comfortable with the leasing company. This relationship is usually more important than transaction pricing. With the rapid rise in venture leasing over the past decade, a handful of national leasing companies now specialize in venture leases. A good venture lessor has a lot of expertise in this market, is accustom to working with start-ups, and is prepared to help in difficult cash flow situations should the start-up stray from plan. Also, the best venture lessors deliver other value-added services - such as assisting in equipment acquisitions at better prices, trading out existing equipment, finding additional venture capital sources, working capital lines, factoring, temporary CFOs, and introductions to potential strategic partners.
When all is said and done, a blend and extend lease can often be a good option for both landlord and tenant to consider. If the landlord/tenant relationship is a good one and the office building location works well for the tenant, then there really is no reason to ignore the blend and extend lease option. Even with the few potential negatives listed above, the pros often times outweigh the cons of this type of lease. A blend and extend office lease ensures that the office property remains rented and the tenant gets a better deal than it had previously. It is easy to see why blend and extend leases are becoming much more common in the commercial real estate market-place.
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Frank Miller has a Debt Consolidation Blog & Finance, these are some of the articles: Things To Keep In Mind When Applying For A Loan You have full permission to reprint this article provided this box is kept unchanged.
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