By Darryl McCullough
Senior Partner
COUNSELING SINCE 1972
4 MIN READ
This paper is educational material drawn from real transactions. It is not an offer of securities, and it is not tax or legal advice for your situation.
Leases: Vacancy = Equity
Rent lost to vacancy is gone forever. One landlord traded ten years of empty space for a free-and-clear development parcel.
FIRST PUBLISHED JANUARY 15, 2018; ADAPTED FOR THIS LIBRARY.
Fact: every day a space sits vacant is a day whose benefits can never be recouped. The opportunity for rental income, once missed, is gone forever.
Vacancies happen for many reasons, curable and incurable. One alternative is to exchange the vacancy itself for equity in real or personal property.
A win-win example
A landlord, with a background in land development and leasing, owned an industrial and commercial property with persistent vacancy. The prospect of finding tenants in the short run was limited. He acknowledged the reality that rent lost to vacancy can never be recovered, and decided to do something about it.
A local entrepreneur had a start-up business needing about 5,000 square feet. Market rent for such a space was six dollars per square foot, about $30,000 per year. The entrepreneur had very little cash. But he owned a free-and-clear development property worth about $300,000, difficult to sell in that market to raise cash.
The agreement: the landlord leased the entrepreneur the 5,000 square feet for ten years at zero base rent. In exchange, the tenant deeded the development land to the experienced landlord.
Landlord benefits
The vacancy is filled. The landlord owns a free-and-clear development parcel he knows how to work with. Taxes, insurance, and maintenance on the space pass through to the tenant. And he now holds another asset that can be financed, exchanged, or collateralized, expanding his opportunities further.
Tenant benefits
The tenant has prepaid his rent for ten years, greatly improving his odds of success, and paid for needed equipment without taking on heavy debt. He could even sub-lease part of the space and receive rental income.
Conclusion
Packaging non-performing vacant space, whether retail, office, warehouse, or recreational, and exchanging it for equity by offering a prepaid lease is a real alternative to watching lost rent accumulate.
One more variation: the tenant may offer the landlord an ownership interest in the business, via preferred or common shares, in exchange for the space. Variations on this example are plentiful.