Leases: Vacancy = Equity
Rent lost to vacancy is gone forever. One landlord exchanged ten years of empty space for a free-and-clear development parcel.
By Darryl McCullough4 min read
FIRST PUBLISHED JANUARY 2018; EDITED FOR WEB READABILITY.
Rent lost during a vacant month cannot be recovered from that same month. Vacancy is not only an operating problem; it can also be part of the value exchanged.
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, so he considered what else the empty space could buy.
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 prepaid the base rent for ten years with the land, removing that monthly expense from the operating plan and improving the start-up's chance of success. He could use his limited cash for equipment instead of taking on a large amount of debt. He could also sublease part or all of the space if the agreement allowed it.
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.