Leases: Vacancy = Equity
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Fact: every day there is vacancy in a project is a day that benefits cannot be recouped. In other words, the opportunity for rental income or alternative benefits is gone forever.
Vacancies occur for a number of reasons, be it curable or incurable economic obsolescence, structural obsolescence, and so on.
One alternative is to exchange the vacancy for equity in real or personal property. The concept can be applied to virtually any kind of property.
Let’s cite an example of this becoming a win-win situation.
Landlord A, (“Landlord”) whose background is in land development and leasing, is the owner of an industrial/commercial property that continues to experience some vacancy. The prospect of finding tenants in the short run for all the vacancies is limited. Landlord acknowledges the reality that rent, which is lost during the time when the space is vacant, can never be recovered. Therefore, Landlord is determined to do something to rectify for that lost rent.
Local Entrepreneur B (“Tenant”) has a start-up business opportunity requiring approximately 5,000 sq. ft. of space. Research has determined that the market rent for such a facility would be $6.00 per sq. ft., equating to a base rental of $30,000 per year.
This budding Tenant has very little cash with which to start up a new business. However, he has a free and clear development property with a value today of $300,000. Current market conditions make it difficult to sell the development land to raise the needed cash. An agreement is made with Landlord to lease to Tenant the 5,000-sq.-ft. property for a 10-year period at $0 base rent. In exchange, Tenant deeds the development land to the experienced Landlord.
Landlord Benefits
The 5,000-sq. ft. vacancy is filled. Landlord now owns a free and clear development parcel he can work with. Also, his taxes, insurance, and maintenance expense for the 5,000-sq.-ft. space have now been passed through to Tenant.
Landlord now has another asset that can be financed, exchanged, collateralized, and so on, allowing even more expanded opportunities.
Tenant Benefits
Tenant has now prepaid his rent for 10 years, enhancing greatly his chance for success. In addition, he has been able to pay for needed equipment and so forth without incurring a large amount of debt.
Also, Tenant could, in turn, if desired, sublease some or all of the space to an arm’s length or related entity and receive rental income.
Conclusion
Packaging nonperforming vacant space, including retail commercial, apartment units, warehouse, homes, and so on, and exchanging it for equity in real/personal property by offering a prepaid lease on the vacant space is a viable alternative to experiencing ongoing lost rent.
Another Option
Tenant may offer an ownership interest for Landlord in Tenant’s business via preferred and/or common shares for the vacant space.
Obviously, variations of the above example are plentiful.
