"Stabilized" Shopping Center Deals with free-rent nonsense tenants
Saw this deal recently where some guys are re-selling a retail center they bought at 30% vacancy, leased up 20k SF to random tenants with free rent, and now are bumping the NOI in-kind. For example, NOI was $125,000, they are booking the new tenants' rent fully and have increased the NOI to $190,000 and are expecting it to be worth $1MM more. Most of the tenants aren't even moved in. Anyone else seeing deals like this? Are they just waiting for a desperate 1031 buyer??
[{"id": "idl42b9", "text": "Sounds like you hit the nail on the head. Tenant-specific underwriting should be scrutinized heavily. If those tenants stop paying rent, now there's no NOI and the new LL has to try to evict them or renegotiate their leases at a lower rent.", "replies": [], "depth": 1}, {"id": "idl48q8", "text": "Every seller is lying about something. My favorite is 100% occupied but 30% of the leases expire in 1-3 months, and the tenants are already vacated.", "replies": [{"id": "idokgsz", "text": "What is the lie? Maybe \u201ceconomically occupied\u201d if they paid rent\u2026", "replies": [], "depth": 2}, {"id": "ie319yg", "text": "Rule of thumb when I look at multi-tenant assets to buy.\n\nAny lease sub 2 years I treat it as if it's going vacant.", "replies": [], "depth": 2}], "depth": 1}, {"id": "idl9dq9", "text": "Most experienced perm lenders will catch free rent tenants and call out donkey tenants on a first look, in my experience. \n\nUnfortunately happening in office too. We had to back out of two deals in DD because the RR and proforma leases were bullshit. I blame it on the sellers but also the brokers for trying to sell a deal with LOIs and renewal indications as actual place leases.. thinking the timing would sort it all out. \n\nIn both cases our lenders wanted some proof of move-in, seasoning and actual business activity in the suites...otherwise chop chop on proceeds.", "replies": [{"id": "idlvn4u", "text": "&gt; donkey tenants\n\nNever heard this term before, what is a donkey tenant?", "replies": [], "depth": 2}, {"id": "idm14aj", "text": "RR?", "replies": [{"id": "idnhm6z", "text": "Rent roll", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "idl9dqp", "text": "I haven\u2019t seen that, but the master lease agreement trick and the all the leases expire in 1-2 years.", "replies": [{"id": "idlgz0e", "text": "Or the sale master-lease back, \"I'm starting a co-working company and I'll rent out the suites\" trick.", "replies": [], "depth": 2}, {"id": "idmyvo8", "text": "Serious question - how does this end up being a trick?  I\u2019d assume the cap rate would still account for some of the risk?", "replies": [], "depth": 2}], "depth": 1}, {"id": "idnsir7", "text": "Free rent no big deal. Just get a credit at closing.", "replies": [], "depth": 1}]