Tenants Moved Out but Still Pay Rent? (Office Hours)
Join me in this week's Office Hours as we dive into the unique investment opportunities and challenges of dark and vacant commercial real estate. We'll discuss scenarios like tenants going 'dark' (still paying rent but ceasing operations) and how these situations can impact neighboring tenants, property value, and lease agreements. I'll also cover strategies for investing in discounted dark NNN properties, how to evaluate their potential, and key considerations when re-leasing the space.
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Key Takeaways:
Going "dark" in commercial real estate refers to when a tenant shuts down their business but is still legally obligated to pay rent. This can create opportunities for landlords to get properties at a discount.
When a tenant goes dark, the landlord has to weigh the pros and cons of suing the tenant versus negotiating an early lease termination. Lawsuits often end up costing more in legal fees than they are worth.
When releasing a dark property to a new tenant, it's important to negotiate a buyout deal with the existing tenant first before bringing in the new one, otherwise the landlord has less leverage.
For financing dark properties, there are lenders willing to work with these situations, but it will depend on the landlord's overall financial strength and the specifics of the lease.
Building relationships and a strong network in the commercial real estate industry is crucial, especially when transitioning from residential to commercial investing.
About Your Host:
Tyler Cauble, Founder & President of The Cauble Group, is a commercial real estate broker and investor based in East Nashville. He’s the best selling author of Open for Business: The Insider’s Guide to Leasing Commercial Real Estate and has focused his career on serving commercial real estate investors.
Episode Transcript:
Tyler Cauble 0:00
This episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www dot cre central.com to learn more. Welcome back to the commercial real estate investor podcast. We are live from Nashville, Tennessee for another round of office hours. You've got questions on commercial real estate I might have the answers. We'll see. I guess. Today we're gonna be diving into what I've been up to the past week. We're gonna dive into some articles from Reddit on making money without having tenants in a commercial space. That'll be a pretty interesting one. And then, of course, we're gonna be diving into y'all questions, whatever you have on commercial real estate. Let's hear it. That is what this time is for. This past week has been a good one. Been out planning our mastermind we're having another in person mastermind event in Birmingham in early March, and so working with the team on pulling that together. It's always fun, putting an event like that actually on the calendar, getting the speakers scheduled and getting everything planned out. It's going to be a really fun one. We released our inner circle, which is for 10 people within the accelerator that want to work with me a little more hands on, a little more personally, on their investment. So I'm coming in and I'm working with them to get them a deal this year. And so we've got an extra day for the inner circle, starting on a Thursday. We've got two full days of workshopping Property Tours. We're going to be hearing from lenders, from brokers, from other members of the the mastermind on projects that they've done. And it's going to be a really good time. So I'm excited for that. Our last in person meetup was back in October, and so even though we're doing them once a quarter, I feel like sometimes we just go really far in between these in person meetups. So looking forward to that. It's gonna be a lot of fun. I've got a crazy busy March. I'm gonna be speaking at the best ever conference at the beginning of March. We've got our mastermind. I've got some traveling. I'm headed to Hawaii for the Entrepreneurs Organization in April. It's gonna be a bit of a wild ride, but that's generally how springs go for me. I've also been working a lot on the Self Storage deal. So if you all tuned in last week, you know that December 31 we closed on a 105 unit deal out in Madison, which is like, 10 minutes from my office, and that's been a hell of a takeover, because the previous owner, let's just say, fluffed up the numbers on how many tenants they actually had ended up being 62% occupied compared to the 95% that they said. It was not unexpected. I mean, you know, we figured getting into it that we're going to have some more vacancy than what they said, but that was definitely a surprise. However, the great thing is, about these kinds of deals, when there's an operational value add, all you have to do is answer the damn phone and sign the leases for the people that want units, right? That's the fun thing about just taking over these properties is you don't always have to do a physical value add. Sometimes it just takes answering the phone because the previous owner clearly did not care to make any of this happen. We're building 350 units out in Chattanooga. I'm actually headed down there on Friday to meet with my contractors to pull this one together. It's kind of a wild deal, and I'm going to be keeping you guys along for the ride, because we have to spend one and a half million dollars in the next 120 days, give or take, which is a good problem to have. I'm pretty excited about that. We sold a property back at the end of November. We're doing a 1031, exchange into this property. And it's it's going to be an interesting one, for sure. Because while you know, one and a half million dollars that you have to spend is a good thing, you also got to think, like, we have to do all of the construction, we have to build all of the self storage units. I have to put electrical, plumbing, fire, you know, safety sprinklers, right? All of that stuff in 120 days. So it's going to be a wild ride. Looking forward to it, and I'm ready to get that one up and running. So this, this past week, I noticed a few articles that were on Reddit that I thought were pretty interesting, talking about commercial real estate that doesn't have any tenants but still makes money, right? And so it really started with this article here, what's it called? Again, when a retail move, tenant moves out, but they're still paying rent. It's it's called going dark in commercial real estate, right? Imagine all the lights are shut off, right? They are shut down because of the way that commercial real estate leases work. Just because a tenant shuts down doesn't necessarily mean that they can just stop paying rent, right? They're still legally obligated to continue. Paying you rent, and so you're starting to see this trend. I mean, it happens all the time, right? It's not entirely uncommon in commercial real estate that a tenant has to shut down their business, but what happens if you're the landlord? Well, we're seeing that quite a bit with Walgreens right now, right? They've decided to shut down around 1200 stores across the country. Just because they're shutting down the stores, though, doesn't mean that they get to stop paying rent. So what you have in that instance is what's called a dark Walgreens, right? So they have shut down, they're still paying rent. These assets will typically trade for 100 to 150 basis points higher than a fully open and operational Walgreens would trade for. And it depends on the market. Sometimes it might be a little bit less, sometimes it might be more. It depends on where you are, but it's a pretty interesting opportunity for the right investor out there, because Walgreens likes to pick main and main right they are at the center of everything, typically at a high visibility, lighted intersection, which makes for a great investment. And so if you can get it at a discount, why not go for that? Right? Because the chances of Now, here's the thing, Walgreens could file for bankruptcy, and then you're going to have to deal with something right at that point. But the chances of that happening are relatively slim if you're going to start dealing with companies that are doing that, especially if they're not national, like a national tenant, like Walgreens, you can go and listen to all sorts of private equity podcasts and news articles talking about the health of the company, which will certainly help you get a little more comfortable with that investment, if it's right for you or not. But I like those opportunities, because, again, if we're talking 100 to 150 basis points, to put that in perspective, if a normal Walgreens goes for a 6% cap rate, then these would go for a seven to seven and a half percent cap rate, right? So 100 to 150 basis points higher, which means that you might, you know, be able to get closer to to breaking even today with where the interest rates are if you can refinance later on, you know, kudos to you. You're going to have a cash flowing opportunity. But if and when you have to backfill it with another tenant, you've got a highly desirable location. You've got a building that is pretty well suited for many different types of uses, right? Everything from another retailer, a CVS to a gym, right? Or maybe even a small church, right? There's, there's so many different things that you could do with those buildings, because at the end of the day, they're basically just an air conditioned warehouse. Like next time you walk into a Walgreens, look up, look at all the walls, it's basically all it is is an air conditioned warehouse. So it's a it's a pretty interesting opportunity. Of course, it does come with its risk, right? Cap rates are reflective of risk. So if they're a little bit higher, it's because there's probably a little bit of risk, right? I mean, everybody wants to get a 9% cap rate deal, until you start looking at why it's a 9% cap rate deal, because I promise you that owner would sell it for less a lower cap rate, which means a higher purchase price if they were able to achieve that, right? So the lease is valid, they're still paying. The term you're looking for is Shadow space. They're going dark. One user saying most retail leases have specific clauses that state the tenant needs to be operating. A dark tenant is never good for a plaza. However, most big box retailers have dark clauses that allow them to stop operating or even vacate the space while still paying rent and keeping the lease active. If you're looking at single tenant deals, not the biggest deal in the world. But let's say that you're buying a shopping center, right? Well, if it's a Kroger, let's just use Kroger as an example. If it's a Kroger anchored shopping center, and Kroger goes dark, every other tenant in there that leased those spaces that was relying on the traffic generated by the Kroger, they're going to be pretty upset. And typically, what those businesses will do is that they will put a clause in their lease that says, hey, if Kroger ever goes dark, which is rare, but it does happen. If Kroger ever goes dark, our rent is cut in half, right? I've seen that plenty of times in leases, or we don't have to pay, or you have 12 months to backfill this before we can terminate our lease too, and that can put a landlord into a pretty interesting spot. So going dark isn't always a good thing. Typically, it's a bad thing, especially when you have a multi tenant situation where people are depending on the traffic generated by those retailers. But you all know, I'm an opportunist. I love finding deals where we can create value and create the opportunity. And I have a feeling, considering that it's 2025 think about what was going on five years ago, which is the average, probably median, commercial real estate loan term is five years. It was January of 2020. We were heading into the pandemic. Like interest rates were relatively low,
so they're not going to be able to refinance. A lot of these deals can't refinance into something different. Some of these tenants aren't doing as well. So there's going to be a lot of these kinds of opportunities popping up. So I would recommend diving into dark commercial real estate and seeing if there might be an opportunity in your local market to take advantage of some of these opportunities. This next Reddit thread is, what is a good strategy for dark triple net commercial properties issues are saying, I see that some absolute Triple Net Properties are listed with a great cap rate, large discount, like I was saying, because the corporate entity, such as a Rite Aid, is not actively occupying the building, and it's listed as dark. My understanding is that this could be a great way to enter into a commercial property at a discount if it's in a high traffic location, with potential to release it to another commercial tenant on a triple net lease. Figured if I'm going to do this, I can make it an aggressive offer, and the best way to ride out any gap in rent is to pay cash up front. Refinancing could come later with a new tenant, if you were able to pay cash out upfront, so wait until you get a new tenant and sign a lease. That is a great way to do it. Right? You can typically get a Walgreens anywhere from, I'd say, three to $5 million so if you think about it, if you're able to pay cash for that, but you're getting a discount, and then you go out, you find a tenant, you refinance it based on the cap rate that that new tenant is bringing you in, then you're good to go. Right now, going dark doesn't necessarily mean it's vacant, right? You may not necessarily be able to just go out and release it to somebody else, because that tenant is still there, they're going to want a pound of flesh to get out of that lease if you want them to move on. Right? I had a student in our mastermind call last night ask, you know, what does it look like if I just go out and release it somebody else? Could I get this tenant, you know, who has a 10 year remaining lease to buy out of their lease, right? Will they give me three years or five years or seven years to buy out? And more often than not, they probably won't want to buy out, right? Because if they're paying five years of advanced rent today, that's a lot of money, and all they're doing is getting, you know, bringing a future obligation to the forefront today. Right? They're creating a future problem today. So more often than not, if a company is shutting down a lot of its stores, it's because it's pulling back its cash and it's trying to get into a better cash position to then go redeploy in more strategic areas. So that's definitely one thing to keep in mind when it comes to financing dark commercial properties. There are lenders out there that are fine with these, right? It's going to depend on your balance sheet, your global cash flow, but if you're able to get them comfortable with it, and it's a good long term lease, I mean, you know, we've, I've done dark deals for tenants or for buyers all over the place, and they're great opportunities, because one you're going to cash flow it, right? They're probably going to shut down. So you can go ahead and start planning years in advance for what you would like to do with that space next, right? There's a lot of interesting things that kind of come out of these opportunities, right? It's, it's, they're relatively rare, right? This next right, that is saying, dark retail, what if they simply stop paying rent? What if you find a new tenant before their lease ends? Well, this, this user is saying landlords recourse is they sue the tenant. It's pretty straightforward, but obviously it only makes sense to do, so if there's something to be gained. Often a mom and pop goes dark, there's not a lot of upside to suing them as for releasing always work out a recapture deal before introducing a new tenant. Once the new tenant is involved, a lot of leverage goes out the window. So let's, let's break that down a little bit. Yes, you have personal guarantees or corporate guarantees, just because you have something like that doesn't necessarily mean that it's worth getting getting an attorney involved to fight over this. And I have learned the hard way over the years that if you have to get attorneys involved, everybody loses, right? Unfortunately, I had a tenant. I mean, this is this is crazy. I had a tenant sue me because they stopped paying rent. I know you're probably sitting there thinking, What in the world would they sue you for? And that's what we thought for the entire two years that we had to fight them. But they just kept coming after us, and they finally got to a point where they settled, we both walked away with nothing except for our own attorney's fees, which was absurd. I mean, I think I spent probably $100,000 in attorney's fees. They had to have spent over 150 I mean, they were just they were going crazy, and they gained nothing out of it. But I still had to protect myself. Yeah, right. And so that was just a $100,000 loss on that property. Fortunately, it was a very profitable deal. We ended up selling it and doing just fine, but that's $100,000 it could have been in my pocket if this person hadn't sued me. And obviously this would be a little bit different, because you'd be the landlord suing the tenant. But more often than not, it's just not worth it. It's really not like you're gonna you're gonna sleep better at night knowing you just let them out of the lease, or they gave a three month buyout, maybe something small, so that you could just go find a new tenant and move on, because you're not going to gain anything from it. If a mom and pop shop goes goes dark, even if you have personal guarantees, a lawsuit is only as good as what you can actually collect on it, right? So that's one thing to think about and consider when you are signing leases with new tenants, right? What is their actual financial standing if they stop paying me rent? And I've spent all this money on build out, I've spent all this money on commissions. Is there something that I can get from them if they just stop paying rent and move out and I have to sue them? Right? If the answer is no, then you have your answer right there as to how you should handle getting an attorney involved. No, let them out of the lease, negotiate whatever payment plan they're willing to work out and move on. You know, I've, I've, I've been on. I've done both, right? I've gone after tenants that owed me a lot of rent, and I've let others off the hook. And I'll tell you that my my general Mo is to just let them off the hook, because it's just not worth it, and you got to get better at doing your due diligence on businesses on the front end and building relationships with them so that they don't, you know, just see you as some nebulous, you know, mailbox that collects a check, right? The other thing that they said, As for releasing, always work out a recapture deal before introducing a new tenant. So if you have a tenant that has gone dark, you're going to want to negotiate with that dark tenant as to what their buyout will be if you find a new tenant first, right? Because what they're saying is, if you go out and you find a new tenant, and the dark tenant knows that, and you're itching to get them in, you have no leverage to negotiate with the dark tenant, because they're going to go they're going to go, Well, you've got a tenant in place. Why don't you just let us out? Right? Whereas you may be able to negotiate three months, six months, 12 months of a buyout that will at least cover your commissions, your costs of getting this new tenant in and hopefully they don't go dark. So I figured that would be a fun discussion for us to have as we are kicking off this week's office hours. Let's jump into yells questions. See what you guys have that ramen guy is saying, I live in Gallatin. Do you need any photo or video work? Ramen guy, appreciate it. I've got a lot of video and photo equipment. I've got a camera here. I've got a camera over there. We've got a bunch of drones. We've got a bunch of DJI Osmo threes, and then I've got a guy that's got a whole camera crew, so we don't but I appreciate it, man. Thank you for reaching out. Alex is saying, What's up, brother, I run a residential and commercial real estate team in Northwest Indiana. I also own 10 multifamily doors and set a goal for my girl commercial property this year. I would imagine girl probably means first commercial property this year. He's saying, I've got an opportunity to purchase my first multi tenant commercial space, a Class A class building and location for our area. Sellers open to seller financing, trying to figure out how to structure it. Well, that's awesome, man, yeah, Alex, congrats on on working out that deal. I love seller financing. It's a great way to structure a deal, because you don't have to worry about banks, you don't have to worry about qualifying for loans, you don't have to worry about going through committee and going through the credit checks and all of that fun stuff. And it's typically a big benefit to the to the sellers, because they get to collect monthly cash flow, right? I've got a deal that I sold last year. It was a pretty good deal. I ended up carrying a $475,000 note at 7% interest for the next five years, right? So I also got, I don't know, 25 or $50,000 over my asking price, because that was kind of like my points that I was charging in order to do that loan. And it's a nice deal. I don't have to worry about it. I'm getting a 7% cash on cash return on my on the loan, and if they default, I get to take it back. You know, they're investing a lot of money into the property. They're doing something completely new there. So I like those opportunities. So yeah, man, keep us in the loop with how you get how you get it figured out. Ted is saying, Thank you for all you do for us. Happy to do it, Ted. I love doing these. These are a lot of fun. I. I'm looking at a $3.3 million deal at a 7.8 cap noi of 261,000
What, in your experience, what would a loan structure look like? Thank you in advance. So Ted, traditionally, it depends on the specific lender you're going to go to, what kind of capital you're going to right? If you're going to like a private, private lender gonna be totally different. Let's just say you're working with a community bank. You're probably gonna be somewhere around 7075 maybe 80% of the loan to cost, right? So out of that 3.3 million, just multiply it by 7075 80% I would say probably 75% right? They'll give you probably a five year term. You're probably going to be somewhere around seven to seven and a half percent interest today, just depending on, you know, your personal credit, your relationship with the bank, you know what they're looking to get on their deals, and probably a 20 year amortization. Yeah. So, I mean, you know, I know that that's super high level, but those are typically the terms that people want to see. You know, they may have some bad boy carve outs, which, if you're not familiar with, a bad boy carve out is basically a bad actor, right? If you go out and you, you know, get a DUI, or you commit a crime, or whatever they can call the note, things like that. Tory is saying, hey. Man, new to your channel. I'm looking to transition from wholesaling residential properties to commercial. Welcome to the channel. Tori, what are your tips on where I should start? And simple steps for me to get into this space. Tori, the best thing you can do, man, get in with any commercial real estate networking groups that you can that are in your area, right? Go meet everybody in the industry. No matter where you live, the commercial real estate sector is relatively small. It just it's always going to be so I would get out and go to the CCIM events, go to the Urban Land Institute events, go to your local real estate investor events. Meet everybody that is doing commercial real estate in that market, and start building your network. From there, what I have found is that commercial real estate is not about what you know, it's about who you know. So your wholesaling background is certainly going to be beneficial to you as you are getting started in the space, knowing the right people is going to be far more beneficial. So I'd get out start building those relationships, and then from there, you'll find a foot in the door, right? Either you'll find a broker that says, hey, I'll bring you on as a junior. You know, you go hunt some deals for us, and you know, we'll give you a cut of them. You'll find a developer that may say, hey, we want you to come work in acquisitions. There's all sorts of different opportunities there. Cesar is saying, Tyler, good morning. Good morning. Cesar, what conditions or negotiations do you normally see that enables a tenant to renew their lease? Thank you for what you do. Happy to do it. I mean in terms of like conditions or negotiations. I mean it's to me, it's relatively straightforward, like, I prefer tenants that release or renew their leases, because it makes it easier on me, right? Like, I know that I'm not going to have any vacancy. I'm probably not going to have to pay as much in commissions. I'm probably not going to have to pay for a whole new tenant improvement package. Makes it easier on everybody. So as long as we can have a reasonable discussion around what the new rent is going to be, then I just renew, you know, I mean, we're pretty simple with it. You know, if it's a good tenant and they've been paying on time, no problems, even if they're a little bit under market rent. I'll just say, hey, let's just keep going up at 3% per year. You know what I have found over the years is that it is not like when I first got started in commercial real estate. It's a let's make let's squeeze the value out of everything, right? Let's squeeze blood out of every turn up. If I can get $500 more a month in rent here, let's do it. And now I'm kind of on the opposite side of that. I'm like, You know what? I don't need the extra $500 a month. I've got a good tenant that pays me rent, that never has any problems, that takes care of their space and treats the building nicely. Whoops. There's no telling what kind of what kind of other tenant I would find, right? You never know. The next tenant might just stop paying rent three months in, or they might throw their cigarette butts in the parking lot, like stuff like that. Just bothers me. So that's kind of how I approach it. Is just an honest discussion with them. Hey guys, and we like having you here, here's here's your proposal, right? We'll typically send a proposal open up that door as early as possible. Padre is saying, Hey, Tyler, thanks for the responses to the YouTube comments I made. I asked what you would do with the Royal Caribbean International's 160,000 square foot facility in Springfield, Oregon. Yeah, absolutely. I think. I mean, it's an interesting building. I. I, you know, I didn't look into the purchase price or anything like that, so I don't know exactly what it would cost for you to go about doing that, but, you know, 160,000 feet, you can do a lot of things with that, right, depending on how the property the building is set up, you may be able to add some loading docks in the back, throw up some, some demising walls and do some small, you know, 16, 10,000 square foot spaces, right, that you could easily lease. Now, you've, you've very well diversified your rental income on that property. You've probably increased your price per square foot because you're going for smaller spaces. There's so many different, different opportunities there. Padres saying is hemp Crete, hemp lime construction, something that you would consider possibly, I mean, I'm not opposed to any type of construction. I don't know much about hemp Crete myself. I don't know if it's more expensive, less expensive, or really what the benefits are. Let's pull this up. All right. So according to Google, hemp Crete is basically a bio composite material made from hemp and lime. So it's like concrete that has hemp in it to actually hold the structure together, right? So those fibers will will keep the concrete from cracking, typically, like whenever you see concrete with giant cracks in it. It's because they didn't do the rebar properly, which is kind of the fiber, so to speak, to hold the concrete actually together. Let's see. It's sustainable, yeah. I mean, anything made from hemp is sustainable, healthy. It's non toxic, anti fungal, anti pest, fire resistant. It has an insulation factor, and it's flexible in its use. Yeah. I mean, look, as long as it's an affordable product, I don't see why not, you probably qualify for all sorts of green credits if you wanted to take that route. So, yeah, definitely look into it, see what the costs are. Tori said, Thank you absolutely. Tory, happy to do it, man, we rely on questions. Today, there's 48 of y'all in here. We've only had like seven questions. I love this one from Victor. He's saying any contract clauses that saved your ass? Yeah, this is probably not the direction that you were thinking that I was gonna go with this. I've got a deal with a partner where he owns the majority of the deal, because he brought the majority of the capital, and I have a minority stick, and he decided that he didn't want to pay for his share of some of the expenses that we had, which meant either, you know, we get into a lawsuit with whoever is trying to collect on those expenses, or we pay them. He wouldn't pay them. So I had to, I had to pay for everything, right? I mean, we're talking six figures in expenses here. And fortunately, in my operating agreement, we have a clause that states that if a if a member does not contribute during a capital call, they lose 100% of their voting rights until they're caught up, right? And so I have full control of the deal now, which saves me, right? It makes sure that I can, I can protect my investment. It also has in there that I earn interest on that money. So with the way that it's set up right now, I'm earning about 13% interest per year on my six figure investment. Not a bad return, actually. So it's kind of hard to argue against that. It's like, Man, I don't know how many other deals I could find where I could just very easily make 13% of my money. So I would say having the right operating agreement is unbelievably important when you're getting into doing deals with partners. Because if I didn't have all of that, then I would have had to have come out of pocket for that cash just to prevent us from being sued, and I wouldn't have any rights or recourse within our company to be able to handle it. So that clause definitely saved my ass. So it was I'm very grateful that we spend the time spend the money on attorneys to put the proper operating agreements together, because you never know when the never know when it's going to come back in and haunt you or help you. For sure, looks like we're out of questions, guys. If nobody else has any questions, we'll just call it a day. Y'all stay tuned. We've got a lot of new content coming out here pretty soon, with regards to the self storage facilities that we're doing, gonna be a lot of fun running you guys through those and documenting that process. We've got the hotel that we'll be delivering later this spring, early summer, which I'm really excited about. Stay tuned. Maybe we'll have to throw a big, big party here in. Nashville for the grand opening, which would be a lot of fun. And other than that, I'll see you guys next Tuesday. Y'all take care. This
episode of the commercial real estate investor podcast is brought to you by my cre accelerator mastermind, where you'll get access to my step by step investment blueprint, essentially a library of resources on how to invest in commercial real estate. You'll get connected to a supportive community of other commercial real estate investors that are doing projects just like you. You'll get personalized coaching and feedback from me every step of the way. Go to www.crecentral.com to learn more you
Transcribed by https://otter.ai
Join me in this week's Office Hours as we dive into the unique investment opportunities and challenges of dark and vacant commercial real estate. We'll discuss scenarios like tenants going 'dark' (still paying rent but ceasing operations) and how these situations can impact neighboring tenants, property value, and lease agreements. I'll also cover strategies for investing in discounted dark NNN properties, how to evaluate their potential, and key considerations when re-leasing the space.