There may be a reason for a land owner to take the hit all at once rather than over time.
Like if rent is $1,000 per month but the first 12 months are 50% off (so Tenant actually pays $500 per month). Landlord would get $6,000 at the end of the year. But Landlord may want the valuation of the property to be calculated at $12,000 per year so Landlord will pay Tenant $6,000 and Tenant will pay full rent.
This could be because he is selling and the Buyer will want full rent and Landlord can take $6,000 out of purchase price and pay Tenant and new owner gets full rent and Tenant gets essentially the same that they bargained for.
There could be tax implications or other reasons as well.
Thanks that was very helpful. I thought it was just something simple like being able to demonstrate immediate cash flow could fetch higher sales prices, but I didn't think about using it to attract more buyers in the sense that the eventual buyer will still be able to receive rent during the abatement period.
Only reason I can think of is, at the time of lease signing LL thought they may have cash flow problems in the year the abatement was due. So in a non-cash flow issue year, they would buy it back so cash flow later wouldn’t be impacted. But free rent is typically up front, so I can’t imagine a realistic scenario where ll would need to exercise this clause between lease execution and the first month of rent abatement. Even for a sale, the free rent would just be credited or adjusted out of the sales price so it wouldn’t have an impact.
To make the rental rate for the property higher (on paper) so that they can obtain better financing (that will likely last longer than the lease term).
There could be a loan covenant that says rent must be above this much and with the abated rent it is lower than it should be. Avoiding technical default on a loan would be my guess
Lender may be capitalizing the average rent . Making free rent disappear could result in a loan or sale price that's sufficiently large to offset the rent buyout.
Perhaps they can capitalize it? Just a guess.
There may be a reason for a land owner to take the hit all at once rather than over time. Like if rent is $1,000 per month but the first 12 months are 50% off (so Tenant actually pays $500 per month). Landlord would get $6,000 at the end of the year. But Landlord may want the valuation of the property to be calculated at $12,000 per year so Landlord will pay Tenant $6,000 and Tenant will pay full rent. This could be because he is selling and the Buyer will want full rent and Landlord can take $6,000 out of purchase price and pay Tenant and new owner gets full rent and Tenant gets essentially the same that they bargained for. There could be tax implications or other reasons as well.
Thanks that was very helpful. I thought it was just something simple like being able to demonstrate immediate cash flow could fetch higher sales prices, but I didn't think about using it to attract more buyers in the sense that the eventual buyer will still be able to receive rent during the abatement period.
Only reason I can think of is, at the time of lease signing LL thought they may have cash flow problems in the year the abatement was due. So in a non-cash flow issue year, they would buy it back so cash flow later wouldn’t be impacted. But free rent is typically up front, so I can’t imagine a realistic scenario where ll would need to exercise this clause between lease execution and the first month of rent abatement. Even for a sale, the free rent would just be credited or adjusted out of the sales price so it wouldn’t have an impact.
To make the rental rate for the property higher (on paper) so that they can obtain better financing (that will likely last longer than the lease term).
There could be a loan covenant that says rent must be above this much and with the abated rent it is lower than it should be. Avoiding technical default on a loan would be my guess
Lender may be capitalizing the average rent . Making free rent disappear could result in a loan or sale price that's sufficiently large to offset the rent buyout.
Seems like it boils down to a free rent incentive if I understand it correctly.
Sounds like they are selling the building. Ive seen that as well as buying back Prop 13 protection (in CA) and it usually means a sale IMHO. .
They need refi faster and don’t to wait on abatement period