Why I Paid a Tenant $500K to Leave (and Made $1.5M Profit)
TL;DR
I bought a commercial property for $3.1M with a tenant on a COVID-era peppercorn rent. I paid that tenant $500,000 to relinquish their lease, then re-leased the premises to an international tenant on a 10-year deal at almost double the rent. Rent went from $125,000 to $390,000 a year, and the value went from $4M to $6M. I now hold offers around $6.4M.
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The short version
My analyst brought me a property in June. We bought it for $3.1M with a lease already in place. The tenant, a kids’ indoor playground, had restructured their rent during COVID down to a peppercorn level, and that low rent was dragging the whole price down. I could see the underlying value the building should have been demanding, so the job was to bring that out without taking on unnecessary risk.
Here is the thing. I went to the sitting tenant and offered them $500,000 to relinquish their lease, on terms that let me give three months’ notice any time over the next five years. They kept paying rent and covering my interest in the meantime, and they got to walk away with half a million dollars and no make-good bill. That is a win for them and a win for me. This is exactly the kind of move I break down in commercial property investing in Australia, where the goal is always a win-win-win, not a fight over rent.
With the property already valued at $4M against my $3.1M purchase, I had unrealised upside and no extra cash going in. Within three or four months an international tenant offered a 10-year lease at almost double the rent. We agreed a heads of agreement, formed the lease terms, then gave the outgoing tenant their $500,000 cheque. Knowing how to read those terms is its own skill, and I cover it in how to read a commercial lease.
The result: rent moved from $125,000 to $390,000 a year, the value moved from $4M to $6M, and I am selling now with offers around $6.4M. That is how you de-risk an opportunity and imbue genuine, life-changing upside into a single transaction. It is not difficult once you know the tools.
Where to go from here
Most people start with Cal’s Fortify Your Wealth series, a multi-part video series on the strategies he uses when the market shifts, with weekly videos on YouTube.
If you would rather talk it through, book a quick 15-minute intro call with the Investor Code team: book an intro call.
And for the full framework, that is the Commercial Property Mastery online course.
Frequently asked questions
Why would a landlord pay a tenant to leave?
Because a below-market lease can suppress the value of the whole property. Paying the tenant to relinquish their lease unlocks the right to re-lease at market rent, which can lift the capital value far beyond the payment made.
How did paying $500,000 create a $1.5M profit?
The $500,000 removed a peppercorn lease and let me re-lease at almost double the rent. Higher rent capitalised into a higher value, taking the asset from $4M to $6M, with offers now around $6.4M against a $3.1M purchase price.
What is a peppercorn rent in commercial property?
A peppercorn rent is a very low, nominal rent, often agreed in unusual circumstances such as COVID when landlords cut rents to keep tenants. It keeps income coming in but can mask the true market rental the property should command.
Was the property still generating income during the process?
Yes. The sitting tenant kept paying rent the entire time, which covered the mortgage interest. That meant income from day one and no cash going into the deal while the higher-rent upside was being unlocked.
How do you re-lease a commercial property at a higher rent?
Structure a deal with the outgoing tenant, market the premises for lease, agree commercial terms with an incoming tenant through a heads of agreement, then form the lease. Only then do you give notice to the outgoing tenant, so you are never without a signed replacement.