An industrial vacancy is investable when the buyer can identify credible tenants, deliver suitable space, and fund the entire period until collected rent supports operations and debt. A stabilized cap rate alone does not show the cost or risk of reaching that state.
Model readiness, marketing, negotiation, tenant work, approvals, free rent, collection, and stabilization as separate milestones. Include an executable slower case and alternative use. All figures below are hypothetical and do not state current Chicago leasing conditions.
Establish what is actually ready to lease
Inspect condition, loading, power, utilities, fire protection, roof, floor, office areas, access, and site use. A vacant unit may need work before it can be marketed credibly or occupied lawfully.
Identify the target tenant’s requirements and distinguish landlord work from tenant-specific improvements. A shell suitable for storage may not support manufacturing without substantial systems and approvals. The intended operation should guide inspection scopes.
For Chicago properties, use the official construction-code resources with qualified professionals to establish applicable work and occupancy requirements. A lease commencement date cannot be based solely on a contractor’s cosmetic completion date. Chicago Construction Codes
Record unresolved conditions. An advertised power capacity, shared access, or prior use should be verified before the investor promises delivery. A tenant lease signed on incorrect assumptions can create a liability rather than stabilization.
Research a practical tenant pool
Define tenant categories by operation, size, loading, power, location, and rent capacity. Ask brokers which actual users would consider the property and what alternatives they have.
Collect comparable leasing evidence with transaction date, term, structure, concessions, improvements, delivery condition, and known marketing period. Asking rent is useful context but does not establish achieved effective rent.
Identify rejection risks. Prospects may need a smaller unit, more power, different loading, a yard, or less office area. The investor should know whether a common objection can be fixed economically or narrows the market permanently.
STAG’s public risk disclosures discuss competition, tenant incentives, and re-leasing exposure. Use those categories to structure the local investigation, while relying on property-specific evidence for actual assumptions. STAG Industrial 2025 annual report
Build the schedule from cash milestones
Break time into acquisition and readiness, marketing, lease negotiation, design and approvals, construction, tenant installation, free rent, and cash collections. Some activities can overlap; others depend on a critical condition.
Do not treat lease execution as cash stabilization. The landlord may still owe improvements, pay commissions, carry the building, and wait through free rent. Loan tests or refinance requirements may depend on actual occupancy or collections.
Use monthly cash flow through the unstable period. Annual averages can conceal the month when equity is exhausted. Show when debt draws are available, when contractor deposits are due, and whether holdbacks require owner advances.
Include a realistic response if leasing takes longer. The plan might reduce rent, modify unit size, change the improvement package, or target another user. Each response changes capital and timing and should be modeled rather than improvised after cash runs low.
A hypothetical vacant-building model
Assume a 20,000-square-foot building costs $1.4 million. Acquisition costs are $50,000. Base-building readiness work is $150,000. The prospective lease provides $200,000 annual base rent after completion and concessions.
The base case assumes six months before tenant work begins, three months of tenant work, and three months of free rent. First cash base rent begins in month thirteen. The exact overlap is hypothetical; the schedule should reflect the actual delivery terms.
During the first twelve months, unrecovered property carrying costs average $7,000 monthly and debt service averages $9,000 monthly. Carry and debt total $192,000. Tenant improvements are $160,000, commissions are $60,000, and additional legal and leasing costs are $15,000.
| Illustrative use before cash rent | Amount |
|---|---|
| Purchase | $1,400,000 |
| Acquisition costs | $50,000 |
| Readiness work | $150,000 |
| Carry and debt before rent | $192,000 |
| Tenant improvements | $160,000 |
| Commissions | $60,000 |
| Legal and leasing | $15,000 |
| Total | $2,027,000 |
The $2.027 million is a gross pre-rent cash-use schedule, not an accounting basis or an unlevered yield denominator. It includes debt service. Separate interest and principal, show loan proceeds as a funding source, and reduce the debt balance for principal paid. Evaluate rent through the complete operating, capital, and financing cash flows; do not capitalize a basis that counts purchase cost and debt principal again. Additional contingency and reserves may still be needed.
Calculate effective rent and owner contribution
Compare proposed leases after free rent, improvements, commissions, landlord expenses, and timing. A higher face rent can produce lower owner cash if it requires a much larger capital package or longer delay.
For a hypothetical five-year lease at $200,000 annual face rent, three months of free rent reduces undiscounted base collections by $50,000. Deducting $160,000 of improvements and $60,000 of commissions leaves $730,000 of simplified net base collections over the term before other owner costs and time value.
That equals $146,000 annually on a simple average basis. It is not NOI, a discounted effective rent, or an IRR. The purpose is to prevent a $200,000 headline from being mistaken for owner economic contribution.
Compare a renewal or lower-capital tenant using the same method. A lower face-rent deal can be superior when it starts sooner and requires less spending. Tenant credit and residual utility still matter.
Stress delay and lower rent together
If first cash rent is delayed six additional months, the illustrative $16,000 monthly carry and debt adds $96,000. If required improvements also rise by $40,000, incremental exposure is $136,000 before further effects.
Now assume achieved rent is 10% lower. Annual base rent becomes $180,000, reducing stabilized cash flow and potentially loan proceeds or value. A delay can coincide with weaker rent because both reflect a soft market; test the combination.
Model a failed prospect after design spending. Determine which improvements remain useful, which deposits are recoverable, and how quickly marketing can restart. A signed letter of intent is not the same as a funded tenant ready to open.
Avoid treating the contingency as unlimited. Define the downside capital the investor can actually contribute and the point at which the strategy must change.
Align financing with lease-up
Review rate, amortization, interest reserve, term, extension rights, fees, recourse, draw conditions, leasing approval, reserves, and refinance requirements. A bridge maturity should not assume the fastest plausible leasing case.
A lender may withhold improvement or commission funds until conditions are satisfied. The investor must know whether it advances cash first. Present the funding schedule alongside project uses.
A filed AMB industrial lease includes possession, commencement, expense estimates, and capital-recovery mechanics. It illustrates why signed terms must connect to the delivery and cash schedule; its provisions are negotiated historical examples. Filed industrial lease
Build the takeout loan using supportable stabilized income, actual lease term remaining, market rate sensitivity, and capital obligations. Maximum loan-to-value is not guaranteed proceeds if income constraints bind.
Evaluate the tenant and delivery contract
Review financial capacity, deposits, guarantees, business plan, required approvals, and responsibility for equipment and installation. A tenant with attractive rent but inadequate funding may not complete its own work.
Counsel should define scope, specifications, responsibility, change orders, access, rent commencement, outside dates, remedies, and failure consequences. The landlord should not promise a utility or approval result it cannot control without pricing that risk.
Track milestones with evidence rather than optimistic verbal updates. A project manager should identify changes early enough to protect cash, lease rights, and loan deadlines.
Set measurable leasing decision gates
Before closing, define what evidence would cause the owner to revise asking rent, improve the space, divide it, or change target users. Use qualified inquiries, tours, proposals, repeated objections, and actual competitive transactions rather than an arbitrary deadline alone.
For example, several prospects rejecting the same loading constraint suggest a product problem, while strong tours followed by objections to total occupancy cost may indicate pricing or lease structure. The response should match the evidence. Lowering rent cannot fix an operation that physically does not fit, and expensive renovation may be unnecessary when the main issue is a rigid concession package.
Attach a cost and cash runway to each response. A subdivision strategy can widen demand but require design, systems, approvals, and additional management. A lower-rent lease can start sooner while reducing refinance proceeds. Updating those consequences before reserves are depleted helps the investor preserve options instead of accepting the first offer under funding pressure.
Include the final landlord work letter in the funding review; it can create obligations beyond the improvement allowance shown in the leasing spreadsheet.
Set a decision and monitoring plan
Before purchase, establish a complete capital budget, credible tenant pool, monthly funding schedule, and downside. During ownership, track inquiries, tours, proposals, objections, negotiations, approvals, spending, and available cash.
Update rent and timing assumptions when evidence changes. A lack of qualified inquiries after a defined marketing effort may indicate a pricing, product, or access problem. Continuing the original forecast unchanged does not preserve its credibility.
Proceed when the expected and credible downside cases fit available capital and acceptable returns. Reprice where the complete cost is higher than the seller’s stabilized presentation suggests. Decline when the investment depends on immediate rent or refinancing that the property cannot reasonably achieve.