What would you do with this tenant? - Posted by Bo

Real Estate Investing Office
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Posted by M.S. on June 05, 2006 at 23:17:34:

I would fire the tenant. It’s your building and you don’t want to be stuck with this type of situation for the next 5 years…

Do business with people you WANT to do business with you. That’s why you’re doing this in the first place, right? Well besides the little moolah factor :slight_smile:

Seriously - I’ve always found it’s much better to fire a bad employee, tenant, vendor, etc. than drag it out for years. I know there are costs associated with re-leasing the space…but I guess you have to weigh that out.

Just my 2 cents. Good luck - if you decide to follow my advice there’s only 4 months to freedom!

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What would you do with this tenant? - Posted by Bo

Posted by Bo on June 01, 2006 at 16:34:59:

I have a small commercial office building I developed (used to be a store). 5000sf, 2 floors, in Wisconsin on a main road, in a rapidly redeveloping area.

I paid 150,000$ for the property, spent 200,000$ gutting/developing it. Turned out great, rented the entire building to a tenant who started a real estate agency. Within 6 months he had 20 plus agents, a loan company, etc. Basically, he “seems” to be doing well.

Rent is 3300$ total on a triple net. Cap rate works out to about 10%. Properties here sell for about 9-10% caps, but the area is rapidly improving, and so are property values.

The plan was to hold the building for 5-10 years, then sell. The tenant is at the end of a 2 year lease, and wants to buy the building. We told him it would eventually be for sale but not yet. I was very straight forward, and explained to the tenant that my investment pays off in the long term, and I have no desire to sell now. When I intend to sell, I will be happy to talk to him. Well, ever since then he has been very “unpleasant.” Went to pick up the rent, he “didn’t have it yet” and will “call when its ready - in a couple of weeks…” (!) Also got very irate that the airconditioning went out for 1 day (We called to repair the moment he mentioned it. Also, per the contract HE IS RESPONSIBLE FOR ALL REPAIRS after 12 month)… He also complained that taxes went up (he did significant improvements - so it was reassesed - hardly my fault). He wants me to start paying the taxes…

I am getting an unpleasant feeling about this situation. His lease expires in 4 months. There are HUGE back end costs if he doesn’t renew. Per the contract he has to UNDO all of his improvements (30-40,000k$), and of course he loses the value of his improvements. Basically, he has a lot to lose if he doesn’t renew.

On the flip side, the area is doing well, but it may take me a while to re-lease. Thats the risk on my side.

So how does one play their cards. I want to be pleasant, but don’t appreciate being mistreated. Part of me wants to decline ANY renewal (it is my right, there is NO OPTION TO RENEW in the contract). Part of me wants to retain a tenant that has, in the past, been nice and paid on time.

I understand he wants to own the building…but so do I. And as far as thats concerned - its not negotiable…

How would you guys deal with this?

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Re: What would you do with this tenant? - Posted by eh

Posted by eh on June 07, 2006 at 14:26:17:

Certainly, part of it may be the re-negotiation process which brings out the gamesmanship from both sides. Who is to say the tenant isn’t doing his own cost-benefit analysis weighing the buy vs. own option. Or that competitive rents dictate a better deal for him in spite of his invested lease improvements to the site.

I get a sense of a lot of cross-currents from your email. You may sell, you want to hold 5 - 10 years, you actually may never want to sell. If I were a tenant making a serious long-term lease decision, this type of vacillation would certainly erode some trust in the other party. But that’s not my point.

If you really want to sell in the future, perhaps you can offer an option with the lease renewal that would be to both of your advantage.

Another option. I think Ray posted something awhile back about the fact that everything is for sale … at a price. So what was your intended IRR, and if you did sell now, what would he have to pay to meet that IRR? If the cost is so ridiculously high, maybe he’ll get it and stop asking. But if you do this, make sure you ask him to offer the first price.

If you absolutely will not sell for any price now or unlikely to even in the next few years, I would make it very clear to the tenant that I had mis-spoken and after further thought, I will definitely not sell the place at all. That way, if he renews his lease with you, he doesn’t smolder in resentment at any mixed signals he got.