Making an offer for a commercial retail unit contingent upon finding a tenant

[David Switzer]

Hey all!

New to the forum and happy to be here!  I currently own a commercial condo, and when I purchased it there was already a tenant in place with a long term lease.

I am looking at a new commercial space that is built for retail, however it does not have a tenant.  My agent has told me she has received a lot of rental interest, but I can't really be sure.

Can I make an offer contingent upon finding a tenant to lease the space within X amount of time?  Is this ever done?


Thanks so much,

David

[Chris Mason]

"Can I make an offer contingent upon finding a tenant to lease the space within X amount of time? Is this ever done?"

That is 100% commonly done, yes. You can make closing contingent upon finding a tenant that you approve.

The fact that they are being transparent about this is actually a really good thing. I've seen cases where they  try to throw a "straw tenant" in there just for the purposes of finding a buyer, and so that buyer can get good financing. I only know about the times where this was found out prior to closing, obviously I have no way to know about the times this shady behavior wasn't found out.

Since you get a vote in who this tenant is, and it's retail, PSA that commercial lenders (especially the ones offering the best terms...) are starting to vet deals by how 'recession proof' the tenants are, even if they are currently paying on time. An example of not recession resilient would be a karate studio or hair salon, things consumers cut back on when times are tough (and now you, the property owner, aren't getting rent, and thus might have challenges making your mortgage payment). Two classic examples of very recession resilient would be the 2 things certain in life: death and taxes. So an estate planning lawyer and a CPA. Those are the two extremes, obviously most businesses are somewhere in between. 

[David Switzer]

Hey thanks so much for the great insight Chris!

[Jameson Sullivan]

I would say that you "can" submit an offer with anything you want in it but depending on how much activity the property has, your offer might look worse than the next offer. Generally speaking, the developers I work for negotiate feasibility timelines and execute a lease with their tenant during that period and the lease is contingent upon them closing. 

Chris is right, the creditworthiness of the tenant makes a big difference in the debt offering, or the ability to get debt at all if you aren't a very strong borrower. 

[Jeffrey Abraham]

1. Offer Contingency Based on Lease

Yes, you can make an offer contingent upon finding a tenant. This type of contingency is known as a "lease-up contingency" and is sometimes used in commercial real estate transactions. Here's how you can structure it:

• Contingency Clause: Include a clause in your offer that states the purchase is contingent upon securing a lease agreement with a tenant within a specified period.
• Time Frame: Define the time period within which you need to find a tenant. This could be 30, 60, or 90 days, depending on the market and your comfort level.
• Rental Terms: Specify any minimum terms for the lease, such as rental rate, lease duration, and tenant creditworthiness.

2. Due Diligence Period

In addition to the lease-up contingency, you can negotiate an extended due diligence period. During this time, you can market the property to potential tenants and secure a lease before the purchase becomes final.

Steps to Implement a Lease-Up Contingency

1. Consult with Your Agent and Attorney
   • Discuss your plan with your real estate agent and a real estate attorney to ensure the contingency clause is correctly drafted and legally sound.
   • Your attorney can help you draft a contingency clause that protects your interests.