Please share your thoughts. I feel this is a little fishy. Im new!

Please share your thoughts. I feel this is a little fishy. Im new!

Logan, UT · Member since 2014 · 2 posts · 1 vote

So I've been wanting to get into commercial real estate and finally found a good deal on a office building and it was going to have two tenants leasing from me. Everything has been going good with it and about two weeks away from the due diligence deadline. Heres my worry though. At first lets say the tenants names were Tenant 1 and Tenant 2. We set up the contract for Tenant 1 and Tenant 2. Anyways today I come to find out that not only on the investment analysis did a name change but also on the lease agreements. Now its not Tenant 1 and Tenant 2 but now there is Tenant 1 and a new Tenant which we'll just call Tenant 3. Tenant 3 is a name that had not been discussed with me at all from any point in this process and my banker has told me that last time he looked at Tenant 3's financials they are not very good and this Tenant 3 is partner with Tenant 1 and they're trying to Sub lease to the original Tenant 2. I don't know if that makes sense but I called the realtor and said well if we keep going along with this we need to re arrange the contract so the names are Tenant 1 and Tenant 3 but he says we don't need to do this. My banker seems very concerned now. I just feel like this realtor and the seller are trying to slide something past me. Basically if Tenant 3 left during their lease according to their previous financials which I have yet to see there is nothing you could go after. I right now just feel like they are trying to change too many things on me last minute. Hope this makes sense and hope I can get some help. Probably going to back out of this deal and look for a new one as the contract stated it was between Tenant 1 and Tenant 2 not 1 & 3.

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  • Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    12y

    @Chris Olsen welcome to the site

  • Property Manager · Santa Rosa, CA · Member since 2014 · 56 posts · 16 votes
    12y

    I dont know much about commercial leasing, but i would want the tennant that is to occupy the space to be named on the lease. Either having tennant 2 as the primary or co-signing on tenant 3s lease. How long has tennant 2 occupied the space in a sub-lease? It may not be an issue if they have a history of timely full payments at a market rate! Welcome and keep us posted on how it shakes out

  • Real Estate Agent · West Boylston, MA · Member since 2014 · 47 posts · 13 votes
    12y

    It really depends on how each of the tenant leases are written. It's an important distinction if Tenant 3 is subleasing TO Tenant 2 or subleasing FROM Tenant 2. Who holds the master lease? Does Tenant 1 have the Right of First Offer if any adjacent space becomes available for lease? When does Tenant 2's lease terminate? Do they have an Early Termination Right if the property transfers title?

    If either Tenant 1 or Tenant 2 have the right to sublease, you would want to understand the approval process. If either Tenant 1 or Tenant 2 are Guarantors on the sublease with Tenant 3, you have some protection because you can go after either of them if Tenant 3 defaults. Have you reviewed Tenant 3's sublease agreement to find out what the terms of default are and what rights you have if they default.

    If it's too complicated a situation and you don't have someone representing you or you're not willing to pay for representation I would just walk away if you can.

  • Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    12y

    @Chris Olsen - from the info you provided, it does not sound like you've got two solid tenants who will be around for a long time. The gut-check question I always ask when looking at a multifamily property is how would I feel if all of the tenants moved out the day I buy it. In most cases, I buy distressed and rehab, so this would be great for me. If I were focused on buying stabilized properties (which I'll assume this office building is) then I would not want to buy something that had bad/risky tenants in it without getting a reasonable discount to account for the extra hassle.

    Bottom line - how difficult would it be to re-let the property if tenants 1, 2 and 3 all turn out to be problems? Remember, there is always a reason for the owner to sell. In this case, it could be not wanting to deal with the tenant situation or wanting to get out before it blows up (it could very easily be something else too!).

  • Logan, UT · Member since 2014 · 2 posts · 1 vote
    12y

    I'll be checking out how the sub leasing works today. Tenant 1 is a construction company tenant 2 is a real estate company and tenant three is a realtor. The construction company owns the building and supposedly they want to sell because they need cash for a new development.

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