Tenant wants high speed internet

Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes

Have a great national tenant. Pays bills on time and takes care of commercial building. They spoke with AT&T and will cost $50k to run service to building. They are willing to pay it but wants added to rent. If we front the 50k and spread out over 3 yr lease, is it right/fair to charge an interest on top of that? Thanks for all replies

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Justin Fox

Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes

10y

You're giving them a loan. Simply spreading out the loan principal out over 3 years doesn't make you any money (you'd lose in that scenario). I would keep doing 1 year leases and structure the 50k as a separate loan. Amortize it out for 10/15 year with a balloon, whatever, but I would keep it separate.

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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
10y
You're giving them a loan. Simply spreading out the loan principal out over 3 years doesn't make you any money (you'd lose in that scenario). I would keep doing 1 year leases and structure the 50k as a separate loan. Amortize it out for 10/15 year with a balloon, whatever, but I would keep it separate.
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
Tenant is John Deere. They don't need the loan. Assuming they are just negotiating. So I need to at some level, play their game. So not sure that would work, they want it part of the lease. Assuming to keep book keeping simple......
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
10y
A national chain like that, give it to them, get it in writing that if they default on the lease that they would still owe you for the install. also think of this, you didn't have it installed, they leave, it's now in your building as a plus for the next tenant. I wouldn't be greedy in that situation, they are doing you a favor in return.
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
Yeah, on your page there. Greedy and I'll lose them. They have a reputation and won't mess that up by not paying But not charge any interest on that money? Not sure I want to do that
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
10y
Ok, like i said, they are improving your building and willing to pay for it ( reimburse you for the expense ) they move out, what could you get from the next tenant for the added improvement ? how much can you increase their rent when the lease is up in 3 years if they want to stay ? they didn't say you couldn't increase it then did they ?. this is just my opinion, i know chains go under at times, any tenant is a risk, but to me, that is one worth trying to keep.
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Account Closed
Greensboro, NC · Member since 2016 · 45 posts · 20 votes
10y
Mick Harvey Can you leverage this to execute a lease addendum, where you would recoup the $50k over the remaining lease term and provide yourself a decent return on your investment?
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
The lease is up as well; therefore wants it part of new lease
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Daniel Chang
Professional · Riverside, CA · Member since 2009 · 254 posts · 273 votes
10y
Yes this can be done. It's all in negotiations.
Just calculate the expected monthly payment of a "loan" amortized over 3 years at your specified interest rate. Ex. 8% interest on $50K over 36 months is $1567/month. Add this number to whatever rent you were going to propose before considering the $50K improvement and make it the new base rent.
Now depending how much your original rent is, this may or may not be acceptable. For instance if you are collecting $20K/month in rent, then this may be do-able. But if your rent is $3000/month, then I highly doubt they will accept a 50% increase in rent.
In reality though, I don't think you are seeing the big picture. You have a national credit tenant willing to pay you back for improvement to your property. If it were me, even if they don't give me "interest", I would jump at that in a heartbeat. Because it's an improvement to YOUR property that they are reimbursing for. That means you can raise rent for other tenants in the future. And when cash flow increases, so does the value of the property, probably moreso than any opportunity cost to the $50K.
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Damon DiPlacido
Real Estate Agent · Bala Cynwyd, PA · Member since 2016 · 67 posts · 29 votes
10y
As a starting position I would add interest, but as it's a national tenant, I would agree to remove the interest if they balked at it. No need to negotiate against yourself out of the gate, but certainly balance that with expectations based on the type of tenant you have.
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Dale Shin
Real Estate Agent · Los Angeles, CA · Member since 2014 · 80 posts · 20 votes
10y
This kind of thing could be considered a capital expenditure/improvement. Depending on what kind of lease you have, there may be a provision for how these kinds of expenses could be recaptured. For instance, I believe the AIR lease calls for capital improvements to be amortized over 12 years and the tenant to pay not more than 1/144 of the cost each month.
if this does not qualify as a capital expense/improvement, then maybe it could be added as a common area charge and billed through the reconciliation and get it back within a year, that is if the tenant is paying CAM.
But perhaps it would be best to start with the 3 year amort with interest and see how that flies!
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Originally posted by @Mick Harvey:

They spoke with AT&T and will cost $50k to run service to building.
"They" being the tenant. Call the local phone provider and ask about DSL service as the phone lines are already installed. This will be hispeed DSL and much cheaper IMO.
Secondly, you can off load the charges to the tenant and have no responsibility for equipment or service.
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Andre P.
Madison, WI · Member since 2016 · 53 posts · 23 votes
10y
Originally posted by @Jeff B.:

"They" being the tenant. Call the local phone provider and ask about DSL service as the phone lines are already installed. This will be hispeed DSL and much cheaper IMO.
Secondly, you can off load the charges to the tenant and have no responsibility for equipment or service.
No national chain of any type (or most business of any moderate size) wants to run their business off a DSL line, since every second of downtime can costs huge dollars they are probably looking for business class, fiber-based service potentially using a provider they already contract with as part of their IT services.
I'm in agreement with others here, add the 50k in monthly installments over the course of the lease and thank them for the improvement to your building.
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
For server class services, you will also need a UPS for all the networking + the devices.
Highly doubtful they want that level of service from a rural location, and DSL today runs several Mbps, more than enough for remote access VPN into a central site.
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
So common thought is to put in lease and charge interest. What kind of percent is reasonable or acceptable? I'll talk to CPA as well to see tax benefits. Good call
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Originally posted by @Andre P.:

No national chain of any type (or most business of any moderate size) wants to run their business off a DSL line, since every second of downtime can costs huge dollars they are probably looking for business class, fiber-based service potentially using a provider they already contract with as part of their IT services.
I'm in agreement with others here, add the 50k in monthly installments over the course of the lease and thank them for the improvement to your building.
When this tenant moves out, what residual cost remain to be passed on to the next tenant? Monthly charges for fiber-based connection can be expensive and a deal breaker for a tenant that only wants Email and Streaming Video - - -
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Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
10y
Don't assume national company employee needs massive bandwidth - - ask before you leap - - can you define ASSUME?
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
How long are you wanting to hold the property for?
If it's a a NNN lease the cap rate value is tied to the remaining term of the lease. For instance with a few years left on primary term to sell you might have a 9 cap as it's not able to usually get financed. The buyer would be betting on the tenant renewing an option or leaving. If you get a new long term lease for the primary term with rental increases your resale cap rate can be great. For example if you have a 15 year lease primary term with annual rent escalations versus blocked rent going up every 3 to 5 years it is more valuable. If 5 years goes by and you want to sell you still have 10 years left on the primary term which is easily financed in most cases for a buyer. With the corporate guarantee get the parent company and not a subsidiary on the lease.
Check around in the immediate area before starting negotiations on any alternative sites they could move to. Look at your current rent versus what is being offered in the market. If you have the best location and your rent is at or below market compared to current rates being offered then leverage is better. If research shows a bunch of alternative sites you may not want to rock the boat as much.
These national tenants although they do not tell landlords have alternative sites they have been researching way ahead of the lease coming due to have a backup plan if negotiations with the current owner does not work out.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
10y
Some tenants are also shortening the length of primary lease terms they will do now because of the upcoming FASB accounting changes and how they have to count leases on their books.
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
Good comments/thoughts Joel, no intentions on selling. Have owned over 50 years, family income. I will ask the questions on their needs and not exceed, as well as residual fees long term But still original question has not been answered, what percent interest to charge on the 50k. Or is there no reasonable, get what you can get thing?
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
10y
Mick,
you are getting answers in two different directions, some including myself are saying not to charge interest, some are saying you should. You are providing a loan if you want to charge them, what would a bank charge you ? why not charge the same, they wouldn't do much better if they got a loan for it, but spread it over the term of the lease, or make it longer with a clause saying if they do not renew the lease that the balance is due in full at the time they leave.
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Bill Hamilton
Denver, CO · Member since 2015 · 251 posts · 123 votes
10y
If the client wants to use AT&T why not call AT&T and see if they will finance the install/equipment over the 3 year term, then simply pass that charge along to the client. Or am I missing something? I have never managed a commercial property so........
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Mick Harvey
OP
Real Estate Investor · Napa, CA · Member since 2013 · 50 posts · 18 votes
10y
Great call Patrick, I hear both sides and not just for the cash, but seems fair to charge interest and bank rate is more than reasonable, I agree Bill, valid point, another good call to make to concrete the decision Thanks all. Wonderful comments
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Account Closed
Real Estate Broker · Krakow, małopolskie · Member since 2016 · 2 posts · 0 votes
10y
This may be a bit off-topic/irrelevant... but there's a chance that the tenant may prefer a loan with interest, or it might not make a difference. The lack of interest on a loan is taxable income to the tenant (the IRS sets a standard rate, and assesses accordingly). If their books are in good order (and I assume they are), and they are particularly diligent in their accounting practices, it may be to their advantage structure the loan with interest, in accordance with the IRS's imputed/market interest rate (see https://apps.irs.gov/app/picklist/list/federalRates.html ).
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Paul Falbo
Phoenix, AZ · Member since 2013 · 76 posts · 35 votes
10y
Are you negotiating directly with the decision maker, or through a broker? And, are you the decision maker for the property?
I would ask for 4-5 percent. Maybe even more if you're making more than that with your money. In a few situations like this, once you ask for interest on the loan, the tenant finds an alternative source of financing. The reason I would suggest 4-5 percent is banks are probably charging that, or a little more.
The reason I ask for who is negotiating on both sides is that if it's principal to principal, then negotiations and techniques become more critical. If broker to broker, then you have some wiggle room to adjust your proposal.
The key issues are how long they've been a tenant, is the location a prime location, comparative rents, and availability of other spaces in the market.
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Andre P.
Madison, WI · Member since 2016 · 53 posts · 23 votes
10y
As someone who works in IT and has, and currently does, manage these types of connections for businesses I can say there is no residual cost for the next tenant. That's why the install costs $50k, from that point on all it takes is someone to either turn the connection on/off from the provider. The current tenant will manage their use of the service until they don't need it anymore.
Think of it like any home-based internet, once the cable is to your house, there's no additional costs except for your service.
That option being available for the next business that moves in could be a huge selling point, since they don't have to spend the money to get it installed should they want it.
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