Rental Property Investor · San Marino, CA · Member since 2011 · 398 posts · 144 votes
Hello Bper's
I recently acquired a retail building and I have a tenant who has trouble paying his rent. His rent is 6k a month and he is sometimes able 3000 in two separate payments. His business is somewhat seasonal and he is usually able to get current after a few months. The lease has a late payment penalty written in, however I don't think the previous owner collected as they were more concerned on just getting rent collected. Serving a 3 day notice and eviction wouldn't be my ideal scenario as who knows how long it will take to get another retail tenant back.
I was thinking of offering this tenant a line of credit for rent. Meaning that he can hold keep an overdue balance with me and I'll charge him interest [5-10%]. I was thinking about putting a cap on his ageing of one months, meaning that he can't fall more than one months behind on rent or he would default.
maybe a bad idea. Try to change the rent contract from $6k installment to 4x $1,5k each month, payable at 3rd, 10th, 17th and 24th of each month.
If he cannot supply your own business can be dangerous so no I wouldn't serve him a line of credit. Even seasonal business must be able to pay his rent all months in his calculations.
maybe a bad idea. Try to change the rent contract from $6k installment to 4x $1,5k each month, payable at 3rd, 10th, 17th and 24th of each month.
If he cannot supply your own business can be dangerous so no I wouldn't serve him a line of credit. Even seasonal business must be able to pay his rent all months in his calculations.
What type of tenant is it specifically?? Mom and pop,national tenant,local tenants with a few locations??
Type of business?? Restaurant,carpet,insurance,etc.
When was their lease originated?? 2005,2006,2007
You NEVER go buy actual retail leasing rates for income when purchasing.The reason is the income levels they are reporting have lease rates many times that were written at the height of the economy and everything was booming.These leases are now coming up for renewal or very close.
Now many of the tenants are leap frogging to better locations for the same per sq ft rate they are paying or are asking the landlord for rent reductions to stay.
So even when analyzing the income and tenants pay on time as soon as you purchase they might be moving.Sellers like to dump things like this on unsuspecting retail buyers.
It is fine if you base your purchase price not on what the current lease rate is but what rate at which they will stay and be able to pay and the seller will not tell you this.
You could alter your current lease with them to a base plus sales model for a certain period of time and then it reverts back to the old model.
What you really need to do is figure out what the lease rate is in today's market for that space and how much it would cost you to get them out and rent it to someone else.
Just like a lender if it is a temporary problem then work with them.If their books show otherwise and they are in trouble the writing is on the wall.Go ahead and get them out and get someone else in before the Holidays.
Thanks for your insight and advice. It's very helpful.
This is a mom and pop tenant, restaurant business, lease was entered in 2011 with renewals into 2015. I knew there were these issues with this tenant going into the acquisition and I underwrote to them accordingly. We also bought this property because of the adjoining parcels that we own and the potential future development opportunity we have in owning both parcels.
That being said, I do believe this is a temporary rather than permanent issue and I would initially prefer to try to work something out with the tenant, rather than try to get them out.
Regarding the % sales model, have you seen this work well with mom and pop tenants in a cash heavy business and self-proclaimed bookkeeping? Not sure if I want to jump in bed like this with my tenant yet!
Uwe's idea of allowing them to pay in installments is a good idea and is one that i'm considering.
How about my idea of extending a revolving credit line with a maximum aging period of 3 months? I know this is probably not commonly used but it gives my tenant enough leeway to run his business and let's me collect interest.
Try the installments and stay away from the credit line.
What type of restaurant is this??Eat in,dine out,delivery, or a mix??
Have you reviewed the restaurant owners books?? Do they use a hand written ledger or do they have a computer POS system that tracks everything??
I have extensive experience with this as I was in the restaurant industry for over 10 years before getting into commercial real estate.
By checking the books you can see sales patterns for the type of product they sale.You can see over the past few years if a majority of the sales are seasonal and then if that part of the year has already occurred.If the strong sales are still ahead of them in the coming months they can have a good chance of catching up.
If they have already had historically the strong sales months of the year then they are in really bad shape.
Also it's important to note their sales volume over the years versus new competition in the area.If they have a burger joint and within a 2 mile radius 4 more burger joints have opened up and sales are declining along with profit margins then they are in trouble.
Does your current tenant need all the space they have?? Maybe they scale down and you release the portion they give up and create another space for a new tenant.
Example if they have 5,000 sq ft they reduce to 3,000 and you release 2,000 to spread out the risk and it helps them reduce their rent owed while keeping the same sales.
Also the HUGE problem with mom and pop restaurants is that they do NOT have fixed food contracts like the big boys do (chains and franchises).
The big boys pay a certain price which helps with operations and controlling costs.A mom and pop has to order through a local food supplier.
In the coming months certain types of food are going to rise substantially because of costs.The restaurant will not be able to pass on all the increases to the customers to keep the same profit.
They can reduce the portion some but as soon as they mess with the quality consumers will go elsewhere and the business starts dying and goes out.
Glad I can help. Because of the drought across the U.S. many crops and cattle were affected.
The shortages happened months ago but reserve supplies have been worked through.Now as demand is the same but with limited supply certain items beef,corn,etc. is going to really rise.It has been going up in small increments but will go up in bigger chunks soon.
Smart restaurants are looking at what is not rising or is minimal in increase and trying to create flavor dishes so that their price margins don't go up and the profit shrinks.
They still might use some of the products increasing in price but with less quantity in the dish to cut costs.
This is why for instance if I buy a restaurant business I would adjust down the stated profit model to compensate for the coming higher food costs unless I knew I had a fixed food contract and the supplier could not go up on me.
My background before triple net investing and apartments was commercial land development so I find your assembling of parcels interesting and would like to hear more about it and your plans.
