Commercial lease below market price

Bobby Kolev · 2021-03-02T07:52:18-08:00

Hi everyone, looking for your thoughts on a subject I am sure many small retail landlord are pondering one form or another.I consider allowing a tenant in on a month-to-month basis from April til December at 50% normal retail price as they need less than 50% of the space available though if the business picks up they will definitely utilize the other half as well (and get to normal rent, of course).Being month-to-month and with minimal changes/investment required I keep the option to showcase to other candidates and switch them on the fly if a better candidate shows up.My concerns are less with the tenant than with the appraisal and tax office. My thinking is that for the current year the suite will be counted as empty as it was empty on 1/1/2021. If the tenant does not agree to substantial lease increase in December then the space can again be empty at 1/1/2022.What are your thoughts on the pros and cons of short term leasing at 50% discount and specifically appraisal/tax implications of such a move?

Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

5y

Seems like a ton of work with a bunch of negatives instead of waiting for a strong tenant with a long term lease. If you have high vacancy in your market and not much expansion for businesses then might make sense to get some money coming in.

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Frank Hinck

Rental Property Investor · Minneapolis, MN · Member since 2020 · 540 posts · 285 votes

5y

@Bobby Kolev

Bad idea, their “need” for 50% of the space is really a want & doesn’t mean you should rent it that way, really unless you get 75-80% of the full rent because the rest of the space remains vacant. Plus word will get around to other tenants you’re giving the new guy a break while they’re paying full rent. Have them take the whole space and sublet the rest to another business who needs the space too. Would you consider this if it was an apartment? “Oh I NEED a 2BR but will only use 1BR so don’t charge me for the rest of the space but I’ll probably still store some stuff in that area and you can’t have anyone use the space.”

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Bobby Kolev

OP

Member since 2018 · 6 posts · 0 votes

5y

Thank you for your input.

Perhaps I wasn't clear in my posting.

I know most of the risks associated with cutting off rent in regards to tenants.

It isn't much of a factor here as there is only one other tenant left in the building (beside myself) and they are on the brinks as well; all others were crushed by COVID.

Sure enough there's also plenty more available spaces in other buildings in the area too.

But that's not my major concern as the building is paid off and I do not have banks breathing down my neck.
I just bought it cash.

My concern is with the appraisal office and how they'd look at me saying I've leased half the space for half the money if it comes to that.

There are two parts of this:
For one, the building is a standalone one in the middle of a road connecting two more or less "retail" corners, each at least two miles away. But there's no retail corner right here and there's no foot traffic...it's not a good retail location, but the 5 mile radius *is* a decent retail location.
Over the years that has created a discrepancy between the rent here and either of those two places; this building just can not generate the same revenue as 20-40 shops packed together with a few major names among them.
So year after year I argue with the appraisal district and they just don't care.
Which is why I am even less thrilled by having to explain to them that I am renting at HALF the price I'd otherwise get.
(or renting half the space, the same thing)

And second, I wonder if I could possibly avoid having to explain all that if I let that tenant at 50% off month-to-month until December and then decide if I let them out or if they can pay normal price.
My idea is that appraisal office asks each year if I had a tenant in place as of January 1st.
So if I let them go in December I may not have to explain anything to begin with as the suite would be empty and not included in the appraisal as generating revenue (even though it would have done so in the prior year).

It is not my goal to be cheating the appraisal district.

It is my goal to try and make some revenue with potential to normal levels while avoiding headaches, specifically with the appraisal office, such as having to pay tax at market prices when I am actually leasing at 50% off.

My question is if you've been in similar situation and how was your experience - in regards to the appraisal office and taxation and less in regards to the tenants. On a month-to-month basis with clearly spelled benefits in the lease I have little to fear there.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

5y

Talk with a local property tax attorney. They likely have insight into the appraisal office and how things affect the values.

Since taxing authorities and process vary by area you might want to start there.

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Bobby Kolev

OP

Member since 2018 · 6 posts · 0 votes

5y

Thank you for taking the time to answer, but I don't think I'll follow that advice.

If your building is empty and you're considering half-rent for a month-to-month temporary lease the last thing you'd want to do is spend $3k deposit or whatever they take ($3k is what the attorney suing a tenant who left in a middle of a 5 year lease takes).

If it was a multi-year lease I'd be the first to give fair chunk of it to an attorney to make sure the money are protected.

When there's hardly any money at all and the whole thing is more of a chance to get a paying tenant than an actually paying tenant then I just don't see attorney's fees being justified.
Just my 2c, do not mean to disrespect or argue.

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Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

5y

Property tax and appraisal districts don't care.

$1,000,000 property empty.

$1,000,000 property fully leased.

Same property tax and assessment.

If your having trouble filling or getting the correct revenue, and don't see the numbers working. You might try to rezone and convert to housing depending on the building. Moving from Commercial to Residential will lower your property taxes where we are at. Before you do it, make sure your "numbers" work and talk with the Taxing authority.

Or, look for alternate usage. Liquor store, fire works, Contractor building, etc.

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Bobby Kolev

OP

Member since 2018 · 6 posts · 0 votes

5y

Hmm, maybe local appraisal district is better than I give them credit for.
In the past 7 years of me owning the property their valuation always has been a function of how full the property is.
That is, on the face-to-face meeting, not on the standard forms they send to everyone.

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Commercial lease below market price - pros and cons

Commercial lease below market price - pros and cons

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