I had a tenant ask me if I would build a garage at my rental house. I informed them that although it would be nice, it would simply be too big of an investment and would take too long to recoup my costs. Later they ask if I'd be willing to do it if they paid for half of it. I said I would be open to it.
I need to talk it over with a lawyer of course, but before I do I thought I'd bounce the idea off of everyone here first and get my ducks in a row.
Here is how I am thinking of doing it.... I would pick the contractor and make the garage the way I want to match the house. The tenant would pay me a lump sum for half of the cost up front ($9000) before any work begins. To avoid any confusion with a judge/lawyer after the fact about if the tenant owns half the garage since they paid half, I would classify the lump sum payment as a prepayment of rent.
Since the tenant is paying half, I would essentially keep their rent the same for the next 2 years. On the actual lease, I would increase the rent about $750/month for the first year to account for the $9k payment and the second year it would go back to the same rate as right now.
Does this all make sense? I'm trying to avoid any inplied ownership (hense using it as a prepayment for rent and not a payment towards the garage). Then I have to increase the rent during the first year to offset the lump sum payment. I am doing it all in the first year, so that if they break this lease and move out in year 2 I have already covered the lump payment I received.
How would you approach this?
I would approach it by not doing it. If you want a garage, you should build it and pay for it. Otherwise, forget it. You are allowing a tenant to make a big investment into your property, no matter what you get them to sign to say they're doing it for their own benefit.
@Nathan Letourneau you've over-complicated it and put yourself at risk.
Let's say you increase the rent $750 a month for a year to account for the cost but the tenant pays the entire amount up front. That sounds good on the surface but what happens if the tenant legally breaks the lease? What if the place burns to the ground and the tenant can no longer live there? Your contract makes it appear as if the tenant pre-paid a year's worth of rent increase at $750 so they could demand you return the unused portion.
It would be far easier to just write up an agreement that says the tenant is paying $9,000 towards the cost of a new garage and that the garage will be your property and remain your property, even after the tenant departs. Your attorney should have no problem drawing this up.
The idea sounds good, in general. Adding a garage makes it more likely the tenant will stay longer. It makes the property more attractive to future renters and you can charge a higher rate which will help recoup the costs faster. As long as the tenant pays his share in full, up front, I see it as a good deal.
Thanks @JD Martin and @Nathan G for your responses. I really appreciate your thoughts. I'll be talking with a Wisconsin lawyer to find out his/her thoughts as well. Make sure that I am doing everything according to Wi law.
I compare this to what a commercial building might do when an office tenant wants a buildout. The building gives the tenant a construction allowance that is the equivalent of the construction costs. That allowance is then baked into the lease because the building's owners and the tenant each get substantially greater tax benefits from working the deal that way.
Here, your tenant doesn't get the tax benefits, but I believe you would be able to do more with your own tax and financial management of the building if you paid the full freight and got higher rent from the tenant. Check with your CPA rather than your attorney on how that might work out. You might be able to structure the garage cost creatively by having the tenant prepay a chunk of money that is then characterized as rent. My gut tells me this is more of a financial than a legal question.