leasing to TIN (no SSN), and what is average giving in TI?
Property Manager · TX · Member since 2019 · 327 posts · 69 votes
Hi BP,
We have a retail spot available and there is this couple who have been showing serious interest in leasing it for a restaurant. Here is the dilemma:
2 persons will be on lease. The husband, and a partner. It is this partner who has no SSN but she has TIN and willing to provide her tax returns and bank statements. My question is: will we have any problems in leasing to them in this situation?
How much in TI to give is the norm? We are in Houston. Thinking of giving 40% towards cost of building of kitchen and grease trap but that will be spread over the 5 years term in the form of credit back to each month rent but not sure if this is reasonable or not?
We are newbies here so and tips/advices are greatly appreciated.
Thanks.
Courtney, Based on your description I am making the following assumptions: 1) The TIN is the tax identification number of some business entity.
2) The TI you referenced is a Tenant Incentive or also known as a Tenant Allowance.
It’s not uncommon to lease commercial property to a business entity. As far as the TIN I would suggest you contact a real estate attorney to be sure you have a good commercial lease that covers you and minimizes your risk. I would do back ground checks to find out about the proposed tenants.
I would recommend a triple net lease (NNN) where the tenant is responsible for paying additional fees - the property tax, all maintenance (including or excluding the roof - (your choice) and insurance on the property. The insurance I am talking about is insurance to protect your property such as from fire, damage, etc. You should purchase this insurance and collect from your tenant.
The above ( taxes and insurance) should be paid in estimated monthly installments with a provision to allow you to bill them at the end of the year for adjustments such as an increase in insurance or taxes. If they have over paid that can be applied as a credit against future Additional Fees.
They must have business and liability insurance. Any insurance they purchase, you should be notified by the insurance company if the insurance lapses.
The tenants should be responsible for keeping all mechanical systems in working order throughout the term of the lease and return the property with all systems working. I found the following information on a google search - Around 60% of restaurants fail with in the first year. If it goes sideways you want to have a solid commercial lease that spells out everything very clearly and has all of the tenant parties responsible for the lease.
What is the size of your retail space? Is it free standing or in a strip center?
You have several questions to ask yourself / find out. Do you want your property to be converted to a restaurant? Is this the best use for this space? Do the proposed tenants have any restaurant experience? Are they opening a franchise restaurant? Are there other restaurants in the area that are successful? While it will be an additional expense to you getting a commercial real estate agent to help you could be beneficial. He/She May also know a good real estate attorney
Have the prospective tenants asked for a TI? Do they have a cost for construction and itemized list of equipment? If so how much? Has the health department approved of the plan and equipment? Can they afford the initial build-out to transform your space to a restaurant that will pass health inspections and have enough funds left for the start up, food cost, and marketing? The start up cost for a restaurant can be significant plus there will possibly be increased HVAC requirements.
Once converted to a restaurant it will be harder to rent as a shop or office. However it will be somewhat easier to rent it as a restaurant.
As for the TI / TA
I would not give it as a rent reduction. The rent is the rent. If they do not fulfill the terms of the lease or the business fails you have a lease with X number of months at a specific rental rate that they are responsible to pay.
If you want to participate in helping them convert your property first you must determine home much you are willing to spend. There are many ways to do it. Are you going to be a partner in their adventure?
1) You can, as you suggested, do a monthly credit and divide the TI over the length of the lease. I would make this contingent upon all terms of the lease being met. Examples- Payment wasn’t late for the month, insurance is current, Etc. If they aren’t current then they don’t get that months reimbursement check from you.
2) Similar to the above - make the payment at the end of each lease year. If they haven’t been current for the entire year they do not get a reimbursement check from you.
In the above methods who owns the equipment?
3) They most likely will push you to give them most of the money up front. I would not recommend this as it is like an unsecured loan. If you decide to go this route I would not give them any money till the work has been completed, they have passed inspection, gotten a certificate of occupancy, and have opened for business. Maybe pay with in 30 days of opening. In this method all improvements and equipment should remain with the building.
4) If I give a tenant allowance I increase the base rent to cover the cost of the allowance. It can be structured in many ways.
5) I have a tenant that took a rough historical building that I owned and converted it to a brewery/ tap room. The building had been vacant for 2 years and my commercial real estate agent was getting nowhere until this person wanted the building. Since he had to go through months of applications, approvals, ATF permits to brew beer, and building upgrades that would remain with the building. I gave him 7 months of free rent. All he had to do was pay for the property taxes and insurance. He also paid for all improvements to get the building to be Compliant and fit for his use.
There are lots of other things to think about but I am sure the above is a start.
Courtney, Based on your description I am making the following assumptions: 1) The TIN is the tax identification number of some business entity.
2) The TI you referenced is a Tenant Incentive or also known as a Tenant Allowance.
It’s not uncommon to lease commercial property to a business entity. As far as the TIN I would suggest you contact a real estate attorney to be sure you have a good commercial lease that covers you and minimizes your risk. I would do back ground checks to find out about the proposed tenants.
I would recommend a triple net lease (NNN) where the tenant is responsible for paying additional fees - the property tax, all maintenance (including or excluding the roof - (your choice) and insurance on the property. The insurance I am talking about is insurance to protect your property such as from fire, damage, etc. You should purchase this insurance and collect from your tenant.
The above ( taxes and insurance) should be paid in estimated monthly installments with a provision to allow you to bill them at the end of the year for adjustments such as an increase in insurance or taxes. If they have over paid that can be applied as a credit against future Additional Fees.
They must have business and liability insurance. Any insurance they purchase, you should be notified by the insurance company if the insurance lapses.
The tenants should be responsible for keeping all mechanical systems in working order throughout the term of the lease and return the property with all systems working. I found the following information on a google search - Around 60% of restaurants fail with in the first year. If it goes sideways you want to have a solid commercial lease that spells out everything very clearly and has all of the tenant parties responsible for the lease.
What is the size of your retail space? Is it free standing or in a strip center?
You have several questions to ask yourself / find out. Do you want your property to be converted to a restaurant? Is this the best use for this space? Do the proposed tenants have any restaurant experience? Are they opening a franchise restaurant? Are there other restaurants in the area that are successful? While it will be an additional expense to you getting a commercial real estate agent to help you could be beneficial. He/She May also know a good real estate attorney
Have the prospective tenants asked for a TI? Do they have a cost for construction and itemized list of equipment? If so how much? Has the health department approved of the plan and equipment? Can they afford the initial build-out to transform your space to a restaurant that will pass health inspections and have enough funds left for the start up, food cost, and marketing? The start up cost for a restaurant can be significant plus there will possibly be increased HVAC requirements.
Once converted to a restaurant it will be harder to rent as a shop or office. However it will be somewhat easier to rent it as a restaurant.
As for the TI / TA
I would not give it as a rent reduction. The rent is the rent. If they do not fulfill the terms of the lease or the business fails you have a lease with X number of months at a specific rental rate that they are responsible to pay.
If you want to participate in helping them convert your property first you must determine home much you are willing to spend. There are many ways to do it. Are you going to be a partner in their adventure?
1) You can, as you suggested, do a monthly credit and divide the TI over the length of the lease. I would make this contingent upon all terms of the lease being met. Examples- Payment wasn’t late for the month, insurance is current, Etc. If they aren’t current then they don’t get that months reimbursement check from you.
2) Similar to the above - make the payment at the end of each lease year. If they haven’t been current for the entire year they do not get a reimbursement check from you.
In the above methods who owns the equipment?
3) They most likely will push you to give them most of the money up front. I would not recommend this as it is like an unsecured loan. If you decide to go this route I would not give them any money till the work has been completed, they have passed inspection, gotten a certificate of occupancy, and have opened for business. Maybe pay with in 30 days of opening. In this method all improvements and equipment should remain with the building.
4) If I give a tenant allowance I increase the base rent to cover the cost of the allowance. It can be structured in many ways.
5) I have a tenant that took a rough historical building that I owned and converted it to a brewery/ tap room. The building had been vacant for 2 years and my commercial real estate agent was getting nowhere until this person wanted the building. Since he had to go through months of applications, approvals, ATF permits to brew beer, and building upgrades that would remain with the building. I gave him 7 months of free rent. All he had to do was pay for the property taxes and insurance. He also paid for all improvements to get the building to be Compliant and fit for his use.
There are lots of other things to think about but I am sure the above is a start.
@Jack Butler What a great set of comments.
Thank YOU soooo much for such a great set of tips. Really really appreciate it.
And yes, TIN is tax identification number of the partner, TI is tenant incentive I was talking about.
They already own a Cuban restaurant and from research they are doing pretty well with that one. Other restaurants on this street that this strip center is on are doing very well. It is a very busy section of the town.
The size of the space is about 1200 square feet and it is in a strip center (9 units total, built in 2018 and we purchased it in mid 2019). It is NNN. The previous tenant (a Nutri shop) was not doing well and had to terminate the lease and just moved out on 1/15 so this space will need to be converted if we decide to lease it to these new people. In this strip center we already have 2 restaurant tenants, 1 is a Thai curry and 1 is a Jinya ramen and both have been doing very well. This new potential tenant wants to build a Mexican restaurant so that might be a good mix to have to the strip. Since we are new we have no idea how much of the converting of the space into restaurant will cost and how much in TI landlord normally gives to tenant so that's why the question (along with the TIN question).
As your suggestions on TI/TA:
1) Will go with this.
2) Or this.
3) Will avoid this because we already got burned by this. We have a second unit that has been vacant for quite a few months now. It was rented to Fit Body Boot Camp and the guy was not able to pay since day 1 that we took over. This strip was built in 2018 and we bought in mid 2019 and soon after we bought we found out that previous owners were giving this tenant 20-30K in TI and all kinds of promises to get him to sign (of course they then raised the base rent higher) so they made the strip 100% occupied and raised NOI. I am sure you are way experience in this so you would know but back then we didn't. Big lesson learned.
4) Great tip. We will need to think about this. We will need to think about how to structure it.
We will need have more talk with them about the followings:
1) Who will own equipment?
2) Need clarification from them if the 2 persons on lease will be on lease as 2 individuals or as in a business entity such as LLC.
3) The questions you posted above:
Do they have a cost for construction and itemized list of equipment? If
so how much? Has the health department approved of the plan and
equipment? Can they afford the initial build-out to transform your space
to a restaurant that will pass health inspections and have enough funds
left for the start up, food cost, and marketing?
Jack: I have more questions for you.
1) So is giving 40-50% in TI/TA is the norm in this case?
2) Who normally own the equipment? Do we want to say we will own it, or better let them own it?
3) How will you go background check on a person who only has TIN?
4) What kind of screenings/checks you will do in this case beside credit/background/eviction check? Do you ask for their previous tax returns and bank statements?
(the man already passed the credit/background/eviction check. Still don't know how to check on the partner with TIN yet).
Once again, thank you so much for taking the time to answer and write such a great long, detail set of tips/comments. Your help is greatly appreciated.
@Courtney Duong: Thank you for the additional information. Sorry you got burned by the seller and the inherited fitness business.
In my limited experience giving a TA of $$$ at this level of tenant is not very common and suggests they are financial challenged. If one is given then the rent is adjusted to a higher level. Just think of the fitness business.
Larger regional and national tenants often bargain for a TA and get it since the landlord is often presented with a multi year lease - like 10 yrs with several 5 yr options. These tenants usually have multiple locations.
Maybe a way to find out how to check the TIN credit is to ask for references, banking account information, current and previous landlords. I would also contact a CPA or Real Estate attorney for additional methods.
In my opinion the best scenario for you would be as follows:
1) 5 yr lease with a 3% rent increase every year on the year anniversary.
2) Require proof of ability to fund the build out project. ( Letter from Bank, lender )
Require a one month rent or more security deposit at lease signing.
3 ) You should have building insurance ( build out/ construction insurance ) started at lease signing. This is an additional policy that protects you against building damage or loss during construction. This can either be part of the NNN payment or you can pay for this additional build out insurance.
4) At lease signing and going forward the tenant is responsible for the NNN items and pays these each month for the entire term of the lease.
5) Since you do not want to be their partner I would not give a cash TA/TI since this is cash out of your pocket. And if they fail you are out of luck. If they don’t have the cash or bank finances to fund the building out I would be reluctant rent to them. I am speaking from a personal experience and poor expensive choices on my part.
5A) As with most commercial leases - non attached trade equipment such a refrigerators, mixers, steam tables, unattached tables and chairs, dishes are property of the tenant as long as they are in complIance with the terms of the lease. Attached items such a walk in coolers, fire suppression systems, hoods, power vents , sinks and the likes are part on the building and remain.
6) If a TA is needed to get the lease signed and you desire to give one I would give them 1-4 months without rent. This period is not part of the 5 yr lease. Example- if you give them 3 months then the lease would have a 3 month build out period with no monthly rent. However the NNN features would be paid during the build out period.
Then with which ever comes first- At the end of the 90 days or if earlier upon receipt of a certificate of occupancy and them opening the doors the rent would begin then and the build out period would end. If during the middle of the month prorate that months rent and lease period would begin at the 1st of the month. The 5 yr period of the lease can begin when they open the doors or at the first of the month if prorated. So as a result you would have a 3 month or less build out period and a 5 yr +|- rental period.
7) I highly recommend that you get a local real estate attorney to make sure you have a solid lease that can be enforced in all areas.
Thanks for taking the time to write and provide all the great tips. Greatly appreciated. I have sent them some questions and waiting for answers.
Oh, today a broker called me and asked for info about the same space. Her client is a franchise grab and go pizza and already has 14 other locations in the Houston area. So sounds very interesting. She randomly threw a number for cost of building the kitchen, about 200K she said which is way too high so we definitely need to really think about this giving out TI like you said. The cost is way too much and we don't want to get burn in case things don't go as planned with the tenant.
Thanks and have a great day!