All Forum Posts by: Jack Butler

I have serious concerns about your proposed property. You haven’t mentioned the area or chance of appreciation so I can not factor that into my reply. Will you be managing yourself or have a property manager? 

However, Even if you can get the rent to $1500 per side ($3000/month) with a $2500 mortgage payment that only leaves $500 per month. You have not planned any money for vacancy, repairs, Cap X. If you do unrealistic projections of  5% for vacancy and repairs. That totals $300 and you still have cap x items to consider.

Based on my experience I would figure 8% for vacancy and 8% for repairs.That totals $480/ month.  A property built in  1950 will have repairs - some will be costly such a roof, HVAC, hot water heater ( $900-1200) and rehabilitation of unit at tenant turn over. 

You will not have any $$$ for the above. Unless there is some major upside you haven’t mentioned I would run away.  My bottom line is this is a bad position to put yourself in. Move on and look for a safer deal. 

I have used Robert H. Sprain at the Law Firm Friedman, Dazzio, & Zulanas in Birmingham. He has done numerous commercial and residential real estate transactions, complex leases for me.

Just Google bathtub refinisher Fairfax, VA. It pulled up 3-4 companies.

Daniel, I would check out to see if there are any bathtub refinishers in your area. The professional company will come in- tape everything off and put plastic sheets all over the bathroom. Then they treat the tub with chemicals then with color coating. The entire process takes about 5-7 hrs.  We did one here in Birmingham, Al. The cost was $450. I have seen prices less in other markets. What I have read about the longevity is that if professionally done it will last between 5-15 years depending on how good the job was and how the tub is cared for by the tenant. Cleaners with bleach and or abrasives will shorten the life span.  

I recommend getting an estoppel document / agreement for each property. This should be filled out and signed by the tenant and current owner. It will help you discover discrepancies between what the lease states, what tenant says and what owner states. Do this during the due diligence period. Just search the forum for Estoppel Agreements. 

Consider getting copy of photo ID for each resident. 

@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.

Courtney Duong

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. 

Brian the real estate agent sold our house earlier in the year. When I found a house on MLS that I wanted to purchase for a rental I contacted the agent about it since we now live 1800+ miles away and I needed someone to see the property. When it was under contract before I could react she told me about another property she had listed in the area. It turned out to be a property that needed lots of TLC with an onwer that was very motivated for a fast sale. She does keep me on the radar after this purchase for other properties that she finds.

I was recently refered to RMI Realty Group in Birmingham by a friend of mine that does both SFH and commercial. I have been talking to Scott over the past several days. Their prices seem inline and I plan to meet with him soon to set up management my SFhomes. They have a web site so you can get some information about the company and contacts.