New property purchase - should the current tenant provide financials?
I'm looking at purchasing a commercial property with a single tenant (liquor sales.) The tenant is 2 years into a 10-year, triple net lease where they basically pay for everything...all maintenance/repairs etc. My bank has asked me to request the tenant's financials. The tenant is refusing and also has first right of refusal to purchase from the current owner. Through second-hand info. I have found that the tenant *supposedly* wants to purchase, but hopes to purchase at a lower price than the current owner wishes to sell for and therefore probably doesn't want to cooperate with another buyer. Purchasing a property with a tenant is new territory for me - any thoughts on this situation?
[{"id": "iyhvlcr", "text": "Presumably you have the lease, and can see if the tenant is obligated to provide financials to LL upon request? If they are, then you could tell the seller to make it happen, or no deal.\n\nIf they're not obligated, then you would have to circle back to the bank and see if they'll finance without tenant financials.\n\nPersonally, I would be cautious about walking into a scenario with a hostile tenant. Is it worth the stress?", "replies": [{"id": "iyhzyoe", "text": "I wouldn\u2019t necessarily call the tenant hostile just yet. If I am a business owner, I am not just going to turn over confidential information to a random prospect claiming to be buying the building. If landlord asks me and im obligated to, that\u2019s different. \n\nWho\u2019s to say that OP isn\u2019t a competing liquor store just trying to get the scoop on their  competition? I\u2019ve seen it before.", "replies": [{"id": "iyjjpb2", "text": "That's a good point - and review of the current lease doesn't appear to state that the tenant provided financials at any time. For what it's worth, my intent is purely long term investment - I would hope/prefer the tenant stays for the duration of the lease.", "replies": [{"id": "iyjyx7a", "text": "While some leases require tenants to provide financials on an ongoing basis and some dont, it would be very hard to believe that the tenant *never* provided any financial statements. 99.9% of the time a LL is going to ask any prospective tenant for financials before leasing to them. They may not require it to be in the lease, but they will always ask before leasing.. always. If the LL is saying he didnt get their financials before leasing, hes either an idiot or hes lying to you cuz their financials are shitty and he doesnt want you to see them.", "replies": [{"id": "iykcury", "text": "Lender is not interested in the Tenant's financials PRIOR to becoming a Tenant.  Also, those financials are confidential.  Landlord cannot share Tenant financials without consent. \n\nLender's underwriting will require to see Tenant's current financials.  They don't care about financials 24 months ago.", "replies": [], "depth": 5}], "depth": 4}, {"id": "iym4kde", "text": "Do they have any other liquor stores or is this the only one? Any security deposit or guarantee on the lease ? How hard would it be to release if they leave?", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "iyjjgt2", "text": "That is the vibe I'm getting as well. Definitely weighing on me.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iyhvnmq", "text": "Does their lease require them to turn in financials?", "replies": [{"id": "iyjjs1l", "text": "It did not - this was more of a directive coming from my bank.", "replies": [{"id": "iyk4glh", "text": "So there is nothing in the lease about what the tenant is responsible for if the property is being sold or marketed?", "replies": [{"id": "iyk4m86", "text": "Basically that they are to allow showings and have a 15 day first right of refusal to purchase the property.", "replies": [{"id": "iyk6e7v", "text": "Sounds like the tenant has no legal obligation to do anything other than make the space accessible to you for showings. If you don\u2019t have a real estate attorney handling this, you might want one.", "replies": [], "depth": 5}, {"id": "iykenuz", "text": "Where are you on the 15 days? There\u2019s a lot going on and you need some actual document review.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "iykws75", "text": "find a new bank... Tenant isn't required to share the info if the requirement isn't mentioned in their lease.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iyhym78", "text": "It sounds like you are in a due diligence phase. At this point in time, the tenant has no obligation to you and isnt required to respond to your requests for their information. You need to go through the seller and sellers broker for this. \n\nOn their purchase option - you also need to have seller rep that this has been cleared appropriately.", "replies": [{"id": "iyjhfdx", "text": "Thank you - I should have clarified. My agent is dealing with this. The seller/sellers broker states that the tenant will not provide any financials regardless of whether they (tenant) decides to exercise first right of refusal.", "replies": [{"id": "iyjivi0", "text": "Thanks for clarifying. In that case I don\u2019t think there\u2019s much you can do. Even if the tenant has an obligation to furnish it to their landlord in their lease, if the landlord isn\u2019t willing to enforce it you need to decide how big of an issue this will be. (Or rather your lender will)", "replies": [], "depth": 3}, {"id": "iykd3jx", "text": "&gt;tenant will not provide any financials regardless of whether they (tenant) decides to exercise first right of refusal.\n\nTenant is not required to provide financials.  You are missing this point.  They are not legally required to provide any financials (nor should they) to anyone besides their lender (if they choose to use one).  They do not answer to you or the Landlord (since it's not in the lease) in regards to financial documents.", "replies": [{"id": "iykdgpx", "text": "I was just responding to the previous comment - I understand, but I was just clarifying that agents/brokers were involved...not me directly. This was more of a directive/request from my bank.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iykcejo", "text": "Unless lease stipulates, Tenant is not required to supply business financials.  If Tenant has first right, Tenant can match whatever price agreed upon.  Otherwise, it's yours to acquire.  Your lender cannot force the Tenant to provide financials.  However, two with year's tenancy there's 24 months of rental payment history.  That is sufficient for a lender.", "replies": [{"id": "iykgxgj", "text": "I've never purchased a commercial property with a tenant - so this is new territory for me. My lender makes it sound like a reasonable ask, my agent was neutral, and the seller was just a no. Trying to find out what is typical. I could float the building without a tenant for a while if the worst happened, but want to minimize that risk...financials would make me feel better, but I get it, the tenant has zero obligation. I would guess if the tenant really wants to purchase the property, why would they want a competitor (me as the buyer) to feel good about making the purchase.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iyklna6", "text": "I\u2019d request it. And anytime I acquire a building I always ask for maintenance records for people who are \u201ctaken care of everything\u201d because chances are they are not actually taken care of anything. Ask them for plumbing records, HVAC records and if they don\u2019t produce anything send somebody in to see if there\u2019s maintenance tags on all of their mechanical systems if not , explain to them you are an active landlord and these are the types of things that would cause a lease violation three lease violations in a year and we can evict. Give them 30 6090 days whatever you want to bring everything up to code for up to maintenance standards", "replies": [], "depth": 1}, {"id": "iykme3h", "text": "The lease May stipulate estoppel, meaning you can verify they have a lease and what is in it. You can ask seller to provide financials which the tenant probably submitted to get the lease in the first place. \n\nThe tenant does not need to provide his financials to you, so you are taking the risk, so you want to see if there is an existing letter of credit he provided or if the lease is personally guaranteed. \n\nIf he is selling liquor you want to make sure he has the proper liscenses to do so. You also want to make sure he has an insurance policy. \n\nYou can run a dunn and Bradstreet business credit report in the tenant but those are usually of limited benefit.", "replies": [], "depth": 1}, {"id": "iyko5ul", "text": "Tenant with a current 10 Yr NNN - why will they disclosed financials to you?  And if they have first right of refusal? The seller is playing you out to get a higher number from whom he is bind to offer the property first. \nAnd lender does not need tenant financial to underwrite the loan. They need your financials and current lease.", "replies": [{"id": "iyksyh9", "text": "That\u2019s my hunch as well. At the end of the day, my lender will write the loan with or without the tenants financials\u2026but was looking out for my best interests.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iykx8c8", "text": "Spending money and time on a deal where the tenant has a ROFR seems silly. This will be your first and last time putting a building under contract with a ROFR that you didn\u2019t clear as the first task.", "replies": [{"id": "iykxvch", "text": "Can you clarify what you mean by \u201cclear as the first task?\u201d I haven\u2019t spent any money and probably a couple hours on some back and forth. So your recommendation is generally avoid ROFR deals? Again, I\u2019m new to this and genuinely appreciate the insight.", "replies": [{"id": "iylsl79", "text": "Ok that\u2019s good that you haven\u2019t spent any money because yes most investors would avoid a deal with a ROFR until it\u2019s known that you\u2019re not competing with the tenant. Otherwise you\u2019re doing all the due diligence to validate a price that the incumbent tenant has rights to.", "replies": [{"id": "iyo2097", "text": "I get it now, thank you.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iyl2sv3", "text": "You might be able to pull liquor tax info from public records, if available in your state, to extrapolate their top line revenue (not including misc items sold) and work your way into a decent P&amp;L that might help with the lender request. Misc sales tax info can probably be pulled for the other sales from public records too possibly. \n\nLender might have decent database access that they can use top line revenue to get comfortable with the tenant from that liquor/beer/wine tax number as they can solve for expected net income. Industry averages shouldn't be that hard to find to get a solid range.\n\nLikely won't get info from a tenant with ROFR, for obvious reasons. I would be the most concerned about the personal guarantees from the tenant, hopefully they are written in and ironclad.", "replies": [], "depth": 1}, {"id": "iym0cv5", "text": "They aren't obligated to share that information. Some will some won't", "replies": [], "depth": 1}, {"id": "iz40vnq", "text": "Have you told your lender they refused and you have no ability to force them too? Could just be an overzealous lender / Underwriter trying to get as much as documents as possible. As an underwriter, its always a battle between what you need, what you want, what you can live without and what docs you actually end up with when analyzing a deal. I underwrite similar credits for many instistutions and none of their credit policies require tenant financials off the top of my head. All I can  think of is they may not like that the single lease is shorter than maturity of the loan, which will likely be a 10 or 15 year maturity, and they want to determine how strong the underlying tenant is. Or it's weak retail market or you don't have strong outside cash flow, liquidity or something... \n\nIf the project is otherwise checking out, the lender will probably back off if you suggest you'll look elsewhere if this is an issue for them. They won't want to kill a deal over just tenant financials (probably) if not required by policy. If they won't budge, there's plenty of fish in the sea.", "replies": [], "depth": 1}]