Potential tenant doesn't want to share financials - what is the risk here?
The space they're acquiring only makes up maybe 2% of the property's occupancy and we're giving it to them as-is (it's already 3rd gen space as well). But it's a new business and they only want to put down a 1 month deposit (we asked for 2). What are the risks here, and how severe are those risk(s)?
[{"id": "j00nroh", "text": "Practically, your risk is probably just non-payment of rent and then the associated costs of throwing them into default as well as the opportunity cost of having them in there vs a higher credit tenant. Budget for 0 rent, have a landlord termination option, and keep an eye out for a more credit worthy tenant. \n\nThe real exposure though is what happens if this 2% company destroys your building or some other casualty happens. They will have some insurance, but they may not have the financial wherewithal to afford rebuilding their space or reimbursing for building damages.", "replies": [{"id": "j00qltb", "text": "This is a great response.  I'll reiterate that no financials, no deposit is a massive red flag of the deal killing varietal.   Shady.  Personal guarantee?  Is the business registered with the SOS?  Insurance?  \n\nHard pass for me.", "replies": [], "depth": 2}, {"id": "j00r1ia", "text": "Thanks for the feedback! What would a landlord termination option look like? Would that allow us to avoid legal action? \n\nWe aren't worried about risk of property damage. This is an office space and the tenants aren't shady enough for something like arson to be a real possibility haha.\n\nFor those wondering what the upside is - this is a value-add project with extremely low vacancy. We're trying to stabilize which, in this climate, means retention and competitive pricing (i.e. concessions).", "replies": [{"id": "j01l6z9", "text": "I\u2019d structure it as a termination for the first 12-18 months of term. You would need to check with your attorney as to wether or not your state would allow that to trump their rights as a tenant. Alternatively a hefty security deposit that burns down may work as well. Sometimes these \u201cno financials\u201d groups have a lot of cash, they\u2019re just not good at managing it. \n\nWater damage from heaters, supplemental units, clogged drains would be the more common concern as far as property damage goes.", "replies": [], "depth": 3}, {"id": "j01zwgp", "text": "Even with some sort of Landlord termination option, you would be expecting them to actually vacate if you exercised it. I\u2019m assuming the other commenter meant the termination option as more of a \u201clandlord wants the right to replace you with a better tenant since you are new, are refusing to show financials and apparently don\u2019t have a enough to put down standard deposit and first months rent\u201d.\n\nIf they stop paying rent and don\u2019t just leave completely, no landlord termination right will keep you from going through the legal eviction process.\n\nAs others have said. Those are red flags that tell me they will be late or not paying rent in a few months, will likely not pay their liability insurance policy in a few months and have that cancelled, and will generally be a big headache. Personally, only if I really liked in their use or if they were going to be putting a lot of work into a space desperately needing it would I recommend considering a tenant like this.", "replies": [], "depth": 3}], "depth": 2}, {"id": "j02z8gt", "text": "...do you/your landlord's not enforce liability insurance which would cover the cost of rebuilding? Is that not a condition of the lease? Between the landlord's insurance and the tenant's liability insurance there should be very limited risk of the space not being repaired in the case of a loss.", "replies": [{"id": "j030mmx", "text": "IF everyone is covered as they should be (wether by lease or by their own risk management), then you\u2019re absolutely right.  There\u2019s limited risk in repairs not being covered. \n\nThe potential risk here is if proper procedures arnt followed, which is generally greater with smaller tenants like this. What if this tenant cancels their insurance a month out and the property manager didn\u2019t ensure that they are notified?  What if landlord doesn\u2019t require sufficient coverage from their tenant in the first place? What if there are conflicting indemnities between the other leases?\n\nWhile I wouldn\u2019t worry about these things as much for a credit worthy tenant, I have to think more about this for smaller entities that I have no information on other than their state registration and maybe some LinkedIn profiles.", "replies": [{"id": "j035zw5", "text": "Everyone's got their risk tolerance, but this doesn't concern me in the least. With zero landlord cost I'd do this deal (through other basic due diligence measures). If this was a class A space I'd be concerned but for not for tired space that is a rounding error on the rent roll.\n\nFor insurance, I'd simply enforce a third party notice of cancellation on any policies. Then it's really just a management issue to ensure it's renewed, like all of other standard management practices.", "replies": [{"id": "j08o7ts", "text": "Limited risk given no/low deal costs.  Making sure insurance is up to date.  Personal guarantee, Letter of Credit, which I think others have noted.  If they are pushing back hard on Security Deposit, then increase prepaid rent, First and 12th month rent or something like that.  Good luck.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "j00qd58", "text": "Just assume they never pay and mess your shit up. And piss off your other tenants.  And burn the place down, after they contaminate it.  The upside is maybe they'll leave some nice mattresses that homeless people can move in and use.  I'll have to think some more about worst case.....  Oh right, all that and they never leave.  \n\nThere is a difference between not wanting to provide financials and not having financials.  Maybe they're just not sophisticated.  They SHOULD be able to provide three or more months up front, or their business is not as tight as they purport.  Or maybe they can explain to you why a bigger spot would mean more income for them.  Unless the spot is cream, I wouldn't think it's worth the trouble.", "replies": [], "depth": 1}, {"id": "j00urr0", "text": "Is it some sort of business like a dispensary?", "replies": [], "depth": 1}, {"id": "j016nzr", "text": "The risks are plenty severe although probably  unlikely.\n\nA legitimate business owner who can\u2019t or won\u2019t give you any sort of financials IS a red flag. It\u2019s something so basic and the first measurable step of their intent. 2% of your rentable area just isn\u2019t worth it. \nBut if you do lease them space have your attorney draft the document. Don\u2019t use a form lease or try and draft it yourself. \n\nHere\u2019s a funny example: I\u2019m two years in brokerage at this time. I sell a property to a developer and they demolish the bldg for a future project. They ask me find a short term tenant who can use as yard space. \nA guy calls me and wants to lease the property. He comes to my office but doesn\u2019t bring the application/financials. He says, \u201chey\u2026it\u2019s a 12 month lease and I\u2019ll pay you the first 5 months upfront.\u201d  I think - no big deal since the building is gone and the property is a mess.  \n60 days later I\u2019m driving by the property and see a HUGE pile of green-waste 100\u2019 tall.  My stomach drops. The gate is locked and the tenant is long gone. The tenant had been charging disposal companies a sizable fee to drop their green waste all day-everyday for months.  The pile took weeks to remove and cost my client 5X what they stood to make in rent over the entire lease. Fk me \ud83e\udd26\ud83c\udffc\u200d\u2642\ufe0f", "replies": [], "depth": 1}, {"id": "j01gim1", "text": "Not enough details here to judge, but just on the premise of being prudent, don\u2019t start your value add deal off with a subpar tenant, in case subsequent tenants judge the location by this group.", "replies": [], "depth": 1}, {"id": "j01kog9", "text": "The risk is predominately opportunity cost if they fail.    If you have other options then downtime for this tenant when/if they fail is lost revenue.  If you have no alternatives (which you likely do not given this question) then the risk is minimal.  Your trading guaranteed downtime today (if you wait to find a new tenant) for the risk of downtime tomorrow (if they fail).", "replies": [], "depth": 1}, {"id": "j01x5ku", "text": "You do not do the deal. It\u2019s that simple", "replies": [], "depth": 1}, {"id": "j022jp9", "text": "Hard hard pass. Jesus Christ", "replies": [], "depth": 1}, {"id": "j02a714", "text": "With these we usually do the following as long as the use lines up well with the project and they don\u2019t seem like legitimate dirt bags. \n- minimum of 2-3x month security deposit (or a PG with one month)\n- No free rent up front if they negotiated any. (Have it come at the end of the term if applicable. Also, if they go into default they lose the free rent concession. This gives them incentive to pay and behave)\n- If they have paid on time and behaved well after 24 month we will credit them back one month of security deposit.", "replies": [], "depth": 1}, {"id": "j02yokw", "text": "I find this thread fascinating. In my market, I would say that less than 25% of landlords check the financials of a tenant as regular practice. That is, only with significant landlord work and TIs do they get super into the weeds.\n\nIf the landlord is not not putting money into the space, the risk is relatively low. Commercial evictions are usually pretty swift. But I'd take a 2 month deposit and make sure they keep active liability insurance in place. You should be able to handle 2% vacancy if they go belly up.", "replies": [], "depth": 1}, {"id": "j03celn", "text": "The problem is it indicates their intentions, and reluctance or inability to show a history performing in good faith to overcome the picture they\u2019re painting for you. A lot of this is formality and doesn\u2019t ultimately safeguard you if you have a bad tenant, so they\u2019re almost symbolic. \n\nYou could be on the hook for any damages, liabilities, outside liens from vendors, disruption to other tenants, zoning violations, etc. etc. Chances are none of this happens but you never really know who your tenants are, they begin subleasing, and so on. \n\nI would always rather someone say \u201cI have bad credit, and no money but my parents are giving my 60k to start my business\u201d, and be up front. I have seen too good to be true financials from tenants in great shape who should own instead, and they can do just as much damage, and the recourse isn\u2019t a picnic with their deposit being a drop in the bucket. \n\nAt the very least you want a guarantor.", "replies": [], "depth": 1}]