Newbie question - rental with a high risk/high liability tenant?
I'm really just curious about the possibility of a commercial investment.  I have several single family rentals but the market where I'm in is pretty bad for adding another one right now.

I saw a listing for a commercial property that looked interesting.  The current tenant is on a 3 year least with options out to 9.  I'd actually like to re-develop the property once the tenant leaves so I'm not worried about that.

The tenant business, though, is kind of a bar/restaurant that allows off-leash dogs.  So, probably, there is significant liability risk with dog bites and dog fights and such.  Assuming tenant has proper insurance, could that in any way effect me as the landlord?

It's really more of a thought exercise at this point . .I'm not in a position to buy this right now, anyway.Thanks - and sorry if it's a dumb question.
[{"id": "hrxiect", "text": "Generally commercial tenants are regarded as lower risk than residential tenants", "replies": [{"id": "hrxmyxi", "text": "??? Cap rates for residential are lower than commercial property for a reason. If a residential tenant leaves, you take at most 3 months to rent the place. If a retail leaves, you might be spending up to a year to lease the space.", "replies": [{"id": "hrxzua5", "text": "People that make widgets (ergo, rent commercial space) don't tend to steal the appliances when they leave, or call the police when their drunk uncle shows up uninvited and a thousand other things that happen on residential properties.  They also understand with nominal hesitation; they have to pay to play. It's a far more balanced relationship.\n\nIn court cases between landlords and residential tenants, the tenant has far more favorable laws protecting them, even if their abuse of the landlord *and* the system is blatant and immutable.\n\nNot so with commercial tenants. Things are vastly more black and white.\n\nI'll take a commercial tenant and lease every day of the week.\n\nAnd, I'd tell my banker..*.\"charge me anything you like if it satisfies any concerns you or the underwriters have....I'll still sleep better with commercial\".*\n\nThe risk is far lower with commercial tenants.", "replies": [{"id": "hrytydj", "text": "I see you don't know what having bad commercial tenants can do to a property. I have seen horror stories with commercial tenants. From doing unlicensed things, to which fines and leans go against the property, to literal criminal activity. Again, it all depends on the tenant, but one more time, there is a reason why caps are lower in residential properties. If you know how to screen for tenants, you can mitigate most of the risk that you describe. You can also do the same for commercial, but again, it takes longer to lease. Thus, why cap rates are higher.", "replies": [{"id": "hryw7co", "text": "I have had bad commercial tenants.  I have had bad residential tenants.\n\nLiens against a commercial property for actions against the tenant are illegal and are usually contractually forbidden in the lease, and as a banker, I'm certain you're well aware of that (or should be). Exceptions of course are for work done on / for the property itself.\n\nThe risk is far lower with commercial tenants.\n\nCap rates were not part of the comment you responded to and are not part of any comment I have made (or am making).", "replies": [{"id": "hryyq31", "text": "&gt; Liens against a commercial property for actions against the tenant are illegal, and as a banker, I'm certain you're well aware of that (or should be).\n\nHere in Fla are completely legal. If your tenant does an illegal addition, it goes against you. You can sue them, but you need to go through the whole process and that is not cheap, nor free. \n\n&gt;Cap rates were not part of the comment you responded to and are not part of any comment I have made (or am making).\n\nStill, the cap rate measures risk. People expect a return for higher risk. Why do you think interest rates for homeowners are low and for land are high? Is all about risk. I mean, what I would know, I only do this for a living, have a master's degree in real estate and have been doing it for almost two decades.", "replies": [{"id": "hrz1r06", "text": "&gt;that is not cheap, nor free.\n\nI think we can safely assume that \"*not cheap\"* would indicate it's \"*not free\".*\n\n*\"People expect a return for higher risk\"*\n\nThey expect a return for lower risk as well.\n\n*\"I mean, what I would know...\"*\n\n(I think we can safely assume it's not grammar or sentence structure).\n\nAnd as to the legality of liens in Florida,you may want to do a little more research before you explain \"as a banker\" how lien laws work.", "replies": [{"id": "hrz4hhr", "text": "&gt; They expect a return for lower risk as well.\n\nA lower return, that is. Higher the risk, the higher the return. This is why McDonald's cap rates are so low and C class office are really high. The same reason why US bonds are 2% and Argentinian and Greek bonds are trash that paid 20% annually.\n\nThis is Real Estate 101.", "replies": [{"id": "hs1wmfo", "text": "&gt;This is Real Estate 101.\n\nSo is the original commenters point about lower risk with commercial tenants.\n\nThank you for the education about the differences between US bonds and Greek bonds.  I'll review my portfolio for any from Zimbabwe or Venezuela.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hryra37", "text": "In this case I would actually be fine with them either leaving or staying.  If they leave, I'll convert the property to a different type of business.  I'd just be worried about getting sued while I'm waiting.", "replies": [{"id": "hryu25f", "text": "Is it in the tenant\u2019s lease that they can allowed unleashed dogs at the property? Not sure if legal reason allow you not to allow that with change of ownership and change of rules", "replies": [{"id": "hrz8c1g", "text": "I assume it is since they've been operating in this location for about a year.  I wouldn't want to try and come in and change anything.  I'd just collect rent for 3-9 years and then re-tool the building for a different type of business.  I assume it will be closer to 3 than 9 because they aren't doing a booming business . .but either way is fine.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hrywbab", "text": "In some aspects, yes. But in terms of vacancy risk, commercial is riskier. Also depends on asset type and even the specific property. Replacing a commercial tenant is often more expensive as they \u201cusually\u201d build out the space which could often mean capex charges in year 0 of the lease of hundreds of thousands of dollars. Dealing with renters might be considered a different type of risk but if you have a good property manager and account for the expenses incurred from said \u201cbad\u201d tenants, I think you can mitigate that risk more effectively and be better prepared for it.\n\nRenters are also supported by the US government and businesses are more at risk for cyclical business recessions which can affect net commercial leasing absorption especially if your tenants are more exposed to the affected industries.\n\nEverything considered, I would still choose a commercial investment vs residential.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hrxnxqf", "text": "Not a dumb question at all. Theoretically you should not be responsible for your tenant's actions or inactions. With regard to dogs biting or fighting one another, I'd find few situations where you could be held liable. That being said, the usual LL liabilities are still relevant (slips and falls, trees falling, etc), but I couldn't see a situation where the tenant's business operations could affect you. Would be worth running by your insurance rep if you are thinking of making a move.\n\nHope this helps.", "replies": [{"id": "hryqxiy", "text": "Thanks - that was indeed helpful.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hrxt95c", "text": "You should not have much risk assuming tenant has appropriate insurance.  Make sure you review their policy and understand what is covered, and more importantly what is not.  Also make sure their coverage limits make sense and their deductibles are not crazy high.", "replies": [], "depth": 1}, {"id": "hrxz97t", "text": "It depends on your state law.", "replies": [], "depth": 1}, {"id": "hrxzj9z", "text": "My first thought was, don't buy this property (or any property) unless you also have the funds for a lawyer on retainer that can help answer those kind of questions - taking into account federal, state and local laws.", "replies": [{"id": "hryqtu7", "text": "I'm still in the 'imagining phase' - not even serious enough to engage representation but, for sure, I will use a lawyer if I proceed.   This particular property will be long sold by the time I get ready to move on anything.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hry51sc", "text": "There can be slightly more risk. Depending on your actions, you most likely are not liable for any actions of your tenants. That said, if you get sued, then you still have to pay to dismiss the claim.", "replies": [], "depth": 1}, {"id": "hs04h2f", "text": "I am friends with tenants who own these kinds of bars and their building owners. There is a clause in their lease that essentially makes the tenant responsible for everything, and it's a NNN lease. So, in general everyone is feeling ok about it. Honestly the building owners biggest concern was damage to the interior finishes. So a sign was put up next to the iconic \"we reserve the right to not serve you (esp if you're a jerk).\" sign indicating that canine guests may also be asked to leave at the whim of the bartender or manager.\n\nThey made it into a funny sign that fit the tone of the place, and it made everyone else more comfortable. \n\nAnother friend just instituted a leash law. Solved all the possible issues.\n\nHowever, this is all legal in my jurisdiction. So maybe read up first.\n\nTBH if this is the biggest issues, NBD. Good luck!", "replies": [], "depth": 1}]