Need advice - commercial real estate tenant propose lease buyout
Hi everyone,

1. I'm stepping in to help my family after a death with a commercial real estate property.-Current fast food tenant got acquired and parent company decided to close location
2. They are proposing 7 months rent. There's 40 months left on the lease.
3. I've discovered they haven't been paying the increased rent as per contract for 5+ years resulting in \~$60,000 loss.

What is a reasonable offer? Getting a new tenant would require tenant improvement allowances and we don't want to pay anything that we don't have to.

&amp;#x200B;

Thank you for your advice

&amp;#x200B;

I've talked to the new management about collecting back rent, but they said since we already cashed the checks within 90 days without complaint, then they are free of the obligation.
[{"id": "escxb7v", "text": "Have you been billing them for the rent increases and they haven\u2019t been paying them and were the rent increases clearly defined in the lease? Is there a termination option in their lease?", "replies": [{"id": "escysw0", "text": "No it's a NNN so they automatically send rent checks. But when new ownership came in 2014 they stopped providing gross sales reports and my family stopped pursuing after several attempts for whatever reasons.\n\nThere is no termination option in the lease. Really appreciate the help.", "replies": [{"id": "esd0q0u", "text": "Is providing sales also something they should be doing in their lease? It sounds like they could be in default.", "replies": [{"id": "esd0x0m", "text": "Yes they should have. A lot of things went wrong and unchecked 5 years ago for reasons I don't know. But I did reach out last month and they provided sales from 2016-2018.", "replies": [{"id": "esd3ona", "text": "It sounds like there might be a percent of sales above a breakpoint clause? NNN doesn\u2019t mean that they pay a percentage of sales necessarily. It means they are required to pay base rent, tax/ins and common area maintenance. Whatever the case, if the tenant has made you an offer to terminate I would counter with at least double the amount. Also talk to a broker and start preparing to market the space immediately.", "replies": [{"id": "esd4ota", "text": "man this sub is really great. great, great advice here. \n\n&amp;#x200B;\n\nHere's the rent clause:\n\n\\-The Base Rental shall be subject to adjustment of ten percent after each fifth year of the Term, including the Extended Term, which adjustment shall be made on the first calendar day of each year of the Term or Extended Term. Notwithstanding the foregoing, if the adjusted Base Rent for the next five years would be an amount greater than an amount equal to eight and one half percent of Gross Sales, as defined below, for the twelve month period immediately preceding the adjustment date, then in, in lieu of the adjustment described above, the adjusted Base Rent for the five year period shall be the greater of an amount equal to eight and one half percent of Gross Sales for the twelve month period immediately preceding the adjustment date or (b) the base rent then applicable without adjustment. The Base Rent may not, on any adjustment date, be reduced below the Base Rent then applicable.", "replies": [{"id": "esd5fkf", "text": "Interesting, I\u2019ve never seen a percent of sales clause written like that. It benefits you though - if 8.5% of their 12 month sales is more than your built in base rent, then they have to pay more. You should really get an attorney involved so you can be sure what the tenant should have paid over the course of the term.", "replies": [{"id": "esd5jza", "text": "How much would an attorney charge for something like this?\n\nDo you know about this - \" I've talked to the new management about collecting back rent, but they said since we already cashed the checks within 90 days without complaint, then they are free of the obligation. \"\n\n&amp;#x200B;\n\nIt also hurts us if their sales are below 8.5%.", "replies": [{"id": "esd5tfx", "text": "Would need to read the lease, which I\u2019m happy to take a look at actually. I do this a lot. An attorney would probably charge by the hour but you can always try to negotiate a cap. This seems like a situation where it is definitely worth it to get an attorney. You\u2019ll be getting a lump sum check from the tenant anyway.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "esdgxcf", "text": "Just because the property is under a NNN least doesn't mean you have to stop being a landlord. You send the bill regardless &amp; you allow follow through on your accounting.\n\nI agree with @longdistancefax. \n\nDo you math on the present value of the remain 40 months with the stated escalations &amp; send them the bill. Then get a lawyer &amp; get ready for war. \n\nThis guys has being stepping all over you &amp; he knows it. If I were you I would do much talking, beside find the present value of the 40 months send him the bill &amp; the name &amp; contact information of your lawyer.\n\nI just researched Kaizen Restaurant &amp; these guys have 17 locations total with total revenue of $27.39 million just an FYI.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "esd2udg", "text": "Without seeing the lease that\u2019s in place.. If there is no termination option then they are required to pay rent per the lease through the term. \nMy experience with a lease buyout has usually been 1/3 of what remains on the term. So if there is 40 months left then 13 months of rent. Hopefully the location of the property is great so you don\u2019t have an issue leasing it back up.", "replies": [{"id": "esd31de", "text": "Wow that's great information, thank you. Can I ask how to justify 1/3 of what remains?", "replies": [{"id": "esdhvkn", "text": "Well many judges look at what other entities reasonably expect in the same situation, so I guess you say \"industry standard is this.\" I agree with others though I think you have very little to lose by playing in hardball.", "replies": [], "depth": 3}, {"id": "ese2tad", "text": "You can justify 100% of remaining term. They are at your mercy.\n\nIf you don\u2019t let them off, they still are responsible.  In fact it would be up to them to sublet the space, and they\u2019d take a hit.  Eg. Collect 75% and they\u2019d have to top up 25% and you would get 100%\n\nF-em.  They want to play dirty, hold them to their deal. A good lawyer will solve this for you.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "esd3jos", "text": "Take the sum of the Rent Payments remaining as per the valid lease agreement (so 40mo. remaining multiplied by the mo thy rent payment(make sure to calculate with the agreed upon rent escalations)). \n\nTake that value and calculate Net Present Value of that money.\n\nThat number tells you the lump sum value of the rent owed if they were to pay you all the money owed in full tomorrow. That is the number you go back at them with. If they balk at that so be it, they are on hook for the entire term then. \n\n\nThings to consider:\n\n-They are in default. If they haven\u2019t been paying you the agreed upon amount as per the lease then they are in default. Not sure if you are billing them or if they are paying you direct or if you have a property management firm handling. Doesn\u2019t matter, you should collect the 60k asap. Get a lawyer involved should you need to. \n\n-You have no obligation to cut them a deal. They signed the lease, pure and simple. You are well within their right to hold them to that agreement. Whether they choose to operate their business or not is none of your concern - they must pay you the agreed upon amount at the agreed upon times (unless you have a \u2018go dark\u2019 clause in the lease preventing them from doing this. If there is, it likely stipulates that they are required to be open and operating for so many hours a week etc). \n\n-unsure of the credit worthiness of your tenant. Is it a single store operator? A franchisee? A corporate run store with regional/national credit? This is just a determining factor is how likely it is for you to get your money should you be forced to sue / how likely they are to go bankrupt etc etc \n\n\nNext steps if you are willing to deal with the headache could look like this:\n\nThe goal is to have no/minimal gap in rent payments between tenant currently in the space and the next tenant. \n\nCurrent tenant pays agreed rent while you market the space for a new tenant with the goal being to backfill the space with a new concept and a new term. You essentially have 40mo to do this before you are out rent and NNNs. \n\nClear this with you current tenant saying - if i find someone new you must vacate the space in xx amount of days. Usually 60-90days. Get this agreement in writing. \n\nShould you find the new tenant - Do NPV calc for whatever amount of money left in rent owed from current tenant. That is where you start your negotiation for lump sum to break lease. Then it is up to you to get however much you can / you feel comfortable accepting. \n\nNot sure of your market - but hopefully market rent has increased since the current lease was signed and you make more money ! Regardless, if it isn\u2019t - $1 &gt; $0. Some is better than none. \n\nBetter to have a lease in place at all times with no gap because otherwise you are paying NNNs out of pocket which is no bueno on a revenue generating property. \n\nHope this helps!", "replies": [{"id": "esd46u6", "text": "Thanks @longdistancefax, that helps a lot. I tried collecting back rent, but they said since we cashed the checks in 90 days without complaint, then they aren't obligated to pay. \n\n&amp;#x200B;\n\nso original tenant A had 50 franchises. he sold them to tenant B which should own the same if not many stores. then current tenant C acquired them. So it's hard to find out how many stores current tenant C might have.", "replies": [{"id": "esd8fg5", "text": "That 90 day rule he\u2019s feeding you is total bs. He\u2019s preying in the fact that you are an inexperienced LL. \n\nThe fact that you cashed the check doesn\u2019t matter. Ever.\n\nThe only case in which that the \u201c90 days without complaint\u201d line he fed would ever be true is if that was baked into the lease. Which begs the question - why the heck would any LL ever in any universe put that in their lease. I\u2019ll answer - they/you wouldn\u2019t. \n\nGet a real estate attorney to review the lease, update him/her on any communication you\u2019ve had with tenant (both written and verbal), and have him draft a letter demanding the money in no uncertain terms. He will know what to do. It will cost you money for the attorneys services but on the other side is $60k. That is your money this man is stealing/has stolen from you. If he has multiple locations he has assets to go after and will lose. If everything you told me is in fact the case.. Gas him. The sooner the better.", "replies": [{"id": "esdhr41", "text": "I agree. No more Mr nice guy.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "esdhlac", "text": "The fact they refuse to pay the back increase would make me wonder why they think you should discount the lease to 7 months.", "replies": [], "depth": 1}, {"id": "ese3a7v", "text": "My advice is redact any posts with the tenants name and delete the link to the doc.  You have their signature/ company name etc.  There is a confidtuality / fiduciary duty you may be breaching by publishing terms of the agreement. They could argue it harmed them and counter sue.  Right now you are in the right , talk to a lawyer before you make any more moves and redact anything that identifies the parties.", "replies": [{"id": "eself5y", "text": "Thanks I missed that.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ese9f56", "text": "It sounds like you need an attorney, have you met with local counsel who can properly read the lease and negotiate on your family\u2019s behalf?", "replies": [], "depth": 1}, {"id": "eselyl6", "text": "You're in over your head here. Get an attorney asap. All of this advice is potentially completely wrong as no one knows what state you are in and laws vary widely.", "replies": [], "depth": 1}]