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[{"id": "hiapj8q", "text": "Market rates are market rates. However, if this individual was as engrained with your father as the post illustrates, you may consider what shaking this up a bit may do to the relationship. He may just leave on principal. Can you lease it again quickly? Was this person doing things for your father that you may find undesirable as well? I don\u2019t gather your dad was giving the house away so I\u2019d persist, but very carefully. \n\nDo you know the answers to these questions? Have you asked?", "replies": [{"id": "hiasp53", "text": "Thanks for your comment!\n\nMy father and the tenant were not friends, but they had an amicable landlord-tenant relationship for a long time.\n\nRe-leasing is not an issue, we're very lucky in that regard.\n\nAnother piece of info: the tenant is just about to retire, and may be (I'm not sure) leaving the franchise to his son or daughter, or they may all leave together... no clue.", "replies": [{"id": "hiau7oh", "text": "The only other reason I could see it being so would be that this individual is the linchpin to the plaza and overall rent reliability may hinge on that business\u2019s ability to fill the parking lot", "replies": [{"id": "hiauolx", "text": "Hahaha, the answer to that is a resounding: \"no\".", "replies": [{"id": "hiclq3f", "text": "So no co tenancy clauses ;)", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "hic2f7x", "text": "what if brought it up as a future thing an negotiated a 3-5 year gradual increase to market rent?", "replies": [{"id": "hic3x1q", "text": "I would consider that.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hiar20q", "text": "I think you have the right idea. I highly doubt that your tenant will \u201cunderstand\u201d but he\u2019s been the beneficiary of a below market deal and needs to either have an introduction to reality or move. In the meantime, though, I\u2019d let him stay on a mo/mo lease with a much less than doubling of rent but substantially higher rent than current to avoid downtime while you find another tenant.", "replies": [], "depth": 1}, {"id": "hiasep0", "text": "Propose something like a 5 year lease deal where the rent escalates up to market rent over the course of the deal. Maybe include a 5 year option where the rent raise goes back to market standard (1.5%-3%). Now you've turned a pretty bad situation into a pretty good one.\n\n&amp;#x200B;\n\nIs this tenant paying utilities? (Gross or net lease?)\n\n&amp;#x200B;\n\nIf the tenant wants to \"leave on principal\" let him. A significantly below market rent is not just charity to the tenant on the rent side, but devaluing your property. Find a tenant that values the space they are leasing from you.", "replies": [{"id": "hiau35u", "text": "NNN lease; increase would be just to Base Rent.\n\nI am considering your rent escalation plan if he pushes back hard, but at the same time I am running my own family business and feel like it would be irresponsible to not to at least be attaining market rates (our rates actually undercut the market by $1-2/sqft.).\n\nWe have all the leverage here, but again... I don't want to be a jerk about it.\n\nThanks for your comment!", "replies": [{"id": "hiblvzb", "text": "You don't want to do rent escalation in CRE.  At least not if you are planning to sell/refi (are you?)\n\nIf you want the highest valuation for the property, you'd want to do something like give him 6 months free, then full price for the second 6 months of the year.  Sell it or refi it after 7 months.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hibrgro", "text": "Ive done this exact same thing", "replies": [{"id": "hibtsse", "text": "If your rent charged is $10/sf, market is $20/sf\n\nPropose the following under the pretense of 'split the difference, and get up to market in 5 years'.\n\n$15, $17, $19, $20, $21\n\n+1 right to renew at market rent\n\nOr a similar deal on a three year term.\n\nOr stay without a lease, on month to month with no 'tenure' ie you can give 30 days notice to vacate as they understand they don't have a lease. \n\nOr, be hard core and just ramp it to market right away, and potentially have a confrontational and untrustworthy relationship with the tenant. I feel like the actual result would be instant retirement and a vacancy for you, which results in 2 problems\n\n1. Obviously no rent is collected\n2. Given that there is no lease, your tenant may not be required to bring the space back to shell, ie you have to pay to demo the old improvements\n3. Leasing commissions and inducements, eg tenant improvement allowance or free rent inducement or both.\n\nI believe in Family Business, it sounds like you have a family business and your tenant does too. It might feel right for your dad to have leased to the father, and you then to lease to the son.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hic8tu4", "text": "As someone in the CRE space and has analyzed thousands of deals, this seems like the best option.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hiaxjes", "text": "It's the \"suddenly\" part that got my attention. No friendship deals last forever, but the last year and a half during covid have been difficult for most businesses.  If you plan to increase his rent substantially I suggest at least a courtesy face to face meeting where you tell him what's coming next and work out and something that allows him to make his own plan - to either close, move or make the transition to the new market rate.", "replies": [{"id": "hibg737", "text": "It's insurance... have they taken a hit?", "replies": [{"id": "hiby4gf", "text": "Probably not, but being disrupted by online insurance brokers", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hib4qhs", "text": "Gradually raise over a period and let them know 100% of your intentions to bring it up to market rate. Show them some comps and that should soften the blow. They'll probaly shop a bit but that's OK it sets expectations of where they stand.", "replies": [{"id": "hibfp0v", "text": "Yup, I've prepared plenty of comps for him... he would have to be oblivious not to realize his old rent was insanely good and even his new rent is below market. Thank you.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hib9bvr", "text": "I would say the best \"non-dickhead\" thing you could do would be to give a long notice period before the new rates kick in.  Or use the escalation idea.\n\nOf course, this costs you money.  So it's a question of how much you value not being a heartless landlord vs. the cost of raising the rent sooner.", "replies": [{"id": "hibfr3o", "text": "Very good point; thank you.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hib9idv", "text": "Your perception that the property is leased under market is not your tenants reality. By definition their current rent is market rent because it's what both parties agreed. Youre not owed anything for the past 20 years and don't expect any goodwill because of it. Having had a number of these conversations, here are a couple of points to consider:\n\nBefore you do anything meet with them and talk. Discuss their future plans and state of the current lease. You may find some documents exist you don't have record of which can inform your next steps. \n\nDecide your priorities.  If its maximising rent as quickly as possible then delivery doesn't matter, only the time it takes to re-let and the new rent.\n\nNot knowing your experience/knowledge, there is often a reason for below market rents, your father ran it for 20 years and knew at least a little about what he was doing. Maybe he was excessively nice. Maybe he knew something you don't that makes that space worth less/harder to lease etc. The later is more common than the former in my experience. Doesn't mean you change course, but be prepared for it being harder, taking longer and leasing for less than you anticipate and ensure you can weather this.\n\nIf you're doubling their rent have the fortitude to look them in the eye when delivering the news. They won't receive it any better but they will respect you more which will make whatever forms your future interactions take go better. Keep the conversation fact based when presenting reasons and avoid being drawn I to emotional arguments. Lots of things get done motivated by spite/anger that make no financial sense. Having them respect you will hopefully minimise the chances of this. As will going in with absolutely all the information.\n\nWhilst the business \"should\" be able to afford higher rent it likely can't. I'm infering from what you deacribe that we're talking a small or Medium family business not a multinational. People tend to work as hard as they have to an especially if they're close to retirement they don't have the energy they initially did to drive it forward and maximise everything. Not knowing the industry its impossible to know the % of revenue rent makes but very few can weather immediate increases. If you want to maintain the tenant without vacancy consider stepping this in over time. Half rent for a year is cheaper and less risky than six months vacancy and three months incentive. Can't say without knowing your market.\n\nIncreasing rent immediately may not be the best business decision. Ensure you're considering the numbers if it takes twice as long and leases for 30% less than you expect.\n\nEnsure you know who the plants/fit out belongs to. Granted if it's 20+years old its likely worthless but ensure you know clearly who is responsible stripping and have funds to present the space as the Market expects.", "replies": [{"id": "hibfio1", "text": "Great advice, thank you. My father was very nice (I'm obviously biased) but unfortunately it led to him being taken advantage of a lot, which never seemed to bother him, but always bothered me.\n\nI really liked your point about discussing it with them first to discover any unknown documents; that's a very possible scenario here so I don't want to look like an idiot having missed a previously agreed upon scenario (in writing) of which I was not previously aware.\n\nThanks again.", "replies": [], "depth": 2}, {"id": "hiblkc4", "text": "This. I'll also add that an insurance business is a nice dry tenant. No smells, noises, late hours, or high parking demand. Can the space be re-let and for what uses? What's the zoning allow? Health department need to be involved? What's the political climate for getting variances if need be for a new use? What's the appetite for this space? Have you spoken to the local retail brokers to understand what tenants are looking and what they're paying? What MEPs/bathroom(s) etc. need upgrading or replacement for the next tenant, and how much will that cost? Are brokers or tenants calling you asking about space, thus giving you an indication of demand?", "replies": [{"id": "hidcmet", "text": "If they've been there 20 years it's almost a given that the space will need the bathrooms almost totally redone.", "replies": [{"id": "hidgilo", "text": "But it's more than just renovating them. You'll need at least 1 ADA compliant bathroom, and those are bigger (likely) than what exists. Now you're eating into ghe remaining usable space slightly, or in order to fit it you may need to relocate it. Not to mention some new codes require things that may not exist, such as a janitors closet &amp; sink or fire sprinklers.", "replies": [{"id": "hifl2p6", "text": "Oh yeah. ADA is a given.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "hic0p51", "text": "I only wanted to comment on the email portion. Cmon. 20 years and you can\u2019t face him in person? He will not appreciate a \u201cthoughtful email\u201d\n\nOP please keep us informed on the outcome. A lot of my friends/clients are taking over parents CRE and they mostly are gung Ho about raising rents but we (myself included) sometimes don\u2019t appreciate how hard reduced cash flow or bad tenants are. My $0.02 as a 37 yo landlord\u2026", "replies": [], "depth": 2}, {"id": "hicir8f", "text": "Damn. I\u2019m going into CRE soon and this comment provides a ton of insight. Thank you.", "replies": [], "depth": 2}, {"id": "hid40eg", "text": "Thank you so much for your insights. I'm on the IT /appdev side of some of this activity at a bank and I find this absolutely fascinating. Doesn't sound like an easy career with a wealth of angles to consider. Thank you also for your humane and fair approach.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hibi60v", "text": "When you say current market rates, are you discounting for no commission, no vacancy, no TI's? I'd double check the math on what the true lease rate is for a new tenant before giving the old one an ultimatum. If you're open to them staying, and they've been a good tenant etc, I also support raising the rate over several years.", "replies": [{"id": "hic459l", "text": "I'm honestly going on my gut feeling about it paying off because it's double Base Rent, but good point I will confirm the long-term finances of it.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hibkidv", "text": "Get ready for a vacant unit", "replies": [{"id": "hic0sa3", "text": "Not a problem at all; we're in a desirable location. However, as mentioned, I genuinely don't want to make it seem like it's personal or anything like that with the tenant... though I also don't want to come across as just \"business is business\". I suppose I'm just looking for the perfect solution that doesn't exist..", "replies": [{"id": "hic0x87", "text": "Business is business I guess", "replies": [], "depth": 3}, {"id": "hif6k9d", "text": "Approach with honorable intentions. If it goes smooth, stay the course. If it goes sideways, switch to biz is biz mode. Set your expectations that it WILL be either one of these two outcomes. Try not to let yourself lose sleep over when someone else in a diff position, diff motives, diff goals from you is not happy getting what they want.", "replies": [{"id": "hifpbku", "text": "Thanks, good advice.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hibr99p", "text": "You are writing your own leases?\nId suggest a lawyer draft your leases, or at least the initial lease form", "replies": [{"id": "hic058w", "text": "Haha no, good question though. I write them with our legal counsel, but I like to be very involved in that process as it's the backbone of our business, of course.", "replies": [], "depth": 2}, {"id": "hic0wc7", "text": "Yes, lawyer here. Definitely first draft hourly, for my LL clients we do fixed fee on subsequent leases.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hic5gj3", "text": "I\u2019d do it face to face. Address your concerns and get his feedback. Find out all the details your father had with him. You may be missing several aspects of their business relationship. Also you\u2019d want to present an open door practice, so you\u2019ll be in the know and not burning bridges (unless you have on site Mgmt where they\u2019ll be your eyes and ears?)\n\nCollect your thoughts and deliver your expectations after conversing. Maybe nothing changes in the lease you\u2019ve written, but maybe there needs to be several alterations.\n\nHow long have you been managing the mall?", "replies": [{"id": "hidop79", "text": "About 3 years now.", "replies": [{"id": "hidtyag", "text": "Oh. So you\u2019ve had several cycles to see the operation.\n\nI hope you haven\u2019t waited until his lease was approaching expiration to bring this topic up and you\u2019ve been having face to face dialog with him, with this concern, for 3 years and haven\u2019t brought it up.\n\nIf so, you need to address this with him ASAP/today. \n\nGet every bit of respect that\u2019s left as soon as possible (prior to the lease expiring). If you do this, not face to face when you\u2019ve been interacting with him for 3 years, your respect will be gone. Period.\n\nYou may need to scale into the market rate based upon your previous actions. He\u2019ll destroy your name with other tenants if not.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hic84d9", "text": "It doesn\u2019t matter what you say.  The tenant will be mad and leave.  You will rent it at market and all will move on.  It\u2019s business. Not charity.  They got a steal of a deal for many years.  My experience is they will try to say anything they can but they know this day would be coming and the free ride would be over.", "replies": [], "depth": 1}, {"id": "hic9lk9", "text": "Calculate the increase to NOI if you raise to market, then based on the CAP rate, what that value increase is. \n\nFor example you increase NOI 25k. On a 6% CAP, that equals 420,000 in value to you.  \n\nSo ask yourself if this business deserves $420k of your money.  \n\nThat doesn't even take into account the money they saved over 10 years which at 7% growth is probably $1M. \n\nFrom a business perspective, I don't see how keeping them at their current rate is worth it.\n\nHowever if you're wealthy and don't need the money, then you have to evaluate whether the hassle is worth it.", "replies": [{"id": "hidovmb", "text": "Thanks for the advice. Definitely not wealthy, but people always think we have more money than we actually do! :p", "replies": [], "depth": 2}], "depth": 1}, {"id": "hicgveg", "text": "Hire a broker.  That keeps all emotion out.  The broker can educate both you and the tenant and mediate negotiations.", "replies": [{"id": "hif7300", "text": "That's a tough play if OP has been dealing with tenants face-to-face the entire time he's been part of the business and for lease renewal negotiation time he sends in a broker. Tenant will absolutely feel some type of way.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hid9d03", "text": "My uncle always says this.\n\nWe (landlord) are not trying to hurt you but this is also not a charity and I am not here to adopt you.  Kindly agree to the new lease or consider this your 30 day non-renewal notice.\n\nHave both the lease and a 30 day notice with you.  I'd also not go directly to market year 1.  I'd start with a significant bump to 70% market year 1 and then bumps every year...  on a 5 year lease it should get you close to market now and while it sux...  think about the fact that you will be getting no rent if the leave peacefully, paying to evict them if they don't go peacefully and, what condition is the space in when they leave?  Are the mechanicals 30 yrs old?  Are the finishes 30 yrs old?  Is there anything that has asbestos in it and will need to be abated?  If you find a new tenant, unless you give them a significant break you will be putting a lot of cash into the space.", "replies": [], "depth": 1}, {"id": "hj0hjyi", "text": "You seem like a young eager guy. That's good, but your pops probably knew a thing or two about how money is made by managing relationships and easing people into decisions.\n\nDo not do this in an email. Your father knew these people for 20 years. \n\nI'd market the space discreetly not for the purposes of finding a new tenant, but for knowing what that actual interest is for the space. It will also give you a reason for speaking with the tenant. Some things like this:\n\n\"I've had an inquiry from a business for a space and you are my only month to month tenant. I'm not inclined to accept this new offer but I would like to create an actual lease for you space with term of minimum 5 years. Would you like to have that protection?\"\n\nIf they say no, you now know they probably are having some business troubles, can't pay market rent, you are ok to market for a new tenant, and they will have time to find a new place. \n\nIf they say yes, I'd then discuss what market rent is and phase in the market rent over the five year period. Expense shocks can shut a business down even if they could have afforded the rent. This is especially true in family businesses.\n\nSome other food for thought:\n\nCan they pay the new rent or will they be forced to shutdown?\n\nAre there any other documents you're unaware of that protects their rent?\n\nHow long will it take to fill the space and what will be the dollar loss?\n\nAfter 20 some years, how out of code is the space and how much work is needed to be ready to show?", "replies": [{"id": "hj1t2ld", "text": "Thanks!", "replies": [], "depth": 2}], "depth": 1}, {"id": "hnbx2n5", "text": "Im in a very similiar situation as you.  My tenant and i are set to meet this week.  Im curious as to how you chose to move forward and what the end result turned out to be (if you're willing to share, that is)?", "replies": [{"id": "hnbziu8", "text": "I wouldn't say it went perfectly, but not bad (though still ongoing). The tenant's responses were a lot of \"this is a bit of a surprise\" and \"your dad and I had such a good relationship\" alongside some deferment tactics such as, \"well I might retire in a year so let's just forget the whole thing for now\". Tbh, a lot of BS which I expected as well as things that are blatant lies (or bending the truth at best). \n\nCurrently, he has asked for a graduated increase over an unspecified number of years. I will grant the graduated increase but will just average out to be the exact same as the current offer of higher rent (i.e., starting lower than the current offer and ending higher than the current offer so it evens out). He's in insurance (lots of number crunching) so I assume he'll know exactly what I'm doing, which I'm okay with sending that message. No response on that yet.\n\nI'm hoping we can find an agreement and it doesn't come to locking doors and selling off the tenant's assets (always trying to avoid that option). But ultimately I want you to know that I'm being pretty aggressive in this deal because the current tenant is A) vastly underpaying market rental rates, and B) a very small fraction of our business' income. Unfortunately the tenant has found themselves in a position with very little leverage; I would likely take a much more caution approach if the tenant represented a more significant portion of our income.\n\nIf I did it all over, I probably would have done it in person (I emailed) but I'm obsessed with having things in writing. Sounds like you're meeting in person which I'd recommend, but, as is good general practice, you should probably send a follow up email reiterating the main/important points of the in-person meeting.\n\nHope this helps, and good luck.", "replies": [{"id": "hnecw8q", "text": "It does!  Thank you for taking the time to respond!", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]