Avoiding Crafty Tenants - a Primer for Commercial Landlords

Oh, the joys of being a commercial property owner.... the cash potential, an appreciating asset, and all those tenants you can lease to... What prospects you have! But wait. Is there a downside to a commercial lease if you are a landlord? What are the pitfalls to look out for? Here is a good "Top Four" to look out for in the commercial real estate scene, and news you can use for avoiding problem tenants.

Sham Corporate Entities

Forming a corporation can sound so "official", and so business-like. If you are a commercial landlord, don't be fooled by a corporate name. Behind every corporate entity there are live people, pulling the strings. When you are a landlord and are leasing to corporations, you need to be sure to obtain a lot of information about the corporate principals, and how to find them. You will need names, addresses, phone numbers, a list of all corporate officers and directors, articles of organization from the state business licensing authority (usually the Secretary of State). Case in point: John Q. Landlord had a tenant for three years when the tenant's business went south. When he tried to sue the tenant, he found out that the corporate entity that he thought he had been doing business with did not exist. He did not know that he could sue the individual and he lost out on substantial income based upon the lie. It's best to get all of the pertinent information up front!

No Personal Guaranty from the Principal of the Corporate Tenant

Just because ACME Corporation has been in business for 20 years does not mean that the rent will be paid on time or at all! Whenever leasing to a corporation, be sure to require a personal guaranty. You wouldn't rent your million dollar pad to an 18-year-old with no credit would you, without a parent co-signer? Well, don't rent your precious real estate to a new company (or an old company for that matter) without a personal guaranty. That means that you need only an extra signature in the "Guarantor" signature block to make that effective. If you have to file suit at any time, you now will have the major player in court - and likely your source of recovery. Case in point: Jane G. Landlord rents a commercial office space to ACME Health Care Services. She never finds out if that is a corporation or an assumed name or a sole proprietor ship. When ACME stopped paying the rent and Jane finds out that ACME is going out of business and can't pay, she is at a dead end in holding the principal responsible, because she does not have a personal guaranty. It's always best to know the principal and secure their personal agreement. Companies go out of business, but people can still be on the hook and they should be!

Security Deposit

Think you can do business on a hand-shake and avoid a deposit? No way! While most commercial leasehold arrangements require a deposit of one month's rent - if you can get two months, you are in an excellent position. One month is a standard, so don't worry if you can't get more. However, if you can, you can bet that your tenant will be more careful, as they have more invested in the property. It's always possible to negotiate a large deposit, that is partially released over time to the tenant (i.e. taking 4 months up front as a deposit, and then after 6 mos or a year of good payments, some of the deposit gets released back). As an alternative, you can always require a letter of credit. These are offered by banks, on the credit of the requestor, which when given to a third party, are paid on demand by the bank to the third party. Case in point: Jose La-Landlord owns a restaurant space and rents it out to Juanita LaRestauranta who runs a fabulous ethnic food joint. It's the best on the block, until one day Jose finds that Juanita has left town and the place has been trashed, all without notice to him. LaRestauranta is la historia, and Jose has a lot of cleanup costs. He can defray those with a hefty deposit and his Lease should clearly cover this.

Non Payment of Utilities

When renting a commercial space as in an apartment, the tenant should be responsible for the utilities. The landlord needs to be able to predict costs and maintenance items. If the utilities are included in the rent, then the price of the rent will generally reflect those additional costs. In commercial spaces, the tenant should be responsible for the monthly and maintenance costs of all major appliances, including heating and air conditioning. When a landlord rents a property, one condition of the lease should be that the tenant must keep the utilities paid and current. A tenant that cannot afford electricity, will likely soon default on the rent. As a corollary, it is often the case that where the tenant is not held to be responsible for the utilities, he or she will run up the bill and the utility company will force the landlord to pay, regardless of whether or not landlord incurred the charges. To keep yourself in the clear with the gas and electric company, never agree to pay for the utilities for your tenant, where possible! It will save you in the long run.

While there are a lot of things that can happen and that should be talked about, commercial (and residential leasing for that matter) can be a very lucrative venture. Usually in the commercial context, the tenant wants to be there for a long time, they want to establish a long-term relationship, and they are invested in the building and community. These are all great traits, and can make being a landlord a great thing. As a landlord, you must document carefully, don't trust anyone too much, and do your background homework.