Today I took a break from property management training, and had an almost three hour lunch with one of my best investment property management clients.
Not the Mad Men type of lunch that may have jumped to mind, but a good casual meeting where we talked about a variety of topics, none of which involved property management training.
My client/friend travels internationally quite a bit, so we only have the chance to catch up and talk about his properties and tenants, and our individual investments, and the related investment property management issues every few months.
One topic of conversation was a problem tenant in a single-tenant property he had purchased a little over a year ago.
Every three months, almost like clockwork, the tenant pleads poverty and approaches us for aren’t concession of one type or another, nowadays an all-to-often occurrence with investment property management.
Our last meeting with the tenant was surprisingly adversarial, with the tenant, who is almost two months behind in its rent, basically giving us an ultimatum that if we didn’t reduce their went, then they would break their lease and go elsewhere.
The investment real estate property is owned free and clear, and the owner has substantial capital reserves, so if the tenant ends up leaving this won’t be a financial hardship on the owner.
But cash flow is still cash flow, and the odds of getting the building rented quickly aren’t that great, given the area of the market that it’s in. So we decided our best investment property management approach is to continue with the strong, firm, reasonable hand we’d taken with the tenant from day one.
The problem is that in this case, the tenant really does have the upper hand if the negotiations get tough.
Here’s the investment property management problem.
The building is leased to a private social club with national exposure. While at first glance that might sound good, the problem with the lease is that the party on the hook as the tenant is only that specific location entity, not the national group.
Nor are there any personal guarantors.
Which gives us a weak hand to play in this specific game of investment property management.
The situation we have is similar to leasing a free standing building to Walgreens or CVS, and not having a corporate guaranty but instead only the guaranty of that individual store location being around.
If that store goes, you’re out of luck.
I don’t think my client quite understood this until our lunch meeting.
Most problems that arise with investment property management and real estate are foreseeable and can be determined with even some very basic due diligence or research, but for various reasons are often overlooked.
Sometimes:
The buying real estate investor is motivated by a hot market
Currency exchange rates plays a factor
People buy into the ‘market hype’ going on at the time
Bad advice is given, or the investors will second guess themselves and not go with their first instincts.
Let’s face it, it’s easy to over analyze anything and find data to rationalize the decision you’d like to see.
In the case of our problem tenant, there are a few simple things that my client/friend could have done prior to buying the property that would have made his investment property management go much smoother:
Have a trusted independent advisor review the lease.
This can be an attorney, a friend in the business, or a real estate consultant. But for sure somebody who does not have a vested financial interest in whether or not the property sale closes.
Determine what the tenant actually does and who the management really is.
It’s very easy to assume that because a tenant has been paying their rent, they will continue to do so.
The problem is, things always change. There can be a new competitor, a change in the market demand, a family situation with the tenant, or a management change in the staff.
In our case, with one short pre-purchase meeting with the tenant, my client could have discovered that not a single member of the management group had any prior experience running a business, let alone the one they were currently involved in.
Figure out who is actually liable on the lease.
This is the easiest thing to do, but also the area that is often overlooked or erroneous assumptions made. It’s easy to assume that the tenant wants to stay in the lease, or values their business. To an extent, they probably do.
But if you’re operating in a market environment where increasingly people blame other for their problems and bankruptcy becomes more and more common place, understand that your tenant is likely going to be influenced by whatever the prevailing attitude is at the time.
In the case of our tenant, essentially nobody or thing is on the hook. There were no personal guarantees, and if the entity on the lease decided to become insolvent, my client would have very little to go after.
Yes, you can always get the attorneys involved, but then nobody wins, except the attorneys.
Doing a little basic investment property management due diligence on an existing lease can go a long ways to keeping your hard earned investment money in real estate that generates cash flow.
Jeffrey Roark
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