I recently purchased a multi tenant business office building. One tenant who has been there for 15 years emailed me stating that his carpets are worn down, always look dirty, and have some areas of balding. He wants me to replace his carpets in his office. I'm thinking the the he and his staff have been tearing up the carpets so I shouldn't just replace them for nothing in return right? It's essentially a leasehold improvement which would make the unit a bit more desirable and valuable. So, I responded that he could replace his own carpet but I would have to approve of the contractor and the material used, no linoleum. Or, I would contract it out and pay for it out of my expense but in return I would need to raise monthly rent and possible secure a lease contract from him for a longer period of time. What are your thoughts on how to handle this tenant?
If there is little vacancy in the market you have the upper hand.
Overall I prefer to keep my property up and tenants happy, but also don't like to give away anything I don't have to.
I would say you eat 50% and he eats 50% as Tanh suggested. Or you do it and raise his rent enough to recover it in 2-4 years plus a little bit for "financing it" over the 2-4 years.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
4y
Your post doesn't give any context for what the lease and tenancy req's in order to answer your question. If this was residential I'd 100% say you should replace the carpet, and if it is a commercial NNN I'd say it's on him. But the commercial could be NNN, NN or state something completely unique as far as what was provided and who is responsible for which maintenance. Without that info who's to say if you should cover the cost or if her should cover the cost.
It’s a gross lease not a triple net. I guess my concern was he’s the one that’s been running it down for 15 years, I buy the place and 4 months into ownership it’s now a big deal to replace it. He’s 2186 sq ft so it would be quite expensive at $3-4/ sq ft. I wouldn’t be getting anything for the return on this investment except for a content tenant. Or I could really fix up the place and in turn rent it out at a higher dollar : sq ft amount.
If there is little vacancy in the market you have the upper hand.
Overall I prefer to keep my property up and tenants happy, but also don't like to give away anything I don't have to.
I would say you eat 50% and he eats 50% as Tanh suggested. Or you do it and raise his rent enough to recover it in 2-4 years plus a little bit for "financing it" over the 2-4 years.
Sycamore, IL · Member since 2017 · 1 post · 2 votes
4y
I could see the hesitancy to make this long term tenant happy. If you replace his carpet for say ~$10k, what will your other tenants start demanding when they hear of this?
I'd probably see what your lease agreement says first. Is it a full service gross lease or a modified gross lease? Whose responsible for inside & outside maintenance on the property? Typically, normal wear & tear for residential properties that responsibility lands on the landlord. In commercial space, it all depends on what your lease says.
I'd say offer him options:
1) he pays for it himself with your approval of contractors/materials. 2) You pay for everything but he has to sign a new lease with a higher rent and make them change to a NN or NNN style lease going forward. Depends on what the business is. 3) You guys split the cost, with him paying for the majority of it. 70/30 or 80/20 split and just a minimal increase in rent but stay with a gross lease.
Investor · Houston, TX · Member since 2018 · 25 posts · 5 votes
4y
I think @Ryan Moudy nails it with #2. If you can get the tenant to sign a longer lease and/or increase the rent and/or decrease other expenses, you'll make your NOI go up... if you end up paying for the carpet to make this happen I think the ROI is still excellent.
Rental Property Investor · Ontario, Canada · Member since 2016 · 68 posts · 29 votes
4y
In commercial, it is all based on lease agreements. I like the idea that others have suggested to offer your tenant options to choose from. It could be the opportunity to get the tenant to sign a new NNN lease with a rate increase that will help cover for this expense.