Negotiating A Lease w/ Pre-Existing Tenant in Commerical Property

[Dewain J.]

Hello All, 

I'm a new investor and I recently acquired a property that has a commercial 1st floor and several apartments in it as well. The apartments were all in need of rehab and are vacant. The commercial space is occupied by a business operating on a month to month lease. 

To acquire the property I used a mix of my own cash and a hard money loan, so I do have some interest payments being made monthly, so having the business in there to offset some of that expense has been great, but I think that their rent is a little low for the space they have. 

As the rehab is coming to a close and we are looking to start filling the apartments, I need to address the lease situation with the business tenant. They have been operating on a month to month lease all along with the previous owner, and we just let it continue while we rehabbed. Obviously we'll need to sure that up for a longer term. Also I feel the rent may be too low and would like to increase it, especially since we had some capital expenditures that had to go into this space already. 

So I just have a couple questions. Any help would be appreciated. 

1. How can I go about finding out what the market rent  for the commercial space should be for the area? 
2. Any advice on approach in terms of addressing an increase in rent? They seem to be good tenants (they had even put some work improvements in the place themselves prior to my purchase), and I would love to keep them there and not have to deal with a potential commercial vacancy. 
3. How long of a lease should I shoot for, and is it normal to build incremental increases? 

[Mav Larson]

Just some thoughts:

- If you generally like the type of business, I'd probably work to make them stay, especially if the business enhances the property and will make it easier to rent the apartments up top. 

- In the past, I've signed onto loopent, in the for lease section, and looked at what other units are renting for in the area. I then would sign my tenants to something similar. 

- What I've done is just blame the lease on the bank. Let the tenant know that the bank requires at least a three year lease in place at this rent. I've literally used this line before: "The lending bank is being a hardass and I have my hands tied. There's nothing I can do. The bank requires a lease in place and at market rent. It was part of the lending agreement and they've already asked about it so we have to get this done asap." 

- I would think that a 3 to 5 year lease is appropriate for a local business. @Martin Z.is right, if the tenant isn't doing well, they'll just leave. And at that point, they won't have any cash for you to go after, nor would you probably want to.

- I also lease my spaces for slightly under market rent but in the lease make them in charge of everything inside of the exterior walls and roof. This means that they're responsible for anything electrical, water and plumbing to the meter, mechanical, and any interior modifications or maintenance. For the HVAC, I have something like: "Tenant is responsible for the first $500 of repairs or replacement to the HVAC system." I have some HVAC units that are 30 years old and if they break, they probably would need to be replaced. This way, the tenant would also pay $500 of the cost of a new unit. In general, the type of lease that I use is a Modified Gross Lease.

- I have mostly startups and local businesses on my properties. NNN wouldn't work, but the next best thing is that they're responsible for the repairs and maintenance of everything in their unit.

Hope this helps!