Rent to business + cash up front? Pitfalls?

Question

I have a condo for rent near a military base outside of Seattle in Washington State, and got a strange call today:

A man and woman called and asked about the condo.  I told them someone already applied and we were going through the approval process (in truth we already approved someone who hasn't yet provided a deposit to hold the unit, but I didn't say that). I said I could give them a call back if it falls through, but was happy to answer any questions in the meantime.

They told me that in order to get to the front of the line for approval they would be willing pay the entire year's rent in all cash (not necessarily all bills, probably a check).  I asked them a few questions and learned that they are a supplier for the military base and need a place to live for their employee, but they would be paying for it.

I said I would think about it and call them back.

Here are my thoughts:

• Upfront rent means there is no credit risk in theory (as compared to currently approved tenant who has less-than-stellar credit).
• Concerned about renting to a business, but probably could get them to cosign the lease, along with the employee, as individuals so I don't have to go into business credit analysis (plus they would be paying all cash).
• Probably could write a lease that says if they default I will refund the remaining rent balance.  That way they can't say "but we already paid for the full year" if I ask them to leave early due to a default.
• I would feel bad for the tenant we have already approved if we reversed our decision.  On the other hand, we approved her two days ago and she still hasn't provided us with a deposit to hold.  We also haven't signed any documents, so I technically could do it I think.
• Concerned about renting to a business if my lease isn't 100% bombproof (because it sounds like they can afford good lawyers.

What do people think about this?  Are there major pitfalls I'm not thinking of?  My immediate reaction is to be suspicious, but on the other hand this could be a good opportunity.  Frankly the only value in getting all the rent upfront is the reduced risk and time value of money.  I would probably rather have them pay more for the unit each month instead (which they might be willing to do).

All thoughts and insights would be greatly, greatly appreciated.  Thank you!

Matthew Olszak · Answer

@Ben Lukes They could need a place asap to put someone, and if the rental market in your immediate area is tight, I think its totally reasonable for them to try to jump to the front of the line in a way nobody else can likely surpass. It might be costing them multiples of your rent amount by not having that person living there. And as a military supplier, your yearly rent amount is likely a drop in the bucket to their budget.

Good thing with this is that they are a corp so tenant-landlord residential laws likely won't apply. On a deal like this, It'd be worth it to consult with an attorney and have them put in a provision that if the lease terms are broken, like the corp's tenant is dealing drugs out of the house, destroying property, etc, remaining rent if fortified as liquidated damages (I'm not a lawyer, they could make that sound nicer).

Still check basics like are they an established corp, maybe try to lookup their gov't contract or request it from them, basic financials, etc. That'll ensure if your unit is damaged, or the tenant doesn't move out at lease end, you'll have some recourse.

My first lease was to a temporary-relocation company using a gov't grant. I got paid way over what I was asking, got a reliable direct deposit every month, and had a lease backed by a multi-million dollar corporation. Don't be afraid of something different - a full year's rent is crazy for a family to pay, but its likely nothing for a decent sized corp who properly manages their finances.

Bob B. · Answer

I would consider it a red flag if they offered to pay 12 months rent up front.

Did they say why they wanted to do this?

I don't know of any (successful) business that would offer to prepay for rent, or for anything else. I've heard of individuals wanting to do this for various reasons, but based on the advice you have been given, I'd hold out for the applicant you already have.

Kim Meredith Hampton · Answer

@Ben Lukes be very careful on both fronts; leasing to a corporation, and taking a year up front even though it sounds  enticing! Even though you would rent to the corporation, an officer of the company must sign, AND I would run a background on the employee too.

Secondly, never ever take a full year up front. Just because you put a close in your lease, does not negate the fact that you took ALL the money: here's a copy of a blog I wrote about this very topic:

I know it may sound appetizing and those dollar signs can look oh so great, but there are many downsides to collecting all the rent upfront. You also will need to check with your state and or municipality, it could be against the law to collect money beyond the current rental period.

Some of the issues that I have ran into in the past are that the tenant needed to break the lease, we re-rented the property, but the owner wanted to keep all of the rent in escrow. We had no vacancy, no repairs, and the tenant paid our lease fee. There was no out of pocket or loss to the owner, so litigation ensued, eventually (one year later) the owner lost and had to refund the money we had in escrow. Thank god we had the funds in escrow and refused to send them anywhere until litigation ended, or I think the tenants would have been out the money, long spent by the owner.

Some other issues to consider that could and have happened to owners, is that the property could be damaged by a hurricane, flood etc... and they have spent all of the money, which essentially needed to be refunded to the tenant.

The tenant could file bankruptcy, and the owner could be dragged into this because of the upfront rent the tenant paid.

What if the owners get divorced, what happens to the money that was already paid? What if the tenant is in violation of the lease and you need to evict, you may have a real issue when it comes time to evict.

Lastly, if your applicant has not paid a holding deposit, they technically don't Have anything

Ben Lukes · Answer

Thanks @Bob B., that's what I decided to do.  They offered to pay everything up front after I told them someone else had already applied (as an incentive to me to move them to the front of the line).

Ben Lukes · Answer

@Kim Meredith Hampton Thank you so much for your insight.  I knew there was something wrong with taking all the rent up front, but I couldn't come up with what it was exactly.  If I had done it I would have kept all the rent in an (interest bearing) account in case something like what you mentioned came up and I needed the money.  That is why I would prefer more money each month instead of all the money up front.  The benefit of all that money would just be a little more interest.  That said, I just won't take the money up front and avoid the problem as you suggest.

If I do the following things would that solve the issues you raise?:

• Have the employee and the business owner (who I think is the person I was talking to) co-sign the lease as individuals, not as the business, and run credit and background checks on both of them.
• Not take the rent up front, but charge more monthly rent instead.

If I were the employee I wouldn't want to put my name on a lease that says I'm responsible for the rent, so maybe they won't agree, but from my perspective I don't want someone living in my unit that isn't on the lease.

Shaun Patterson · Answer

when your renting to a business its going through the business for all issues that would come up. Most of the landlord tenant laws don't apply in florida. It's all on a contractual basis since it's for a business. You can do whatever you want with the other tenant since nothing is signed and no money is given. They can technically be looking at another property and waiting for approval their. You will have to make sure that the lease agreement is up to the T on what it needs in it. Since  there is also more room for negotiation in a commercial lease. But if something goes wrong its mostly all down to the lease.

Rent to business + cash up front? Pitfalls?

Most Popular Reply