Lender requires me to decrease term on tenant lease

[Travis Campbell]

Hello! 

I'm in need of assistance about how to approach one of my tenants about reducing the term on their lease from 5 years to 2.5 years. I'm in the refinance stage of a BRRR and my lender for the 30 yr loan cannot accept a property with a lease that is longer than 3 years. This is due to foreclosure risk and the lender being stuck in a long lease, which I understand.

The tenant moved in July 1, 2020 and has been very good so far. She is prompt to communicate any maintenance issues (roof leak, which didn't catch during rehab as it didn't rain) and the kicker is that they have already paid rent through November. The tenant prefers to stay a few months ahead in rent, which was very refreshing to hear. Recently she did mention that the size of the bathroom vanity is too large, so I'm thinking about using that as a bargaining chip to amend the lease term.

Any advice on how to tactfully approach the tenant? I don't want to ruffle any feathers as she obviously signed a 5-year lease for the security of not having to move in the short term, and my decrease to the term would add risk there.

Thank you.

[Kyle J.]

@Travis Campbell A couple options come to mind.  First one, find another lender that doesn't have an issue with the length of your lease (I've never even had a lender ask for a copy of mine).  

Second option (in the event you're set on this particular lender), just be upfront with your tenant and explain the predicament you're in and see if she'll agree to a shorter lease term.  Keep in mind she doesn't have to, but maybe she'll be willing to help you out.  

A bit of advice, if she does agree to a shorter lease, don't ever do a long lease like that again.  There's so many reasons to not do them, and virtually no good reasons to do them.  They just don't benefit the landlord (I know you think they do, but they don't).  

These longer leases don't eliminate vacancy, which is what most landlords think.  But the truth is, tenants tend to break leases and leave whenever they want.  They break one year leases all the time, so what would keep them from breaking a five year lease?  

What these longer leases are good for though is guaranteeing you a lot longer period of no rent increases, which is why tenants like them.  However, I prefer month-to-month so I can increase the rent or change the terms whenever I want (with proper notice).

Lastly, what if you wanted (or needed) to sell the property?  You may not plan to, but what if something happened in your life that necessitated that you sell?  No homeowner, and very few landlords, are going to want to assume a 5 year lease.

Anyway, just wanted to give you some food for thought. Hope this situation works out for you and good luck with your BRRRR!