Long Term Lease
I have a potential tennant who wants to sign a long term lease (8yrs). This sounds appealing to me as long as he is a good tennant (I don't want to get stuck in a bad situation). I am considering offering him a discounted rate while including an annual increase in the lease. The apartment usually rents for 650/mo~how much should I discount the rate and how do i determine an appropiate annual increase?~also does anyone see any potential problems with this arrangement ?
Why offer a discount at all? The tenant wants the long term lease. Why offer a discount for something they already want?
Watch out for your state laws. In Oregon the lease is binding on the landlord but not on the tenant when it comes to the term. The tenant can provide 30 days notice and then break the lease at zero cost. The landlord can not bread the lease.
You said 'apartment'. If we are not talking about residential (1-4 units) then I have less concerns. If you have a 1-4 unit building, what will happen if you want to sell? A below market rate that can not be changed or terminated for years to come will negatively impact your ability to resell the building.
If you are talking about commercial (5 units and above) the value is a function of the rents less the expenses. Hence any discount that I would offer would be in line with my expected savings on expenses and no more. Otherwise you are reducing the value of the property.
John
[addsig]
Well I have to wonder why you would want to do this. First, as John has said, the reality is that leases protect tenants more than they do landlords in the residential business. If your tenant decides to move out before the end of this long-term lease there is, in fact, very little you can do about it.
However, the lease is almost certain to be binding against you. Which means that you will have a diifficult time raising rents should that become desirable/possible. Unless you think that your location is in for a long stretch of no escallation in rents this looks like a no-win to me.
Commercial tenants often sign long term leases like this but the situation there is somewhat different because the tenant needs the stability of the long term lease in order to justify advertising expenses, for example, which help build the business. In addition the turn-over time on a re-lease of commercial space tends to be longer which means that the landlord has an economic incentive to maximize the length of time the tenant stays.
I was recently reading the DE landlord-tenant laws and studying the Va. RE Exam. It rings a bell that I have read that any lease over 36mos. falls into a different ownership catagory ... or something like that. Anyway you need to do some legal research (for your area) because you may loose certain ownership rights. Look into.
I also think that it is a bad idea signing a long term residential lease. It will prevent you from raising rents unless you have a clause that adjusts rent to market.
My first question to the prospective tenant would be to ask her why she wants an 8 year lease term?
Also if she wants to stay somewhere for a period of time, she may be a great candidate for a lease to own or contract sale.