Yesterday I was approached by a client who owns a strip mall in medium-sized city.
He mentioned that he has a property that he bought a few years back that is fully occupied. He added that most of the tenants are paying market rate, but that he has one tenant – an anchor tenant– that was actually there when he bought the property.
The problem is that the rent the tenant pays is well-below market rate, and were the tenant to leave, he could make about 40% more with the increase in rent from a new tenant.
His question was:
How can I bring up a rent raise with this tenant, without seeming like a greedy landlord?
This is actually a problem that isn’t all that uncommon. The real question that this client was asking is, how can he make sure to get a rent raise without things getting nasty between he and his tenant?
There’s also a second question here too, and that is, “is your tenant worth the discount?” Let’s say your tenant always pays on time, or even early. They never give you trouble, and don’t bother you with a million different requests. Is that worth an extra 10%, 20%, or more?
If so, then they should know they’re getting a discount because they’re a great tenant.
This goes along with the business principle of making sure that when you donate services, the person on the receiving end knows the value of what they’re getting. It’s not uncommon for business owners in other business arenas who donate their services to send an invoice, then cross it off, noting the discount.
You wouldn’t do this of course in commercial real estate, but you could let the tenant know next time you see them, that because they’re such a great tenant, you’ve decided to keep giving them a discount.
But let’s say you really do need or want that rent raise. After all, you have a family (or portfolio) to feed too. So how do you do it?
First of all, it’s important to realize that to a certain extent, you will always be a greedy landlord to your tenants. That’s simply due to the nature of your RELATIONSHIP with the tenant. They owe you money, and as such, your relationship with them will never be on completely equal terms.
Despite this, however, there is a way to get clients to agree to a rent raise, without things getting too acrimonious, if you follow these tips.
GOOD RELATIONSHIPS WITH TENANTS PAYS OFF IN THE END
The relationship you’ve built over the years with tenants has a big impact on how your tenant will react. If you’ve tried to treat them fairly, then even with things didn’t go their way, then at least they see you as reasonable person.
It’s easier to hear bad news from someone we get along with then someone we don’t.
If you do have a good relationship with your tenant, then the best thing is to bring up the issue face to face. This will allow you to smooth things over, and address any concerns the tenant has right then and there, without having to wait to get hold of you.
Of course if you can’t do it face to face, you can send a registered letter and follow things up with a phone call. It’s a little more formal though, and tends to be more of a surprise to the tenant.
You might actually be pleasantly surprised by your tenant’s response, especially if its been a few years since the last rent raise. Tenants know that rent raises are a part of business, and just as you’re wondering whether or not to ask for a rent raise, they’ve probably been wondering when you’re going to raise it.
GIVE TENANTS TIME TO ADJUST TO THE IDEA OF A RENT RAISE
Don’t present the rent raise as a coup d’etat.
If you bring up the issue by saying candidly, “You know, it’s been x years since there was a >cost of living increase, and so I’ll need to raise the rent by x date,” you give you tenant time to adjust to the idea of a rent raise.
Doing it this way makes it clear that a rent raise is inevitable, but also allows them some wiggle room to decide whether or not they want to stay. It also gives your tenant a chance to prepare financially for the raise; even if your client is doing well, they’re still a businessman faced with an unexpected increase in fixed expenses.
Interestingly enough, in my client’s case, after his tenant looked around at the other properties available, and then figured in the cost of relocation, they realized that they were still getting a great deal.