If you rent out commercial space to businesses, you hope they all succeed in their ventures for a number of reasons. Not only can successful businesses on your commercial property raise the value of the property if you ever want to sell, but it also means that your tenants will have no problem paying rent and meeting their lease agreement. That said, we don’t live in a perfect world, and businesses go under every single day. So what happens if one of your tenants ends up filing for bankruptcy? In today’s blog, we explain what you need to know about tenant bankruptcy as a commercial investor.
Tenant Bankruptcy For Commercial Investors
Tenant bankruptcy can cause a number of different headaches for property owners and commercial investors. Bankruptcy can impact your current lease agreement, your cash flow and your property value, so it pays to be aware of how you could be impacted by tenant bankruptcy. A bankrupt tenant can:
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Decrease Your Income - If your tenant files for bankruptcy, they will likely stop paying their lease. If you’re not getting paid for the space you’re leasing, your income suffers.
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Lease Agreement - Depending on the type of bankruptcy that is filed, your lease agreement may be changed. The tenant may be able to stay on the lease if remaining on it supports their reorganization plan, or they may be released from any current lease obligations, leaving you with an empty commercial space that needs filling.
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Property Value Decrease - It may become harder to sell your property or find a new lessee at the same rate if word gets out that the previous tenant went bankrupt.
You may feel like you have no control over whether or not your tenants stay in business, but you certainly have a vested interest in their success or failure. You can work to prevent tenant bankruptcy by doing your due diligence when taking on new tenants and ensuring they appear to have their finances in order. It’s also helpful to stay up to date on tenant bankruptcy laws and to understand the risks you take on when you rent out commercial space to others. Commercial properties can help to create passive income and excellent return on investment, but you need to ensure the tenants you rent to can uphold their financial obligations.
For help with any aspect of the commercial real estate process, from drafting tenant easements to ensuring your financial interests are protected during an acquisition or sale, reach out to the team at Commercial Partners today at (612) 337-2470.