Gimer Law

MD and DC real estate law

REI

Tenant estoppel certificates

Real estate investors should be using tenant estoppel certificates (aka tenant estoppel letters) in connection with acquisitions of all tenant-occupied properties… even if they are not required to do so by a lender in connection with obtaining financing.

Why? Because you don’t want to find out after closing that some material fact about the tenancy has been hidden from you as a buyer taking title with a tenant in place. And you need to be able to get a tenant on the record regarding the status of the lease and “estop” them from making a different claim later.

Estoppel is a legal doctrine that says a person is prohibited from taking a different position later due to detrimental reliance upon representations previously made. The purpose of the tenant estoppel certificate is therefore to legally prevent the tenant from changing his or her story and denying the certifications made to the new landlord (you) at a later date.

Here are some common certifications to include in your tenant estoppel document:

  • That the Lease is in full force and effect and has not been modified, supplemented or amended in any respect.
  • That the commencement date of the Lease is X, and the expiration date of the Lease is Y. That the Tenant has/has no option to renew the term of the Lease.
  • That the Tenant has not paid rent or additional rent beyond the current month and agrees not to pay rent or additional rent more than one month in advance at any time.
  • That the rent has been paid through X date.
  • That there are no defenses to or offsets against the enforcement of the Lease or any provision thereof against Tenant.
  • That the tenant has deposited $X as a security deposit with Landlord pursuant to the terms of the Lease.
  • That the Landlord has not agreed to grant Tenant any free rent or rent rebatement.
  • That the Tenant is not in default under the Lease and to the best knowledge of Tenant, there exists no default by Landlord.
  • That the Lease is the entire agreement between the Landlord and Tenant pertaining to the property.
  • That the Tenant has no right of first refusal with respect to the property, option to cancel or terminate the Lease, or option to purchase all or any portion of the property.
  • That the Tenant agrees that no future amendment of the Lease shall be enforceable unless such amendment has been consented to in writing by a third party (such as a lender).
  • Since the date of the Lease, there has been no material adverse change in the financial condition of Tenant, and there are no actions, whether voluntary or otherwise, pending against Tenant under the bankruptcy, reorganization, arrangement, moratorium or similar laws of the United States, any state thereof or any other jurisdiction.

If the tenant cannot or will not make these certifications, you’ve got a problem. Each of these material certifications should be given by the tenant(s) during the investor’s due diligence/study period. If they cannot be obtained, the contract should be terminated or amended.

Overview: DC’s new short term rental (STR) laws

Many of our investor clients are in the short term rental (STR) business. Rather than leasing to tenants on a yearly basis, these investors rent out their properties for a few days or weeks, often with the assistance of a booking service such as AirBNB or VRBO.

There are several advantages and a few disadvantages to this REI business model, which we’ll discuss in another article.

Because STRs compete directly with hotels, and because they tend to change the neighborhood within which they operate to a more transient population, they have experienced resistance (both from the hospitality industry and the residents) in many locations around the country. The issue of whether a jurisdiction or community should allow or restricts STRs in some way produces heated debates. Facing pressure to act on this subject, DC in 2018 set out to establish laws regarding the operation of STRs within the city. The stated purpose of such laws were as follows:

To require the Department of Consumer and Regulatory Affairs to license the operation of short-term rentals, to establish duties and enforcement powers for the department, to provide for the establishment of enforcement procedures for short-term rental requirements, to require short-term rental hosts to obtain a license endorsement to operate a short-term rental, to create a new license endorsement for short-term rentals, to create a new license endorsement for vacation rentals, to establish health and safety requirements and other restrictions for hosts, to establish requirements governing the booking of short-term rentals, to permit limited vacation rentals, to require short-term rental hosts and booking services to maintain records, to require booking services to submit a monthly report of short-term rental booking information, to require hosts to pay transient lodging taxes, to require booking services to collect and remit transient lodging taxes, and to establish penalties for violations of this act.

Here are the most important aspects of the “Short-Term Rental Regulation Act of 2018”, which is just now in 2022 beginning to be enforced now that the structure of licensing and enforcement has been implemented:

  • The Act (and recently-promulgated regulations) establishes two (2) classes of licenses — Short-Term Rental and Short-Term: Vacation Rental. The license comes as an endorsement to the Basic Business License and lasts two (2) years. The fee to obtain each type of license is currently $104.50. A property can have both licenses.
  • The first hurdle to overcome with STRs is permitted use. A license is not obtainable if STRs are prohibited by the HOA, condo association or cooperative association within which the property is located.
  • The second hurdle to overcome is that a property used as a STR with either or both license types must be the owner’s primary residence. In other words, the property must be owned by an individual or individuals who have applied for and obtained the homestead exemption.
  • With a Short-Term Rental, the host rents out a portion (or portions) of the property such as a bedroom, an English basement, or an accessory dwelling unit, and the host remains present on the property during the occupancy, which must be thirty (30) or fewer continuous nights. There are no daily limits for the calendar year with respect to this type of rental.
  • With a Short-Term: Vacation Rental, the host rents out what is advertised as exclusive use of the property. The host does not remain present on the premises. This is your basic “whole house” rental. There is a ninety (90) day limit (within a calendar year) on this type of rental.
  • Fines for violating the law: $250 for the first violation; $500 for the second violation; and $1,000 and automatic revocation of the license endorsement for the third violation

DC has certainly put up some roadblocks to STRs with the new laws. Feel free to reach out to us with any questions about purchasing investment properties of any type, including those intended to be used as short-term rentals.

Investor exit strategies

Real estate investors have a number of exit strategies they can pursue with a property. Many use a combination of these strategies, depending on market conditions, their needs, and their goals. In this article we will give an overview of the strategies. In later posts we will go into more detail regarding each.

Wholesaling: There are a couple of primary ways to wholesale real estate… both of which involve getting a property under contract and finding an end buyer.

The first method is via an assignment of the sales contract. Using the assignment method the investor (B) enters into a contract with the seller (A) and then assigns the contract to the end buyer (C). The assignment fee is paid by the end buyer to the investory/wholesaler at settlement. The result is an A–>C transaction where only one Deed is required and thus only one set of closing costs is incurred.

The second primary method of wholesaling is a double-close. Using this method the investor enters into a contract with the seller and goes to settlement on the A–>B transaction. The property is then re-sold to the end buyer in a B–>C transaction. While this method does require two sets of closing costs, it is often preferred in certain circumstances such as when an end buyer has not been located yet or requires additional time to close or when the spread between the original contract purchase price with the seller and the price with the end buyer is significant.

Flip: Using this method, a property is acquired by an investor who plans to do some level of improvements to it before reselling it. These could be minor improvements such as repairs, paint, flooring and appliances, or major improvements such upgrading systems and undertaking larger renovations.

Buy and hold: It may not sound like an exit strategy, but it is. This is a long-term investment strategy where an investor purchases a property and holds on to it for an extended period of time. The owner typically intends to sell it down the road but will rent it out in the interim. The rents collected recoup some or all of the investment during the hold time; and in some areas appreciation is a factor.

BRRRR: A very popular buy and hold method used by investors is known as the BRRRR strategy. BRRRR stands for Buy, Repair (or Rehab or Renovate), Rent, Refinance, Repeat. By doing the repairs/renovations the investor’s initial investment can be recovered in a cash-out refinance which is based upon the after repaired value (ARV) of the property. By cashing out the initial investment, the investor can move on to the next property to be BRRRRed. This is a proven method for growing a portfolio of cash-flowing rental properties.

We’ll go into significantly more detail on each of these investment strategies, including how they are financed, in the near future!