How Well Do You Know Your Tenants?

Jeffrey Greenberger Comments
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This column is for the purpose of providing general legal insight to the self-storage field and should not be substituted for the advice of your own attorney.

At first glance, the topic of this column may not seem like my normal fare. This one is more of a suggestion. But first, a question: How well do you really know the person you may allow to move who-knows-what into your multimillion-dollar investment tomorrow?

Before you answer, I know the average tenant only stays for six months, the industry is suffering along in a bad economy like every other, and this business is incredibly price-sensitive. This is particularly true in Ohio where operators have just had to add approximately 7 percent to their rent in the form of a state sales tax beginning August 2003. I also know not all of your tenants have A-rated credit. The industry has a segment of clientele that is temporarily between housing or trying to get a fresh start after a separation, divorce, bankruptcy, death of a family member, etc. I will also state, you do not want to get too involved with your tenant’s situation, lest somebody claim your business to be one of warehousing instead of self-storage.

That being said, I still think you need to know more about your tenants in addition to collecting driver’s license information, a credit-card number and an emergency-contact number. There are some other quick resources you can have at your fingertips when a prospective tenant tries to rent from you. These are items you can look up on the Internet, either through public records or a private subscription service, which may help you avoid those tenants who are dangerous risks to your facility. Following are a few examples:

[1] If you were able to look at tenants’ credit reports or summaries of their credit, you would quickly recognize there are some people to whom it is simply not worthwhile to rent. For example, if you were able to see there were 15 credit-card companies, mortgage lenders, auto-loan companies, etc., actively collecting from a prospect or that have made profit-and-loss write-offs in the last year, would you not imagine this tenant is a perfect candidate for bankruptcy?

The risk is that after placing his possessions in your facility for 30 days, the tenant may file bankruptcy and tie you up for 60 to 90 days before you can commence your lien sale; and while you may get Relief from the Automatic Stay, it will then be 30 to 60 more days before the lien sale or eviction is completed. On top of all that, you will probably spend $750 to $1,500 in attorney’s fees to get to that point. I venture to say the tenant I have described is a guaranteed money-losing proposition for your facility.

[2] If you could see that a tenant files a lot of lawsuits against people, including landlords and credit grantors, might you want to avoid being the next target? By checking certain court records, you can detect a trend wherein certain prospects are never happy with anything except a lawsuit at the end of a relationship. I know most of you want to say you are lucky enough never to have been sued, but still, if you take on one of these litigation-happy malcontents, would you not agree you are almost certainly setting yourself up for a loss?

[3] If you could look to see whether the person has been convicted of any crimes and, if so, what crimes and how recently, might you want to reject that tenant’s application? Certainly you have to set limits, and I am not advocating you refuse rent to anyone who has ever been given a payout ticket for marijuana. On the other hand, what about recent counts of aggravated arson, hazardous-waste transport and disposal without proper EPA licensing, fencing stolen property, petty theft from other self-storage facilities, etc.? What about previous drug convictions, particularly operation or distribution of substances you can manufacture in a self-storage facility, such as methamphetamine?

Under federal drug-forfeiture laws and, even more strictly, certain state drug-forfeiture laws, if you knowingly and intentionally rent a premises for the use, manufacture, storage or distribution of a controlled substance, liability can be imputed on your business, and you can have your property forfeited to the government as part of a drug seizure or be fined. This happened recently to a business that allowed its commercial spaces to be used for teen parties known as “raves,” where methamphetamine had been distributed and consumed. The owner was fined $2 million. The government seeks to not only punish the manufacturers, distributors and consumers of the drug, but the people who allowed the party to occur on their private property.

Please do not read this article to say that if you accidentally discover a methamphetamine lab in your facility you should not report it to the police for fear of drug seizure. The terms “knowingly and intentionally” have very specific definitions. Stumbling across someone making drugs or having a drug dog sniff it out should not constitute the actual knowledge. However, if you have been watching videotapes of people bringing 50-gallon barrels of farm fertilizer in and out of your facility and have not done something about it, you may be subject to liability.

Prevention Is Your Best Cure

This is a different day and age for the self-storage industry. Your tenants seem much more willing to put off paying rent for longer periods of time, allowing more and more property to go to lien sale; and they seem much more willing to sue a facility when property is damaged or their goods are sold, even if done so properly. Your tenants are storing hazardous waste or using your facilities for the manufacture of illegal substances more than ever before, and I fear this is a trend that will continue.

My hypothesis is the more strict your standards for rental, the more likely you are to discourage these kinds of people from storing at your facility. I cannot promise you can rid all self-storage facilities of these sorts of people; however, the smart readers of this column can put up enough barriers to entry.

What Next?

So what can you do to look more closely at your prospective tenants? The first and simplest thing is to make sure you have a strict photograph- identification requirement. You should never rent a unit to a tenant who cannot produce at least two pieces of photo identification, one of which is government-issued, including either a Social Security number (SSN) or individual taxpayer-identification number (ITIN).

The second thing you can do is use the Internet, which has become a wonderful tool for checking backgrounds if used properly. There is a lot of free information out there. The first place I would check, which will only add a few minutes to the verification process, is the website of the Clerk of Courts in the county or counties where your applicant most recently resided. Hopefully, your rental contract asks for at least one prior address if the current address has not been the tenant’s permanent address for at least one year.

You should contact your local Clerk of Courts to determine whether it has a searchable database by name of civil lawsuits and criminal charges or convictions. Most counties now do. If you don’t know where to turn to find your Clerk of Courts website, you can search for it at www.courts.net. It is worth playing around on the website to see what sort of information may be out there for civil records.

For lawsuits, I recommend you check the lowest level above small-claims court your county may have. Normally, this is a “District” or “Municipal” court. These are where small to medium-size lawsuits (in terms of dollars) are filed, and they normally handle evictions. If your tenant shows up as having been evicted five times in the last year, or has filed many lawsuits against creditors or prior landlords, you may want to reject him.

If criminal records are available, you might be able to do a quick check to see if your proposed tenant has criminal convictions and, if so, for what crimes. In your county, you may need a criminal-records release, which might slow down the rental process. Even if you do not actually conduct the criminal-records check, if you ask for the release to do so, it may be enough to scare off a prospective drug manufacturer or other type of offender.

Additionally, for a relatively low price, you can join one of the three major credit bureaus and pull actual credit profiles on your tenants. You do have to enroll with these services. The three major ones are Equifax, Experian and TransUnion. Information about each of these can be obtained on the web or by looking for a customer- service number in your phone directory:

Once you join, you have Internet access to a database where you can enter a tenant’s name and Social Security number and, in about 15 seconds, have a credit report. There is some training you will need to understand how to read a credit report or abstract, but it is not difficult. With a credit report, it will not take you long to develop a standard for where you want to draw the line with tenants.

I have one final and very important point: If you are going to establish some sort of screening process, you must be consistent in the application of your screening criteria. That is, if you are going to reject anyone who has had a prior felony conviction for distribution of controlled substances, you must reject all applicants who turn up having that type of conviction. You cannot deviate. You also have to set and maintain a standard for the number of prior evictions, lawsuits, open collections, unpaid bills, etc., that will cause you to reject a tenant. I am not asking you to set the standard very high at the start. If you set a standard for unpaid debts, evictions or criminal convictions, you may deter undesirable tenants from the outset.

About five years ago, some companies tried to sell credit- and criminal-screening services to self-storage facilities as a package on the Internet. These services never got off the ground because owners were hesitant to charge the $5 to $7 extra it would cost to have a complete report. I contend it is a small price to pay to avoid having your unit not earn income for three or more months while you perform a lien sale.That wait could be even longer if you are trying to get a bankruptcy stay lifted, or the hazmat team has to clean up and investigate a meth lab.

I am interested in hearing from readers as to whether there would be interest in using a comprehensive screening service if one became available. If you are interested, or if you believe it is an awful idea, please drop me an e-mail at the address below. In the meantime, there are precautions that are fast, inexpensive and easily available. They may give you enough information about a prospective applicant or tenant to save you hundreds—maybe thousands—of dollars in lost revenue and attorney’s fees.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, call 513.721.5151.

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