Q: I am writing about a recent column about a family inquiring about real estate. long term lease.
I know a similar situation decades ago when a family rented one of the best places in town for a large burger franchise restaurant on a 50 year lease. Apparently neither they nor their lawyers knew about the cost of living (COLA) clause, and sadly they were tied to a tragically poor-earning rental agreement for decades.
That may have happened here. If so, I think children should feel sorry for their parents (and themselves) instead of being mad at them.
A: Thank you for your comment. Not all financial decisions are good. Other times, there are good reasons not to squeeze the last money out of the deal. The adult children in your example, or the adult children we write about, may not enjoy the rewards of a great deal. However, there is also the advantage of earning income in the future.
That’s not all. Their children still own the property today. Once the lease term expires, the contract can be renegotiated. Hopefully you will get a market price for the rental. So it’s not all bad. Not so good for this time of year.
But this poses a bigger problem. It is the number of complaints received from families who feel financially “cheated” by decisions made by their parents or other relatives. Children often ask us about the choices their parents make regarding their commercial and residential real estate. Adult children are concerned about the impact their parents’ decisions will have on their wallets and lives. Many people are upset that their parents don’t leave their money as an inheritance and want them to spend it in their lifetime.
From where we sit, this is a lot of whining about nothing. Parents’ estate. their money. They have the right to make their own decisions about how to treat their money and property. This includes deciding who will inherit what and how much. if you have some trouble.
If you have a million dollars, I think you have to decide how to spend it. You can save, invest, stuff your mattress or buy a jetshare. Of course, I hope that you yourself are acting financially wise. And if it builds wealth for generations and benefits your children too, that’s great.
So what does this mean in the context of your comment?
Residential or commercial property owners often enter into long-term contracts with individuals or businesses. I don’t know what they’re thinking, or if they’ve ever considered what unintended consequences a decades-long deal could have. Perhaps these parents thought they made a good deal. Turns out they were wrong. It happens more often than you think.
Suppose you own a rental property, farm, store, or other property. And let’s say you agree to rent for 20 or 30 years. In the meantime, you will see the income stream that the property will generate. I am satisfied when I signed the contract. This is like buying an annuity or a bond that pays you a fixed amount each month with little effort.
You’re happy with it because you got the highest amount at the time. 1970. Fifty years later, prices have skyrocketed, inflation has risen significantly, and long-term investments have eroded.
Many leases include a cost of living adjustment (COLA) or market rent adjustment at renewal. So if you have a 20- or 30-year lease, you can increase your rent during that time depending on inflation or by knowing what rents are like in a particular area. The rise in the cost of living may be linked to the consumer price index and other indices. Some indexes follow specific states or geographic areas, while others follow larger trends across counties.
These adjustments allow property owners to receive rent increases depending on how the lease was drafted. The increase can occur annually or periodically, for example every 5 or 10 years. But the end result is good. As long as the tenant continues to live in the property, rent can increase according to a fixed index. That way the landlord can avoid a long-term tenant paying the same amount for her 30 or so years.
In another context, a parent can lease a relative to live in a rent-free home for the rest of their lives. At the end of the lease term, the property eventually returns to the family, who can choose to sell the property, renew the lease, or use it as they wish. And it proves to be of some economic value to parents who skip a generation and pass the property on to their grandchildren.
Financial decisions regarding inheritance involving real estate can be complex. Especially when that decision was made half a century ago.
(Iris Grink is the author of “.100 Questions Every First-Time Home Buyer Should Ask” (4th edition). she is also the CEO of best money move, a financial wellness technology company. Samuel J. Tamkin is a real estate attorney based in Chicago. Get in touch via Ilyce and Sam’s website. ThinkGlink.com. )
©2023 Ilyce R. Glink and Samuel J. Tamkin. Distributed by Tribune Content Agency, LLC.