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Question of the Week: Day Care Tenant

An investor has been given a price quote for a tax deed on a property. The former owner operates a day care center there. The day care is still in business. The investor asked for my advice. Here it is:

An operating business or a property occupied by a paying tenant will probably be redeemed. On the other hand, they might be short of cash for the time being and willing to sign a lease. Getting that signed lease puts you legally in possession, which is important when burning off judicial redemption rights. Worst case–they redeem pretty quickly and you get your money back. Most likely case, they redeem after several years and you get the rent plus the interest. Best case, three years slip by without them redeeming, and you can now quiet title in yourself.

A day care raises some red flags, though. Are they licensed? If not, then they can be shut down by the authorities. Makes no different to the investor, except that the loss of income makes it even less likely the former owner will be able to redeem.

Liability issues are especially important with a day care. If a child is hurt or killed while on the premises, you better believe EVERYBODY–including the tax deed owner–will be sued. Under some theories of liability, the tax deed owner might be held liable. The investor should discuss with their insurance agent that the tenant will be an operating day care center, and make sure the investor gets the right insurance to cover such risks. Some companies will not insure properties with day care tenants. Some charge a higher premium. Also, the investor should check into getting an umbrella insurance policy. An umbrella picks up the difference between the maximum liability limits on all your other policies, up to the umbrella amount. For example, suppose you buy a $1 million umbrella, which is surprising cheap, btw. If your auto policy has $250,000 liability limits and your homeowners has $100,000 liability limits and your landlord property policy has $200,000 limits, then for whatever thing you get sued for, the umbrella will pick up the difference. It will add another $750,000 to your auto liability coverage, $900,000 to your homeowners, and $800,000 to your landlord policy.

If you are interested in landlord/tenant advice, be sure to visit our companion site, AlabamaLandlords.com to read the blog articles and check out the class, video, article and book resources.

What do you think?