Where to watch for hair growth on CRE investments

Investment StrategyYou lift it up, look closely and if it starts to grow too much hair, drop it and walk away!  A buyer typically has only a portion of the relevant information before making an offer.  Discoveries often surface during due diligence which can quickly take the fun out of the deal.

Physical Review

There are obvious physical inspections that are necessary.  An environmental audit will reveal the potential for any site contamination or existing asbestos, etc.  A real property report can determine if any encroachments exist.

An inspection of the electrical, heating/cooling systems, roof and structure are necessary to determine if there is any deferred maintenance issues.  A file search at city hall and the local fire department can expose building code infractions.

­Financial Review

In the case of multi-tenant retail, office or industrial buildings there may be existing vacancy.

Has the proportionate share of occupancy costs attributable to that vacant area been deducted from the net income?  Do all of the leases provide for the tenants to pay for market value cost of property management within operating costs?

Are the leases truly net?

Lease Review

It is absolutely necessary to have someone who has a great deal of lease experience read each and every word throughout every lease.  One word or one sentence can greatly alter the viability of a deal.

One of the major tenants may happen to have a cancellation option that is embedded in some obscure clause. Are the options to renew worded properly?  Has a tenant been given the opportunity to renew multiple times at the same rental rate?

Does one of the tenants have the right to purchase the building at a predetermined price on a specific future date?

I have provided only a few examples of the kind of hair that can surface in a deal.  Be sure to have representation you trust and is experienced in multi –tenant commercial real estate ownership.

Posted by Barry Stuart

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