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Commercial Real Estate Due Diligence: Leases

The Commercial Real Estate Due Diligence Process – Part 2 in a Series Leases are Supremely Important In the course of conducting due diligence, a buyer of a new commercial property must be sure that the lease(s) in place have key elements intended to protect his/her real estate investment. Elements an Existing Lease Must Include These are, first, escalations of rent, designed to serve as ballast against inflation and to increase revenue. Market value of property will be dependent on market rents, and a lease with locked-in rates from 10 years ago, without any provision for escalation for the next 15 to 20 years, is detrimental to a property’s marketable value. The second element, established guidelines for the use of the property, should fit your projected concept of use (both retail and office) and restriction of subleases. And the third: a comprehensive review of your tenant demographic. Read Every Word of Every Lease (Followed by Another Set of Professional Eyes)! Either a ‘stand-alone’ tenant lease, or the sum of the tenants’ leases, represents the future value of your investment. Take notes on things you don’t understand and then ask a seasoned mentor, or hire a real estate attorney, to carefully read over the leases. This part of the process is so important that I refuse to completely delegate it, but work on it with a team. If you wish to draft a new commercial lease, I highly recommend turning over the task to your legal counsel, or use as a model the professional lease agreement readily available at web sites like kossresource.com To be discussed in following blog posts: the importance of insurance and title policies in conducting due...

The Commercial Real Estate Due Diligence Process – Part 1

If you do not know how to ask the right question, you discover nothing. – W. Edwards Deming The Function of Due Diligence is to Discover and Verify! The purpose of a thorough due diligence process is that when the time comes to present your deal to investors and lenders, you will be armed with the level of information and knowledge regarding the property required to determine the foundation of a good investment. Due diligence has many aspects, encompassing both the relatively tangible and the completely intangible. Let’s begin with the following. Environmental Due Diligence As applied to commercial real estate transactions, this typically includes Phase I and Phase II environmental site assessments. In the US, these are often undertaken to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the “Superfund law.” The purpose of an Environmental Phase One Assessment: to determine the environmental status of a property or facility as it relates to a real estate property transaction. This kind project follows standards which include those published by ASTM. Regarding Environmental Phase Two Assessments/Subsurface Investigations: these projects include, but are not limited to, sampling and subsurface drilling , asbestos and lead sampling., ground penetrating radar, and monitoring well installation and sampling. Technical Due Diligence Caveat emptor is in important legal principle underlying all property transactions: the party acquiring the property is legally obliged to discover and verify as much about it as possible. This means is that the most comprehensive and painstaking technical due diligence is indispensable. Similar in terms of process to a building survey, the term technical ‘due diligence’ has become increasingly common in describing the process of gathering information regarding the physical characteristic of a property risk assessment tool. The process involves research, analysis and discovery. An engineering or property condition assessment (PCA) typically includes a review of building systems in order to evaluate deferred maintenance items that can materially affect the operation and value of a property. In the course of such an assessment, micro-cameras, scopes or other devices may be required to scrutinize (behind the walls or underground) the condition of HVAC ducts, plumbing, vertical transportation, electricity, windows and walls. The...

Why Go Green? As Apartment Owner

For one thing, because it’s something that you as a good citizen should do. And because Going Green is smart business for you, as apartment owner or property manager. Next time that you, in your capacity as landlord or property manager, have to arrange for the replacement of a light bulb, it might be a good idea to opt for the slightly more expensive, but higher quality and enhanced performance, LED bulb. Why pay such a high price for green tech? Please read on. Property Value = NOI / Cap Rate The facts are these: LED lighting products enjoy vastly greater longevity and save up to 75% on energy. The resulting lower utility bills will raise your net operating income, while improving the quality of the building, and thus increasing its market value. The Best Part is the Free Lunch Be sure to take a look at the local, city and state incentives, which often offer huge rebates to owners opting to install sustainable green technology. Other Benefits The good news doesn’t stop there. In addition to the other goodies: Less use of water and utilities by your tenants means that that they will pay less –and so will you. Less worry for you about vacancies. Tenants will save on utilities and will thus have a strong incentive to stay put. You will save on labor costs. Longer light bulb life (not to mention that of other green products) = less labor needed to...