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Lease and Tenant Mix Checking in Selling Commercial Real Estate Today

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Review all leases and tenants when selling or leasing commercial or retail property.

When you inspect a commercial property for leasing or for sale, the existing tenant mix should be checked and referenced against the current leases.  It is remarkable just how many problems you will find with the property when you do that.

Many landlords and property managers are not accurate and up to date when it comes to lease activity and critical dates from the leases.  This then produces problems later when the property is sold.

Here are some questions to help you with lease reviews and tenant mix status.

  1. Who are the tenants in the property today and what leases allow them to be in occupancy?  Are those leases all current and up to date when it comes to options and rent reviews?
  2. What outgoings are to be paid under the lease and are they full up to date?
  3. Are there any arrears outstanding in the property and if so why?  Any disputes with the tenants will need to be resolved if the property is to be taken to the market for sale.
  4. What do the tenants think about the landlord?  Could that impact the sale in any way?
  5. Should some of the tenants have their leases renegotiated as part of preparing the property for sale?
  6. What does the tenancy schedule for the property say about the tenants and the leases?  Does the information cross reference accurately with the leases and the actual tenant location in the property?  You will need to check this yourself.
  7. Who is the tenant point of contact and how can you contact them to inspect the property before the marketing is to commence?
  8. Do the tenants need more or less space in the building?  Should that requirement be addressed now as part of moving the property to sale?
  9. Do the tenants comply with the permitted use for the premises as outlined in each lease?
  10. Are there any renovation or relocation clauses to exercise as part of preparing the property for sale?
  11. Are there any outstanding issues relating to make good of tenant premises that need to be addressed?

You can add to this list based on the property type and the location of the property.   All of these checks and balances are a requirement of preparing to market and sell a commercial or retail property.  Your diligence in the process of checking tenants and leases will save a lot of issues and problems later.

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Due Dilligence Commercial Property

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As you promote, sell and then document the property transaction you will soon come across the fact and event of ‘due diligence’.

This element of the commercial real estate sale is very common and will be the subject of most contracts with the exception of those that adopt the auction method.

As you would expect the process of due diligence can make or break a sale.  For this reason, it is wise to question a seller well in the listing stage of the sale to ensure that no ‘deal breakers’ or problems are hidden in the cupboard.  Due diligence will likely find most problems on and with the property.

 

What is Commercial Property Due Diligence?

So what can be looked at in ‘due diligence’?  Consider these:

  • Due Diligence is simply a detailed checking process that is undertaken prior to sale and settlement by ‘experts’, to review all relevant data involved in the sale.
  • Usually, solicitors and/or audit specialists are the nominated parties to undertake the work on behalf of the purchaser.
  • The concept of Due Diligence is that the sale and settlement of the property will only occur if the Due Diligence process is successful.
  • On large commercial properties, it is not unusual for Due Diligence to continue for days if not weeks.  A special condition of the contract will allow this to occur.
  • The process is undertaken under the strict control of the Seller. It usually occurs in the Seller’s property management office or at the Sellers solicitor’s offices and is usually in a controlled environment (locked room).  Only authorized parties are allowed into the room so as to preserve security and confidentiality of documentation.
  • A good Agent or Broker will provide total support to the Due Diligence activity.  Expect Due Diligence to check just about everything involved in the sale.

The five professional areas usually covered are:-

  • Engineering
  • Environment
  • Finance
  • Legal
  • Management

 

Cover These Property Issues Plus More

Expect questioning and document discovery to include the following:-

  • Engineering:  Includes verification that the property structures and building services comply with the Building Code of Australia and Local Government building Approvals.  Questions will cover safety risks or non-compliance of structures, fire protection, air conditioning, electrical supply, hydraulics, lifts, escalators, and stand-by emergency power.  Expect the questions to involve adequacy of structures, mandatory service compliance, remaining life expectancy, capital expenditure, and sinking fund requirements for future major repairs or replacements.
  • Environment:  Includes a wide range of issues such as identification and analysis of environmental and physical risks to the property or land and its use.  Issues will include site contamination, dangerous goods and hazardous substances, asbestos, hazardous industrial waste, trade waste, stormwater management, occupational health and safety, heritage factors, and statutory requirements.
  • Finance:  Includes all actions and dealings associated with property financing, review of taxation implications, substantiation of income and expenditure statements, arranging mortgages, financial analysis and modelling, company or entity investigations, plus all other supportive or related documentation.
  • Legal:  Includes all conveyance documentation, easements, permits, titles, contracts, leases, searches, incentives to tenants, site details, compliance with any legislative requirements, outstanding litigation, and any town planning issues.
  • Management:  Looks at any issues associated with ongoing asset management, facilities management, building management, lease management and negotiation, rent collection, arrears, financial reporting, insurance, car-park supervision, cleaning, pest control, landscaping etc.