The following techniques support a strategy of staying power and apply to the purchase of income-producing real estate.

Leases

• Setup a schedule of lease expirations.
• Are the current lease payments consistent with market rents?
• On lease expiration, factor in market rent adjustments, the costs for leasing commissions, tenant improvements, common area maintenance changes, advertising, and vacancy.

Re-leasing at lower rents plus the additional costs of leasing have a negative affect on a property’s value, cash flow, and financing. These factors should be reflected in the purchase price and terms of the potential transaction.

The lease is a legal contract between the lessee and lessor. When buying property the new owner is substituted as the new lessor and therefore assumes all of the obligations of the prior lessor. This is another good reason to review all residential and commercial leases. For commercial properties, you should get an estoppel certificate from each lessee. An estoppel certificate states that there are no agreements other than the lease.

Lessee Profile

As current leases expire, is it reasonable to assume that the profile for current lessees will remain in tact? If not, what will be the new profile, and what affect will it have on the property?
Expenses

Review each line item expense for at least the past three years. Look for possible increases. Look for continuity. Certain operating expenses have a way of disappearing during the year of a sale.

Capital Improvements

Get the property’s history of capital improvements. Determine why they were done and what remains to be done. Find out if any vendor’s guarantees or warrantees still exist. Have a careful structural analysis done. Surprises in this area can be catastrophic to an investment. All the information gathered on capital improvements needs to be factored into the price.

Environmental Issues

The importance of identifying environmental issues through inspections and due diligence cannot be overstated. It’s important for potential real estate buyers to know that even though an environmental problem may have been caused by a prior owner, the costs to resolve it usually belong to the property’s current owner. The current owner may seek redress from the past owner who caused the problem, but they still have to defend or pay for resolving the problem.

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