Due Diligence & Lease Audits/Reviews
When acquiring commercial real estate, the purchaser is essentially acquiring not only the physical property itself, but also the office, retail and/or industrial leases for such property. Colgate Real Estate Advisors prides itself on performing comprehensive underwriting of a property’s underlying leases and in working with our client’s third party vendors in analyzing the physical attributes of the real estate during the due diligence period. In short, our primary objective is to put our clients in a position to make an informed and educated decision as to the viability of a potential acquisition.
Abstracts of Office, Retail and Industrial Leases
A Lease defines the relationship between a landlord and tenant. It provides a detailed roadmap of the rights, obligations, and interactions between the parties. Leases are generally voluminous in terms of both length and content and are accompanied by many documents, all of which make up a “lease file.” At a minimum, the lease file should contain:
- the lease itself
- copies or originals of all amendments
- legal and management correspondence between landlord and tenant
- brokerage agreements
- commencement date and work letters,
- letter of credit (if applicable)
The challenges involved in organizing and understanding each essential provision of a lease and element of its file is imperative: a business’s success or failure could depend on the subtle contents imbedded therein. Consequently, a detailed analysis, or lease audit of the lease file is of utmost importance. A lease audit is comprised of a thorough review of the lease file, including, without limitation:
- financial terms
- legal terms
- business terms
- ancillary documents
Simultaneously with our formal review of the lease file, we prepare a lease abstract to fully summarize the financial, business, legal and technical terms of the lease, along with any unusual provisions. The lease abstract translates the comprehensive and convoluted terms from the lease into a concise and easy-to-read final product. The end result is a time-saving, customized tool that is designed to provide a convenient reference for a wide array of essential business activities. Whether used by your legal, accounting, property management, brokerage or administrative staff, Colgate strives to deliver an exceptional summary of the critical provisions of the lease to better enable your team to effectively and efficiently perform their duties.
Although the level of analysis varies depending on a client’s needs, lease provisions generally abstracted include:
- lease term
- base rent
- additional rent (e.g., real estate, operating and CPI escalations)
- free rent concessions
- improvement allowances
- outside construction dates
- termination rights
- security deposits
- subletting and assignment
- electricity and utility costs
- hours of operation and providing of HVAC
- use restrictions
- renewal options
- late charges
- expansion options
- roof and signage rights
- incentive programs available to tenant
- freight elevator usage
- the granting of a SNDA
- existing issues of concern impact the lease (e.g., rental or repair defaults)
Physical due diligence pertaining to the property includes, but is not limited to, securing a third (3rd) party engineering, environmental and title report as well as zoning and other ancillary legal analysis as to the property’s historic use and condition. The engineering report will enable your team to not only analyze the structural integrity of the property but also enable them to budget for both immediate and long-term repairs and capital expenditures for the mechanical systems as well as the roof, lobby, bathrooms, elevators, landscaping and other common areas of the property. Please refer to the annexed Building Inspection Report for a general outline to help you with your physical underwriting of the potential acquisition.
Colgate Real Estate Advisors does not perform the above referenced third (3rd) party physical reports, however, given the background and experience of our advisory team, we are in a position to walk you through the process and if desired, make introductions to firms who potentially might be a fit for your needs.
Personnel, Management, Accounting, Legal and Leasing of Property
Whether performed by Colgate REA, in-house or in a collaborative team effort, a detailed analysis of the property’s existing personnel, management, accounting, legal and leasing team and policies is integral to the due diligence process.
An estoppel agreement summarizes the basic financial and business terms of a lease at a date certain, and potential problems between the parties (e.g., defaults) are often contained therein. Generally prepared in conjunction with a refinancing or a purchase, the agreement can be for the benefit of the lending institution, the owner, a prospective purchaser and/or a tenant.
Please know that our experienced team of professionals are available to prepare, negotiate and review estoppel certificates if the need arises.
Review of Operating Expenses and Tax Escalation
With experience gathered from over 25 years of intimate exposure to leases, analyzed from many different perspectives, Colgate is well equipped to accurately and efficiently provide its clients the knowledge they need regarding how operating expenses and real estate taxes are impacting their lease. Our team is genuinely confident in our ability to convey to our clients a wealth of information, global perspective, and anecdotal tips about how operating expense escalations and real estate taxes influence how a lease functions and ultimately impacts a client’s bottom line!
Colgate strongly believes that an Operating Expense Escalation and/or Common Area Maintenance (“CAM”) Lease Audit and Review are indispensible aspects of our team’s services. Our preparation of a comprehensive and detail-oriented lease audit incorporates such analysis, and has the potential to greatly benefit our clients in the following ways:
- Provide clients with information to efficiently manage their real estate portfolios;
- Discovering unnecessary costs and overpayments;
- Recover unnecessary costs and overpayments
- Save money over the long term of the lease.
- Find disadvantageous contract language and eliminate it from future leases;
- Reduce payments the client is making to a crafty landlord who is trying to recover more from the client to (1) make up for money it is not getting from a neighboring client or (2) look more attractive to a potential buyer for the building.
All business and firms could benefit from acquiring an improved understanding of what should be in a lease, what should not be in a lease, what is currently contained in or absent from their current lease and how that impacts their bottom line. However, only those organizations that entrust Colgate’s elite team to produce a comprehensive lease abstract are putting their best interests forward on the path to enhanced financial success.