Friday, April 29, 2016

Asset Due Diligence on Rental Properties

A former real estate asset management intern at Henderson Global Investors Ltd., Maxine Marie Hepfer currently serves as a senior in Ernst & Young’s Transaction Real Estate group. The group provides a variety of real estate advisory services, not limited to strategy and feasibility advisory, transaction advisory, and asset due diligence.

Due diligence in property transactions encompasses multiple activities, the most important of which is the business and legal review. Here, the buyer should evaluate all of the property’s essential financial and legal ingredients before finalizing the sale.

The first element to review is the tenant leases. Ensure the rent roll reconciles with the tenant leases. A review may expose glaring discrepancies such as a misstatement of base years and a difference between the recorded current income and the actual income.

Tenant interviews should follow. Here, the aim is to find out the tenants’ needs as well as their leasing expectations. This will reveal any repairs needed to be done on the asset.

Third involves obtaining tenant estoppel certificates. Tenant estoppel certificates harmonize the facts of the lease according to the buyer and the existing tenants. They state the economics of the lease such as rent and future escalations, the amount of the deposit, terms for lease renewal and termination, and a statement absolving the buyer of any amendments to the lease of which he or she was never informed.