Verifying Commercial Lease Agreements

 Verifying Commercial Lease Agreements

One of the sectors of commercial real estate that Wiedmayer & Co. specializes in is property management – the responsibility of overseeing the proper management of a building, along with executing duties such as collecting rent on the owner's behalf. While a sense of urgency (with accompanying action), and good organization are essential to successfully handling a building, the level of complication is usually relatively low. At least I thought so.

Recently, Wiedmayer & Co. was hired to manage a property that had just been bought and was occupied by tenants. We referenced the rent roll that was acquired from the seller during the transaction to formulate rent for each tenant. Shortly after billing the tenants, we began receiving phone calls and emails from seemingly every tenant in the building claiming we had incorrectly billed them too much.  After checking the rent roll again we were perplexed at the disparity as some reported rents were off by thousands of dollars.

Upon speaking with many tenants, we found out that the previous owner went to each tenant and had them sign an estoppel before the building deal was done.  In many of these cases the rent was not discussed, and some of those tenants who signed the estoppel were not English speakers.  At this point it became clear that the previous owner had either purposely inflated the rent rate he was charging or had carelessly omitted that he was providing discounts to his tenants.
 

 

The road to correcting this situation is still cloudy as many questions remain unanswered. One thing is clear – there is no short and easy way to fixing this. The reduced cash flow will lessen the amount of commission the property manager receives. The purchaser of the property suffers the biggest loss in this case as their yearly cash flow is lowered. The value of the building at a time of resale will be reduced as well. 

While there is no fool-proof formula to avoiding this type of situation, there are a few measures we can take.  First and foremost, understand the lease agreements thoroughly.  Understand the wording and the history of the tenants paying rent. Ask questions and get clarifications.  Talk to the tenants in addition to discussions with the other party involved in the sale. This helps eliminate any confusion and makes sure everyone is on the same page.  Lastly, if possible, try to deal with someone you have dealt with in the past and are comfortable trusting. Take recommendations into consideration as well. By implementing some of these strategies in your Atlanta commercial real estate deals you are more likely to understand and validate the lease agreements; ultimately avoiding a complicated situation like my own. And as always, make sure you are getting advice from professionals with experience in the Atlanta commercial real estate market. Stay tuned for an update!

Contact Wiedmayer & Co. for more information. 

 

Article written by John Ogren, Summer Analyst at Wiedmayer & Co.