The Unassuming That Can Negatively Affect Your Property Values

What’s your first reaction when someone tries to explain something to you that you can’t quite grasp? First, you’re confused. Then, if you just can’t figure out what they are saying or trying to convey, you bristle and push back. Doubt creeps in. And, finally you begin to wonder if they are trying to pull a fast one on you. By the way, this is a perfectly natural reaction. In fact, it’s ingrained in the human psyche as a protective device. I’m sure behavioral psychologists have a name for it.

Let’s put this in the context of real estate. Imagine you’re looking at a multi-tenant office property and pre-screening it to see if it meets your standards for a purchase. You receive the due diligence from the listing broker. You find the cash flow statement looks good, all the appropriate expenses are there, the expense ratio looks close to where it should be. The annual budget looks good. The property itself looks like it’s in great shape without a lot of deferred maintenance. And, you’re happy overall with the mix of tenants. Your financing is solid, and the building should appraise at the price you’re willing to pay. All good, right?

Hang on… When it comes to reviewing the tenant leases after that initial pre-screening effort, your alarm bells start going off. In other words, what you expect to be simple and clear is instead complex, maybe even hard to follow. And, you begin to bristle and wonder what’s going on.

At this point, depending on how dedicated you are to buying this property, you either dig in, or, if you are too time-presssed or have many other choices, you roundfile the whole thing and look for another opportunity.

Maybe you’ve been that person, like me, that’s roundfiled a deal or two because they were overly complex. You see, I’ve reviewed a lot of interesting leases – sadly, long after the ink has dried – and more than you’d think could give someone who’s inexperienced or a little gun shy about complex leases, a case of butterflies. Heck, we’ve even had to have attorneys hired to get legal opinions and interpretations because they’ve been so convoluted.

Difficult-to-interpret leases become challenging to administer, even when the intentions were honest, pure and good! Worse, they can cause that reaction I described in the first paragraph.

Imagine then you’re a buyer doing your due diligence and you come across a great property with one or more poorly drafted, complex, hard-to-follow leases, or, leases that are all different. Some might be NNN, some gross and some modified gross or single net. That bristling reaction I mentioned in the first paragraph could potentially tank a property transaction for a buyer if they are intolerable to such things, perhaps inexperienced, or, are already weary of complexities where it’s better to have clarity and simplicity.

This is when it pays to have great leases written in clear and simple language that anyone can understand and for property managers, administer, and for a buyer, eliminate alarm bells and confusion. Great leases can be seen as assets to your property! Poorly written leases can truly be a liability that derails a sale or causes issues when they are followed by a management company for administration.

When you’re in the middle of due diligence, and the leases might seem a little confusing, it’s always best to get an opinion from an expert that they’ll then back-up if push comes to shove. You don’t want to get to the ownership stage and find out the leases you have obligate you to far more than you ever imagined, or, obligated your newly inherited tenants to far less than than you were counting on!