Have You Ever Heard of "Hidden" Concessions?

[Dan Handford]

I was at dinner last week with an attorney who represents apartment investors in Altanta, GA. 

He brought up the topic of lawsuits surrounding apartment buyers/sellers.

I asked him, "what is the basis behind some of these lawsuits?"

He started to tell me about "hidden" concessions that can sometimes be missed.

We are all familiar with front-loaded concessions to get a tenant to sign the dotted line to come live at our property.

However, we don't always think about the back-end concessions that could occur and do occur.

This is where a tenant is told that instead of being provided 1 month free up front, that they will get 2 months free at the end of their lease...or whatever the concession may be.

Sellers will sometimes use this tactic to get their property leased up prior to sale to up the NOI and you don't find out about this until you close on the deal...months down the road.

Then when those concessions come due....you are stuck with much lower cash flows than originally expected.

The best way to protect against these types of hidden concessions is to perform your proper due diligence including a very thorough lease audit. 

This is something that we are now training all of our PMs who perform DD on our new properties we are acquiring.

[Pancham G.]

@Dan Handford: On top of the lease audit, if you want to be an extra careful, investor can get the tenant estoppel signed by each tenant before closing and see if they match the leases.