Sketchy leases please analyze!:(

[Kevin Lopes]

ATLANTA experts please chime in on this.

Bank initially approved my offer to buy a 6yo, modern, nice, heavy traffic, 8000sf foreclosed strip mall in Clayton County, GA for $475K cash. Rent roll show NNN leases with 1 unit empty, 3 units renting $875 monthly, 2 units renting for $400 monthly. I hope to eventually convert all units to $1000 monthly for a decent 12% cap rate.

My attorney said there's a provision in the lease stating 'the leasehold estate would survive the foreclosure', meaning the new owner must honor these $400 monthly leases until 2020!!! I told the bank any investor would expect a potential 10%-12% cap rate for such property in the 'ghetto'; and these $400 leases make this minimal return unattainable. I requested a $75K reduction and the bank said 'no.'

I'm ready to back out but my agent said I still have a week to think about it. What do you think? Are these sketchy $400 leases even legal? Next time I open a business, I pay $20K cash under the table to an underwater owner to sign a 20yr $400 monthly lease; whoever buys the property get stuck with the lease?

[Matt Devincenzo]

@Derreck Wells traditionally all leases survive a traditional sale. When you buy, you buy the current owner's obligations to honor leases as well. Unless the owner gets the tenant to agree to terminate the lease prior to sale, you are stuck with them.

This may not apply to a foreclosure sale specifically, but for regular sales leases are binding on a new owner. The lease may have been between two parties, but you are "agreeing" to it by purchasing the property with that lease in place. That is why you have to perform your due diligence and review the tenant screening that was done prior to lease signing.