I recently represented a client in connection with the purchase of 925 apartment units located in East Tennessee. As part of the transaction, I updated my multi-family commercial real estate closing checklist. In reviewing my checklist, it reminded me of the below 6 items that buyers sometimes forget when purchasing multi-family commercial real estate properties.
1. Purchasers should always review police reports for the last 2 years related to the property (particularly if the property is in a low-income area). A purchaser may not necessarily want to purchase an asset that was the scene of a homicide or known for drug activity;
2. It’s important to identify any units that are not currently available for rental due to needed repairs and discount the purchase price appropriately. A well-drafted contract will include a formula to adjust the purchase price based on any “non-rentable” units as discovered during the due diligence period.
3. Obtaining a current rent roll at closing is always important when purchasing an operating asset. When purchasing a portfolio of multi-family units, typically the individual leases are not reviewed (unlike other transactions like Shopping Centers or Office Buildings) because of the volume and uniformity of leases. Accordingly, it is critically important to include all relevant information in the rent roll to be certified by the seller at Closing, as that document represents the best summary of exactly what leasehold rights are being purchased.
4. A broker opinion regarding market rents can give the prospective purchaser an idea of whether value can be created by raising rents. This is particularly important if the purchaser is from out of state.
5. Review the service contracts to ensure the Seller hasn’t contracted to become a “preferred provider” of telecom services in exchange for a one-time lump sum fee. Usually, these contracts include on-going obligations that would affect the purchaser. If such a contract has been previously executed, Purchaser should negotiate to pro-rate the fee previously received by Seller based on however long the remainder of the term is under the contract may be.
6. Section 8 evaluation. Is the property currently enrolled? Can additional value be created by including Section 8 tenants? What percentage of tenants are section 8? Is the property required to provide low income housing per a previous development agreement with the local municipality or county.
If you’re purchasing or selling multi-family properties and need assistance reviewing your options, please contact the Thompson Burton PLLC real estate team.