Mixed Use Due Diligence

[David Bardwell]

I have a mixed use building under contract and I'm beginning my due diligence period. The building has apartments upstairs and retail on the ground floor, with a long-term tenant. I'm willing to deal with the current residential tenants, knowing I can replace them fairly easily. The retail tenant just renewed their 10 year lease just a few months ago. This all sounds great, except for the fact that I know the store had some financial troubles a few years back. My question... What type of disclosure is typical to expect with respect to the existing retail tenant? If I were placing the tenant myself, I'd expect to see their business financials. The seller does not have info to share and is unwilling to ask. Am I right to perceive this as a red flag? How would you proceed?

[Jessica Zolotorofe]

Not sure it's a red flag. He probably doesn't have the right in the lease to ask, though you can take a look at the lease and see for yourself, some leases will actually include that provision. See if the lease provides for a tenant estoppel. That's the best way to get information on a tenant directly from the tenant. Analyze the property as if you had that tenant in- is it market rate? Below? If below, which a lot of long term leases are, then losing a 10 yr below market rate tenant that has or may have had financial issues isn't the worst thing. If it is market rate, a 10 year lease is comforting, especially if they have already been there 10 years, and it may be worth the risk to proceed and hope for the best if the investment is a good one otherwise.