Leases Attached to a Purchase Agreement in Commercial RE Deal?

Question

Two Commercial Real Estate Multifamily Questions:

1. In negotiation on a commercial multifamily deal and the buyer has requested to annex the leases for the apartment building as an exhibit to the purchase agreement. Seller is willing to provide them in due diligence, but not as an exhibit to the agreement. Is it common to include leases with the purchase agreement, or is this typically done in due diligence, separate from the agreement.

2. The seller was unwilling to share bank statements for the property so that the buyer could validate rent collected. Is it common for a buyer to request bank statements as a way to validate rents? Is there another way? The seller is unwilling to put an amount in escrow to ensure the rent collections are what they stated on financials.

Thanks in advance!

Bjorn Ahlblad · Answer

@Joseph Firmin Number 1 is not a problem I would worry about. Number 2 there are other ways to resolve that. Get Estoppel certificates signed by the tenants and LL. Make sure you collect last months rent and security deposits for each tenant who paid them at closing.

David Miller · Answer

@Joseph Firmin

#1 The leases should be part of the DD materials that seller delivers to Buyer (or allows Buyer to review) upon execution of the PSA.  The PSA usually contains an exhibit with a certified rent roll (which will be updated and recertified at closing) summarizing the tenants, terms, SDs, etc. but the actual leases are not attached.  Seller should also provide a rep/warranty when the PSA is signed (which is reaffirmed at closing) that the rent roll is complete and accurate.

#2 Sometimes sellers will provide this type of rent verification, but many will not.  buyer should request financial docs (I.e. P&Ls and balance sheets for prior years, year to date and trailing 12 months along with a summary of cap ex for the prior X years, etc.).  In MF you typically do not get estoppels from tenants (b/c there are so many and b/c leases often do not require tenants to deliver them and b/c lenders usually do not require them) so you have to rely on seller’s DD docs, seller’s PSA reps and warranties related to the leases and your own DD.

Joseph Firmin · Answer

Thank you @Bjorn Ahlblad & @David Miller!