One very important skill that every syndicator, who does real
estate, every fund manager who does real estate they need to
understand, even if they delegate this out is how to do a
lease analysis. In real estate, the investment real estate
world, the very bottom layer, what drives everything is the
lease, it all comes back to the lease, all the properties come
back to the lease, right. That's how it generates the money. If
it wasn't for leases, it wouldn't be realistic, it could
be something else and wouldn't be an underlying investment real
estate property. So it could be still related to real estate,
but it wouldn't be a real estate investment thing that you're
doing. So in this video comes from, again the past, but what
it does is it talks specifically about how we do lease analysis,
I put this video together for the very top of the industry. So
the very top real estate brokers, real estate developers,
people who really understood leases and understood it in
context of well how a property is done. But when it comes to
actually running a property from an asset management point of
view, not a property manager, but from the asset level, we
need to understand the whole lease structure and where each
lease lies within it. So I know you're going to find this video
useful if you do real estate at all. This is where we talk about
how to actually figure out what that absolutely fundamental
building block, the lease is, and all the terms of everything
that move it change our value of the proper underlying property,
or the which, of course, underlies the entire portfolio,
whether you have one property, or 1000 properties, it doesn't
matter, one door or 1000 doors, it all comes back down to the
lease.
We are going to dive deep into lease analysis also known as a
lease abstracting Now the purpose of abstracting your
leases, so that you don't have to dig through the leases in
order to know what the next step is. So or when you have a tenant
who's asking, can they do this or if they need that, it's all
there in your lease abstract, it makes your life much much
simpler and easier to manage the property. Even if you are not
acting as the property manager, it helps you as the asset
manager under the command structure to be able to
understand where you're at in your leases, it will make it
easier for you to communicate to your investors. And ultimately,
when it's time to sell the property, it will make
developing that rent roll much much easier because we actually
do the rent roll as part of this process as well. So let's start
at the beginning. I'm going to list out here pretty much all
the things that I like to see in a lease abstract, and then I'll
give you kind of some hints along the way as to where about
you'll find them. So first is the date of the lease. This is
normally at the very beginning of the lease itself. I like to
know this because I like to know when this was entered into it
helps me sort through when everything happened in time
because as time goes on, you're going to be getting amendments
made as tenants renew, and so it helps to have that date of the
lease or the date of amendment at the top. I like to know when
the term commenced, or is going to commence. Want to know that
so that it's very easy to see what that date is. I want to see
when rent started. Sometimes these are on the same date, but
it's not always the same date. So I like to know sometimes the
term commences there's a period of rent abatement, and then rent
starts two months later, for example, sometimes it is that
the term commences when the rental period starts. I've
looked like to know what what period that is. And then when is
this lease expiring? I want to know that so I can keep that in
mind and it's put make it a part of my rent roll and so that I
know when that lease is no longer going to be useful. I
should also mention at the top here, I kind of like to put the
tenant name just so I know who we're talking about and In the
unit number it makes it easier. Alright, so now what I like to
do is I like to, when I'm writing these out, everything
below this part, so everything after this, I like to do two
columns, sometimes more, but certainly two columns. And what
I want to know is I want to know, what paragraphs what
paragraph number, I find it in. So it's very, very simple for me
to see. And then I have the category. And then there is the
answer. We fill in the blank. So what I, for example, I want to
know what the definition of premises is. And this is
probably this maybe something like the premises itself is the,
the unit number or the premises is, you know, the whole building
or whatever it is. I like to have that definition. Normally,
this is in paragraphs one or two or something like that. But
here, let's just, let's just say in here, we found it in
paragraph 1.1. And then I would put the specific answer. Now
here, I probably am going to use some shorthand, I would do
something like unit to a one of building something like that. So
premises, I want to know, what is the permitted use? Now, this
is very, I mean, you're certainly gonna have this as it
relates to a retail building an office building, you may or may
not, there may be some restrictions on use. Certainly,
if it was medical, you probably would include that. If it's not
medically, you probably wouldn't. And then, but I like
to put in the permitted use now in an apartment building, you
probably don't have it, I've may still put it there. Leave it
there, just so that I know that if something comes up, and
there's a specific restriction that's been put in there kind of
on the way they use the property, I may put it there.
Like it's like they're going to be using it as an air b&b or
something like that. I may want to know. And I may want to know
whether I gave them permission, I want to know what the square
footage is. In that lease, how it's defined. I want to know
what what parking looks like, have there been allocated one
space two space, three spaces? How's it done? Where are those
parking spaces? It's all in the lease. And again, as we're going
through these, we're putting in where, what paragraph number?
And we're filling in what the answer is on. On for each
category. I want to know the term in months. How long is this
lease gonna last? I want to know what how much have they paid
in their security deposit. And certainly as things change,
sometimes you get an increase in security deposit. And so let's
say this was an amendment it may say something like they gave me
$5,000. On June 120, whatever the year is, and then the
following year, they added $500 on May 31, and whatever that
year is I may want to do that. So that way I know okay, I've
got a running tally of what that security deposit is. So it's
always there. I never have to look at a lease and it's all
done properly. Then I've got my renewal options.
The next section I break down is so these are sort of like the
main or the main sort of basic categories that probably fit
into your rent roll along with part of the next section. And
what this does is this sort of sets up some of the more
important things are not more important than the things that
are referenced more frequently. The next part I will put is I'll
build a table. And what I'll do is I'll put build a table that
has a rental periods so that I know what time period we're
talking about how much we're talking, and rent per month.
What this translates into rent per year. And then I want to
know also, not in my apartment buildings necessarily, but maybe
you might as well put it is what's my cost per square foot,
by either month or year depending on what what, what's
normal for your industry. So in California, it's month, most of
the other country, it's a year. But whatever you were most used
to seeing it is and what the escalations are
now notice right now, I'm not talking about pass throughs at
all, I'm all I'm talking about is just rent. So in here, I may
say, Let's do an example. So I may say, June 120, through May
31.
This is a table remember. And so my rent dollar amount is say,
oh, let's do what we'll do $1 Oh, we'll do just for keeping
math easy. We'll say it's $1 a month. $1 a square foot month,
which means that's 12. And let's say it's 1000 square feet. So
that's, that's $12,000 per year, $1,000 per month. And then my
escalations are gonna take place that next year, right most of
the time, that's when they happen. And so it'll be
starting. Now, obviously, you'll put this in a spreadsheet. And
that'll be a lot easier way to do it. And you can automate the
calculation of all those things as well. And so I would put now
say there is a 5%. That's an awfully high rent bump, we'll
make it a 3%. And so that would suddenly bring my dollars per
month to $1,030. My rent per month, is, let's see, if I can
do this quickly in my head $12,360 per year, my cost per
square foot is now $1.03. And then next year, it's going to be
another 3% rent, for example. So that's the way I would do this
next section on what the rents are. Now, I would still put the
over here, I would still put what paragraph number in the
lease that's found, because it's gonna make your life much much
simpler when you need it. So basically, we're building out a
cheat sheet so that we can quickly find whatever we need to
do in the lease. Because if you have a tenant in front of you,
and they're saying, Well, why is it this you can just simply say,
okay, look, paragraph three in your lease says this. Underneath
here, I like to just put a section for percentage rent, if
as if it is a retail space. And then I want to also now I want
to code to kind of some of the other money kinds of things so
I've got percentage rent. I would put a section on what
tenant improvements rent abatement Construction was a
made available so I'd put a space for that and again always
putting the paragraphs so I can find it then I would put a
section for landlord repairs now you're not looking for this to
be comprehensive This is a table of contents or an index or
whatever to make it simple for you so I would put you know
landlord repairs replace carpet I don't know what it is whatever
it is replace carpet change fixtures whatever is normal for
what you're doing and then tenant repairs so this landlord
repairs can be in the first part and then tenant repairs would be
you know, tenant is going to be install UPS
installing new bathroom. Now, this is for, I tend to use this
for these specific things at the outset of the lease, you could
also use this same kind of section to say that the tenant
is or the landlord repairs and I probably wouldn't would still
note it here. So a common thing in a retail space is the
landlord's responsible for windows, doors, roof structure.
And here, everything else, you know, the tenant takes care. And
when there's specific different sections, I'll probably put
paragraph five. And then here, put paragraph seven, or wherever
it is, again, so it's easy for me to find. Now the next thing
is I do build out a table of operating expenses and pastures.
So here we've got we still are doing our paragraphs, right so
so I've got my paragraph labels going down. And now I've got my
operating expenses, rebuilding another table and so here I'm
looking for the normal ones. And if you have things that are in
addition, great then add those two
real estate taxes, cams insurance now I make this a
personally I make this a checkbox to make it's kind of
simple. So I put in like landlord pays.
tenant pays
tenant pays, pro rata. And then if there are any expense stops
and caps.
So then filling this out, you know for utilities, it's
something like tenant pays their pro rata share. Or let's do a
little bit differently. tenant pays tenants paying for all
their utilities, it's under their name. Real estate taxes is
the tenants paying their pro rata share. Cams is that tenants
paying pro rata share insurance is paying their pro rata share.
But let's say there is a cap on property taxes of no more than
3% per year. Something just to give me an idea about whatever
it says. So, then I like to get into more of the legal type of
questions that are here. So I want the section for
destruction. I want the section for CO tenancy do they have the
right to do a or to have to share that space condemnation
rights now these are probably things you're not going to need
much but it also helps when you're filling out your estoppel
certificate. So that's another reason expansion rights these
does happen so do they have the right to occupy another space
becomes available
Alright, and now we get into kind of the things that that are
referenced the most so you'll see what we've done is we've
kind of referenced the things that are very frequent over here
you know, those you're referencing all the time now
rents you are referencing to some extent that this is getting
pulled over into your renderable so you're probably not
referencing that much you're referencing cams this section
you're not going to reference quite as much here are the
things that certainly come up and when you need them you want
to know right where they are in the lease rather than having to
dig for it. So this section is May the
May the tenant assign without landlord consent in paragraph
six still going here what I do is I normally put either a yes
or no and then if it's a yes I want to explain
next question is does tenant have exclusivity? If Do they
have any exclusivity rights? And I do again do yes No. And
explain this these things now come up much less after this.
These things I certainly want to know about. But here's these are
certain things that will make it easy just to have them all there
for when they come up. So is the lease subordinate? To mortgage?
In other words, do they need to sign an snda? answer is probably
yes, but I want to know it and I want to know what paragraph so
that I've had I've dealt with situations where tenants have
refused to sign NDAs and and it's very frustrating and it
makes it much easier if you can quickly tell them right where in
the lease they have to sign it I want to know do they have to
sign an estoppel and I will know where that happens a lot too.
And then the others are Is there a purchase option I do do they
have a right of first refusal
Do they have any early terminations
and anything else any other thing notes I want to put here
and then last I like to close it out sort of the same way the
lease is typically written I want to know is there at least
guarantee
I want to know if there are any lease amendments. And so you see
this is an evolving document. I want to know who's signed it.
And when one thing I should also mention is under renewal options
have so. So you may have options for the, for the renewals, I put
those up here. So I put option period one. And I put your six
through 10, whatever it is, and then I'll put whatever the
information is there. So that way, then I've got, I know at a
glance that there are renewal options that are out there. And
it makes it pretty straightforward. So this purpose
of lease abstracting isn't just an exercise in in, in generating
paperwork, this is to make your job easier. And it's really to
get your stuff together so that when your investors have a
question, or when anybody has a question your property manager,
if that's you, or if you have one, need something specific to
provide a tenant, or so you can just have a baseline so you can
look at what you're doing across your center in one straight
place. And really kind of move everybody to getting the same
similar kind of lease, this is the way to do it. So we do that
with lease abstracting. And this is part of lease analysis. My
very first mentor taught me a very, very important thing. He
said, when there's ever a question, it comes to the lease,
go to the lease, read the lease, it always is the lease. I heard
that in law school. I heard that in understanding real estate
when I was studying. For my CCIE am, my original mentor taught me
that always, always always, it's the lease that controls the
entire thing. And that's why we do lease analysis. That's why we
need to understand those basic building blocks. Also, as you
saw in this video, it has pointers to where all those
things are in the lease. So if you ever need to understand it,
it's all right there for you. My name is Tilden Moschetti. I am a
syndication attorney for the Moschetti syndication Law Group.
Before I was a syndication attorney 10 years ago, before
this, I was a real estate litigator. What does that mean?
Most of the time I was referring to the lease. I didn't do
evictions or that sort of thing. But when it comes to it, my my
issues tended to revolve around doing cases where property was
at stake, where property was the main issue, not eviction, not
tenancy, not things like that. So most of the time it was fight
over the property and ownerships of the property. And when that
happens, what's very important is value. And when is value and
what's the key building block in value for any kind of commercial
real estate? It's the lease. And so that's why we did this video.
If I can help you do your own syndication investment fund get
you started doing your own 506 B or 506 C syndication, whether
it's real estate or totally unrelated to real estate. I
would be happy to talk with you