Lease audits are an integral and essential component of due diligence when purchasing an investment property. Lease audits apply to apartments, office, retail, industrial, self storage and any other type of property where written leases exist. In lease audits most rent rolls are accurate and consistent with the actual leases. Lease audits can compare rent roll to leases to bank records. Most investment property sellers have not engaged in the nefarious activities such as leasing a volume of space to undesirable tenants. However, the financial pain caused by either misrepresentations by the seller or the seller signing leases with inappropriate tenants can ruin an otherwise attractive investment.
Steps in a lease audit can include the following:
- Determine whether appropriate screening was performed for tenants. For example, for apartments this would include both credit checks and criminal checks.
- Perform appropriate screening for tenants when there is no information in the file, provided the tenant has signed or will sign a release.
- Determine whether the tenant actually occupies the space indicated in the rent roll.
- Interview tenants in person or via written communication to determine whether they agree with the lease terms summarized in the rent roll and lease.
- Interview tenants to determine if they are satisfied with the services provided by the management company and their relationship with the property owner.
- Interview tenants regarding their plans or pending changes.
- Compare lease and rent roll terms versus actual payments.
- Reconcile ledgers with bank statements.
The value of an income property depends upon the quantity and quality of income. Both the quality and quantity of the revenue are dependent upon the accuracy of information contained within the rent roll and implicit assumptions regarding the tenants of lease audits. Sloppy record-keeping and fraud can cause a perspective investor to be presented with a rent roll which is entirely inconsistent with income being generated by the property. For apartments in particular, it is not uncommon for an owner to loosen leasing criteria to increase occupancy prior to selling the property. Investors can mitigate their risk and avoid becoming embroiled in a difficult, time-consuming and financially draining investment by verifying the accuracy of the rent roll and tenant quality via a lease audit.
O’Connor & Associate’s staff complement of over 50 real estate professionals can complete a lease audit to mitigate your risk. They can also handle other due diligence tasks. These professionals are supported by an experienced staff of over 100 who are accustomed to complex assignments. Our team has experience in all aspects of real estate including acquisitions, due diligence, ownership, appraisal, property tax appeals and dispositions. Reduce your risk and stress by utilizing O’Connor and Associate’s breadth and depth of experience to evaluate real estate investments.
To obtain more information on O’Connor & Associates lease audit services, call or email Mike Olivares at 877-375-42941 or fill out our online form.