Verifying leases.

[Lawrence R.]

If you plan to use a leased property in your income approach:

1. How do you verify it?

2. What kind of documentation do you consider "adequate"

3. Do you ever simply take the tenant/landlord's word for it?

4. Do you have a second source to verify with at all?


Thanks in advance to all who respond with something useful.

 

[CBBoston]

1. You try your best and that means you try very hard. I've had to call people multiple times before they would talk to me. Persistence is a virtue.

2. Copies of leases for the subject and calls to the tenants. Lease comps brokers involved in the deal - both sides. Try both owner and tenant. They wouldn't always talk to you but sometimes when they do you learn all kinds of interesting things.

3. Landlords lie all the time.

4. Multiples sources are always the goal. I tend to put more weight on some brokers and owners data but like to get another source.

Vernon Martin has a piece somewhere on the forum that is a must read for anyone doing commercial work.

 

[CBBoston]

Link to Martin's white paper.

http://www.americanpropertyresearch.com/files/Lessons_from_losses.pdf

 

[Michael S]

For the subject I like to see a copy of every single lease. Rent rolls are nice for simplicity and organization, but the lease is the legally binding document and overrides everything else. During the inspection we'll take the rent roll and check to see that everyone on the rent roll is occupying the space and conducting business.

If there's any obvious discrepancies we'll dig deeper. We just did a large shopping center that included some basement space. Most tenants are paying $15-25/SF for in-line space. This basement tenant was paying less than $3/SF. During the inspection we asked the tenant why it was so low and it turns out that even though the rent roll says 10,000+ SF only a couple thousand was usable so based on that the rent was still low but not absurdly so. Another job was a proposed dentist office. The leases for that weren't worth the paper they were printed on. It was a convoluted mess with two sub-tenants (one of whom was part of the partnership that owned the building) and the tenant who was also one of the owner's of the building. The lease rates were absurd and well above market. Seeing the same signature on both the landlord and the tenant side is another obvious giveaway that the lease is meaningless.

As far as comps go pretty much the only source is the broker, the landlord, or the tenant. I'd say about 90% of the lease comps I've ever got have come from brokers. Landlords it's usually tough to get them to talk, same with tenants. The tenants don't always know the exact amount unless it's something simple like $1,000 a month for a 1,200 square foot space. If you've got 7,821 square feet of office space at $14 per square foot they're probably not going to remember the exact amount, and they probably won't know the accurate size either.

 

[Pittsburgh Pete]

Even having the leases in hand doesn't stop some appraisers from doing idiotic things. Just had an eminent domain case where the owner had two leases--one between himself and his wife's corporation that ran a scrap yard and one between himself and his own corporation to operate a strip club--both on the same 10 acre rural parcel (no sewers) with a 4,000 SF metal building (partly used by the strip club, partly used by the scrap yard, and partly used by the owner himself). Leases equated to $45/SF of building area.

The owner's appraiser used the leases opining that they were arm's length--amazing. His definition of arm's length was "whatever is fair and reasonable." He is a noted local hosebag that comes off very knowledgeable even when spewing total absurdity. Jury seemed to like him (he practically took credit for writing USPAP while on the stand--the plaintiff's attorney kept trying to get me disqualified for incompetence since I didn't use the leases in my valuation).

I spent several hours on the stand, a portion addressing the absurdity of the leases and their total lack of relationship to the market. Jury was clearly intent on punishing the condemning authority. A total embarrassment!

 

[Caligirl]

1. How do you verify it?

2. What kind of documentation do you consider "adequate"

3. Do you ever simply take the tenant/landlord's word for it?

4. Do you have a second source to verify with at all?


1. Telephone if I can, but prefer email so I have something in writing.
2. Verification from one party to the transaction via email is pretty good-depends on the property type and the market though. Anything leased recently, I'd like to speak with at least two people to confirm details *and rental concessions*. Generally start with the broker, first.
3. Sometimes-depends on a couple things-who it is, what the property is, how the terms described measure up to other verified comps, what the market is like, etc.
4. I like to use a second source if I can-if all things are equal I will give most weight to the most similar comps I was able to verify with more than one source (at least one of them an uninterested party to the transaction).

 

[The Warrior Monk]

1. You try your best and that means you try very hard. I've had to call people multiple times before they would talk to me. Persistence is a virtue.

2. Copies of leases for the subject and calls to the tenants. Lease comps brokers involved in the deal - both sides. Try both owner and tenant. They wouldn't always talk to you but sometimes when they do you learn all kinds of interesting things.

3. Landlords lie all the time.

4. Multiples sources are always the goal. I tend to put more weight on some brokers and owners data but like to get another source.

Ditto the above.

With regard to #3, sometimes they are good sources. As an example, a few landlords we know in our area are real estate investors. They will give out the information to the right people under the right circumstances.

It also helps greatly to specialize in a particular property type, and/or work in a particular market area. Over time, this allows the appraiser to build up a database or information not readily available, such as copies of leases.

 

[PropertyEconomics]

A source I havent seen on here are other appraisers. A well developed group of collegues and a call to them asking if they have appraised anything similar can often lead to very good lease information. In turn you have to be willing to share the data you have. I have yet to have an assignment where the client specifically requested all of the data remain confidential, however, I have had some appraisers provide me with data for Lease 1, Lease 2, Lease 3, etc. under the agreement I would maintain the specific information confidential in my files.

I find a well placed group of collegues invaluable in verification of market data. Some will say some appraisers lie .... you just dont talk to those appraisers.

 

[Caligirl]

A source I havent seen on here are other appraisers. A well developed group of collegues and a call to them asking if they have appraised anything similar can often lead to very good lease information. In turn you have to be willing to share the data you have. I have yet to have an assignment where the client specifically requested all of the data remain confidential, however, I have had some appraisers provide me with data for Lease 1, Lease 2, Lease 3, etc. under the agreement I would maintain the specific information confidential in my files.

I find a well placed group of collegues invaluable in verification of market data. Some will say some appraisers lie .... you just dont talk to those appraisers.

Very true, and very good point. I also have a network of people I call who also call me.

Another good source is the research department for large brokerage firms. Usually easier to get through to them than the brokers.

 

[Lawrence R.]

Thanks for the input. I am preparing to testify and wanted to see what other appraisers are doing--I hate to be demanding that verification go too far beyond peer practice.

thanks!