This past week, we worked on a 40 tenant open air center acquisition. Often times, a seller severely restricts the information provided to our clients, the buyers. Fortunately, this time, we had almost free access to the seller’s files.
Many of the leases were leases that had been amended and extended 3,4,5 times since their original commencements – some from the 80s and 90s. And, many of the tenants had been defaulted numerous times. The defaults in the files only related to the current seller’s period of ownership – from about 2012. But, these defaults (most were cured) are pertinent to the buyer’s acquisition of the property.
Why? For one, it lets you know what to expect for your period of ownership. If the aged receivables shows a tenant is current, it may not tell the whole story. In many cases, a pattern of defaults lets you know, in advance, that management will have to stay on top of a tenant to keep them current. Rather than being into ownership four months frustrated with a tenant that is now four months behind, knowing in advance that a default on the 15th of every month will keep them current will ultimately make for a much better landlord-tenant relationship.
But, there are other option, restriction and covenant related reasons to be aware of prior defaults. Many leases will have language that specifically eliminates certain clauses in the case of some number of defaults. For example – renewal options. The language might read something to the effect of “Provided the tenant has not been in default more than three times during the term…” In some cases, a tenant will add “… beyond any applicable cure period …”
Options and exclusives are the two more common areas to see this contingent default language. Think about what that could potentially do for you in the case of a tenant with below market options! Think about what that would do in the case of an underperforming tenant with an exclusive. It gives you options!
We have often addressed that once a lease is executed, you HAVE to live with the terms of the lease. However, in some cases we can actually view it as you GET to live with the terms of the lease.
If you search, there may be a silver lining!