Buying a Strip Center

TL;DR - Asking for all the leases AND READING THEM for a strip center before a buyer purchases the property is STANDARD, correct? not illegal? 

We are representing a client on purchasing a strip center. There are 3 tenants occupying the center right now. We are a mainly residential company (century 21) but we do also specialize in commercial. 

The buyer requested financials (which is very standard), but it did not give all the information about the leases and information on the tenants (renewal, increase, etc).

The broker has advised me USUALLY it is in an excel spread sheet, but about a month ago I did a Commercial Management class, and they preached to read EVERY word on the lease before the buyer should even consider buying the property. WHICH MAKES SENSE.

and obviously this goes without saying - the leases are proprietary information and should not be taken outside of the client-agent relationship. (there is a confidentiality agreement signed as well).
[{"id": "e7xzjua", "text": "I would never buy a commercial property without reviewing the actual leases themselves, even if i were given abstracts.  As an appraiser, i'll rely on abstracts, but often refer to the actual lease.  I've never had a buyer not do a lease audit prior to purchase.\n\nEdit: as others have stated, actual leases pre offer aren\u2019t very common.  In due diligence they\u2019re almost always reviewed.", "replies": [{"id": "e7yqjmj", "text": "Agreed, but its not uncommon to make offers on properties without having the leases.  That is especially true for small properties.  You will get the actual leases in dd.  For some sellers, I would actually prefer it because it gives you the opportunity to retrade them over all perceived issues and they don't have a great counter because they didn't provide you the leases before you made the offer.  Conversely, some sellers will view legitimate retrades as unjustified because the price was agreed upon already.  In the end, it depends on the seller and whether you think they will blow up the deal because you want a price reduction when you find out the largest tenant has a termination option in year 3.", "replies": [{"id": "e7yrsas", "text": "Agree as well, offers are fine without, but closing should be dependent on lease audit.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e7xznrm", "text": "Yes, and there's a lot to look for. Exclusives, ROFRs, options, etc. that could  greatly influence a purchase.", "replies": [], "depth": 1}, {"id": "e7y0lds", "text": "Yes, it is critical to see all of the leases.  Banks, similarly, want to see all of the leases before approving the loan - it is a critical step in the estoppel process.\n\nEdit: AND, not only do I read the leases, I review each of them with my attorney.\n\nEdit 2: I should add that you said \"before a buyer purchases a property.\"  That is the case.  It is not always the case before an LOI is executed.  Pro-forma is often good enough for that.\n", "replies": [], "depth": 1}, {"id": "e7y0m33", "text": "yeah, obtaining leases are standard, especially if you want to get financing.", "replies": [], "depth": 1}, {"id": "e7y1wze", "text": "Locally, reading all the leases comes during the due diligence period (conditional period) after the offer is made--commercial offers are typically conditional on due diligence. \n\nPrior to making the offer, no, leases are not necessarily available, but the basic information should be provided (e.g., in a spreadsheet.)\n\nSo I think this is some sort of confusion about timing.", "replies": [{"id": "e7y2sit", "text": "Ok, this is really what I was getting at. \n\nPRE-OFFER I shouldn't be expecting to get leases? ", "replies": [{"id": "e7y3nuu", "text": "I'm Canadian, so different practices may apply. But I haven't typically seen leases provided pre-offer. Post, always.\n\nEverything is conditional upon the buyer's due diligence, and usually that is under the buyer's sole discretion, though, so it's generally not a huge risk. Have a good RE lawyer on standby to review them if needed.", "replies": [], "depth": 3}, {"id": "e7y3ogh", "text": "It really just depends. Sometimes brokers will give me leases before I send an LOI, sometimes they won\u2019t. But to be fair, in the pre-diligence phase, I\u2019m generally taking at face value that what the broker says is on the leases is on the leases. The broker generally wants to represent the facts of the property as factually as possible. Nobody wants a re-trade. ", "replies": [{"id": "e7y9ksy", "text": "&gt; nobody wants a re-trade.\n\nThis shit drives me nuts when dealing with property owners or bad agents.  I've said \"well you can either give me the best information now or we can renegotiate during due diligence\" way more times than I'd like.", "replies": [], "depth": 4}], "depth": 3}, {"id": "e7yb310", "text": "As an owner I would never hand over any leases until there was a purchase and sale agreement in place.  That agreement will clearly state which materials have to be provided from the seller to the buyer. That will always include copies of leases.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e7y46fp", "text": "This is a classic example of why residential agents shouldn\u2019t try to dabble in commercial.  If you want to do your best to represent your clients interests, find a commercial broker that you can refer this deal.  In my experience, residential agents almost always lack basic knowledge of the market and the intricacies of a commercial transaction.  ", "replies": [{"id": "e7y4vwh", "text": "Century 21 has a commercial department, it is small and is being developed, but I'm trying to focus strictly on commercial. I was almost sure though that my broker was incorrect, I just needed my reassurance for my own self.\n\nBut I agree you should specialize in either or.", "replies": [{"id": "e7y9g00", "text": "There is nothing wrong with wanting to do commercial, just maybe if your broker isn't providing the training or guidance needed you should be doing it somewhere else.  At the end of the day someone is paying you to be their expert on this.  If you are here asking basic questions because your broker is giving you bad info, then they aren't getting what they are paying for", "replies": [], "depth": 3}], "depth": 2}, {"id": "e7yfxuz", "text": "Seriously, I always face plan when I see residential agents trying to sell commercial, no fucking idea what they are doing most the time. Like in this case above. You are doing your client a disservice by representing him OP", "replies": [{"id": "e7ytt1n", "text": "Same with leasing they ask about what the commission is before asking for the rent.  ", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "e7yd2jp", "text": "You should ask for leases as part of due diligence. I don't send them until we're under contract. ", "replies": [], "depth": 1}, {"id": "e7yktfs", "text": "I've been getting up to speed on some of this, too.  From what I've gathered:\n\nWhile you explore (loopnet and the like):\n\n* expect to see a simple table in the pitch/presentation of tenants and current rent, leading to the net operating income for this year (and thus the justification for the cap rate and sales price ask)\n* you might, if the deck is good, see how the leases step up and/or how long they last\n\nIf you start dialogue and before accepted offer:\n\n* you can ask the other side for the additional detail above\n* you can ask about any asterisks that appear in the presentation, most probably around how NOI was actually calculated and expenses\n\nIf they accept offer and you move into diligence:\n\n* now you get the leases and you read them like crazy - if something is listed as net/NN/NNN/absolute, etc., you need to verify.  Also look into things around maximum expenses per year, guarantees around what you'll fix and when, etc.\n* and now you get more detail on expenses, which you should verify with the property itself - very possible the current owner has been skimping on things\n\nI have not figured out if it's okay to talk to the tenants directly.  I kind of want to do that to figure out what's not being done that should be (like I've personally noticed security is a big deal, especially if there are homeless people in the area).", "replies": [], "depth": 1}, {"id": "e7yopft", "text": "I never expect to see all of the leases until my client is under contract. While you're under contract I highly recommend you review the leases and get estopplels from each tenant. ", "replies": [], "depth": 1}, {"id": "e7ypark", "text": "The buyer typically puts the property under contract and gets the leases to review as part of their due diligence period. Make sure the buyer can cancel at any time during the due diligence period and for any reason. If they don't want to put it under contract then they will have to settle with a rent roll and P&amp;L's.", "replies": [], "depth": 1}, {"id": "e7yx775", "text": "Because most sellers I see want to get their potential buyers spending money on due diligence activities (including lease review) as soon as possible, it would not be uncommon for the parties to enter into an access agreement under which the seller will give the buyer access to non-confidential and non-proprietary information about the property (including leases).  The access agreement typically governs the buyer\u2019s due diligence activity when the seller and buyer are negotiating a purchase agreement after signing the letter of intent.  The access agreement contains what you would expect to see regarding items like confidentiality, indemnities, etc.  If you are concerned that the seller is not being forthcoming with property level information, you should push them hard for purchase agreement reps and warranties on the due diligence information they provide to you.   I would also push for the right to conduct tenant interviews. ", "replies": [], "depth": 1}, {"id": "e7yy366", "text": "this is a classic ploy of the seller who doesn't really want to sell or wants people to throw out high offers knowing that there's something behind the scenes that will kill the deal before it gets across the finish line but hopes someone will come out of nowhere and make them the offer of a lifetime to retire or whatever. it can't happen without a crappy weak broker representing them who doesn't know what they are doing and/or are just trying to buy listings b/c they have no track record.\n\ni'm not seeing a contract amount listed, but this type of thing is quite common for small deals, say under $1mm.\n\na good broker would never let this fly on any reasonable deal b/c it's not worth their time to go through the listing and marketing process if they don't have the leases to properly underwrite.\n\nonce you have:\n\n1) gotten a confidentiality agreement signed\n\n2) already given out the rent roll with the primary material lease terms\n\nthere is NO REASON not to supply the leases, or at least the abstracts. if you are going to go steal their tenants and buy out their leases, you already have enough info with a detailed rent roll to do that. and if there are only 3 tenants, the rent roll doesn't even save you that much time in doing that.\n\nthe more info you provide as a seller, the more likely you are to get legit offers from the get-go.\n\ngood brokers will go out of their way to put an entire due diligence package together to make sure they properly organize a market and capitalize on the buyers all at the same time by providing quality, reviewed and summarized due diligence. this creates a bidding war scenario and drastically increases the surety of closing the deal.\n\nthe scarier part, as others have alluded to, is that it sounds like this is really not your area of expertise. and simply getting the leases doesn't mean there can't be something else along the way as part of the due diligence that isn't going to either cause the deal to go south, cause you to lose your commission, or cause you to be sued later on for negligence or incompetence and practicing in an area you have no experience. all of the above can and do happen.\n\ni'd say you refer this to someone or simply run from the deal. nothing about this sounds like a deal that will ever get to the closing table.", "replies": [], "depth": 1}, {"id": "e7yyp2m", "text": "If you\u2019re asking a question as simple as this you shouldn\u2019t be representing the client.  One bit of advice, make sure you push for your client to get a phase 1 done otherwise they could be exposed to a huge liability if any environmental problems are found while they own the property or at anytime in the future.\n\nAnother word of advice and a reason you might want to refer this:  if you have any interest in being in CRE your reputation is everything.  If you screw this deal up and miss something during the process then it\u2019s going to follow you.  If you want to do commercial then go learn from someone for a couple years.", "replies": [], "depth": 1}, {"id": "e7zfbw0", "text": "Request each tenant provide an estoppel certificate. ", "replies": [], "depth": 1}]