Cheating With Leasing Incentives
On today’s show we’re talking about the importance of digging deep in due diligence.
Investors are no strangers to maximizing value. Sometimes value creation happens through genuine means and other times it happens through manipulation of the system.
We all know that there is a link between income and value. The math is pretty simple. You take the net income after expenses and divide that number by the market cap rate for comparable properties to calculate the value. Pretty simple and pretty bullet proof objective method for calculating the value.
But what happens when properties are difficult to lease?
But then the landlord offers a leasing incentive. Maybe they offer 13 months for the price of 12. Maybe they make the first month free and then offer to start the lease in month two. But still the landlord took the money up front as a security deposit and then transferred the funds from the security deposit account to the rental account. From the market perspective, it still looks like a 12 month lease. The tenant got an 8% discount on their rent for the year. But it doesn’t appear anywhere. The accounting records for the business look like the landlord got full rent for a 12 month lease. The 13th month appears off the record.
Host: Victor Menasce