TICS and due diligence

Once an investor has determined that they like the tenants in common property structure, they do their due diligence on the available properties. In today’s market and economic cycle, this is more important than ever.

Risks that seemed acceptable upon first glance might involve a little more detective work today.

For instance, let us say that you are looking at a multi-family property that serves a dominant regional employer. For many years, occupancy rates have remained steady at your property and the comparables in the area. And let us say that more than 60% of your tenants are employed there.

What are the business conditions that affect that major employer? Are they growing, flat or declining? Is that site expanding, profitable, or slated for closure?

Today an investor’s due diligence goes beyond simply looking at average rents, rent growth and occupancy rates, but they must look more closely at the tenant mix and their employers, and try to decide if there is a greater risk to occupancy than first appears.

And the same thing goes for conventional office properties. How are these tenants doing? How is the industry that they are in? How do your tenants compare to others in their industry?

The same thing goes for retail properties. Are their sales growing, flat or declining? How do your tenants’ compare with other stores in the same chain? Is your retail center in a growing or flat or declining market, compared to other centers?

Today investors must expand their focus to include the broader economic factors that may pose risks to their properties. Good sponsors and representing brokers are fully aware of these factors and should be consulted on these issues.

Article by: Ken Yamaguchi

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