Many investors are taking a fresh look at income producing real estate after reading that there may be great deals out there. Other investors are hanging on to their existing income real estate investments wondering if and how they will be affected by the vagaries of this vicious down cycle.
In either event, the focus is on prudent, professional management as it always is when real estate values are sagging. Believe me…I’ve been around this block a few times. At the very heart of good property management is a sound, well written lease, the contract between the landlord and tenant and very crux of the relationship. I could put on a three day workshop on writing a good lease, so I will just address some key principles and concepts on this week’s blog. Look for future blogs to address many of these subjects individually.
The term “good fences make good neighbors” is the rule of thumb here. If the three most important words in real estate are “location, location, location”, the three most important words in leasing would have to be “clarity, clarity, clarity”. Using the bullet points below as a guide will keep you in good stead:
Using an industry standard form produced by an organization such as the American Industrial Real Estate Association (AIR) is a good start. They have versions to fit almost any situation. For more information, visit www.airea.com. Avoid defaulting to your old lease form or the form used by the previous owner. The AIR forms are constantly revised to keep up to date with evolving legal precepts.
State the name of the parties accurately or you may have trouble enforcing the lease later in case of a default.
Don’t forget to enter a date at the top of the lease: this is unrelated to the lease term dates, but will serve as a critical reference in all future official or legal correspondence. You would be amazed how many times as a property manager I received a new, fully executed lease from a national institutional client, authored by their $500/hour attorney without the lease date filled in. Amazing!
Make sure the rent schedule is clearly stated. Favor actual dollars (i.e. $3,250.51 per month) over dollars per square foot ($2.05 per square foot per month), as the latter focuses attention on the size of the premises which is often contested down the road by sophisticated commercial tenants or gadfly consultants.
Accurately and clearly spell out the parties’ mutual repair and maintenance responsibilities. This is a key to avoiding fights later.
Address respective insurance requirements thoroughly. In particular, this is an area that has evolved legally.
Make sure the default provisions are clearly spelled out. These will serve as the rules off engagement in case of a battle down the road.
Your property manager should be fluent in all practical lease matters. If he or she isn’t, keep looking!