Premises with a tenant: due diligence before purchase
A ready rental business in Moscow. I work out how much of the promised yield you will actually keep, and check everything that could wipe it out.
The seller shows 12% a year and a chain-store tenant. The listing does not say the rent was raised six months before the sale, that the chain can leave on two months' notice, that the seller pays VAT, or that the premises are pledged.
I check the tenant, the lease, the owner and the premises themselves, and recalculate the yield after taxes and vacancy. Send me the listing and I will tell you for free what does not add up.
Author: Oksana Prisyazhnaya, real estate lawyer · published · updated
Five risks behind a «ready rental business»
- Rent raised for the sale. The rate goes up six months before the deal, sometimes through a related tenant. After the deal, the tenant asks for a discount or leaves.
- A lease with an exit option. Chain operators have a standard clause: unilateral termination with one to three months' notice. A «10-year lease» is in reality a three-month lease.
- Taxes eat the yield. VAT when buying from a company, property tax on cadastral value, income tax or simplified tax on rent. After tax, the yield from the listing turns out noticeably lower.
- Defects of the premises. An unauthorised entrance, alterations, power capacity, permitted use, a façade sign without approval. All of it surfaces at the first inspection or change of tenant.
- Defects of the seller. Bankruptcy, pledge, seizure, a corporate dispute at the selling company. The deal is challenged, the premises go into the bankruptcy estate, and you spend years chasing your money.
A good rental business in Moscow exists, and it rarely sells at a yield above market. If the figure in the listing is clearly better than the neighbours', there is always a reason. My job is to find it before the deposit.
Broker and lawyer: who does what
Legal practice since 2009: I have seen in real cases how a rental business breaks. Commercial litigation, bankruptcy, tax disputes, and before that audit and IFRS. I know how to read a tenant's finances because I learned it outside real estate courses.
Finding the property and the commercial terms are the broker's job, or yours. My part is the legal one:
- Check of the tenant, lease, owner and premises, with a written report on risks and a conclusion.
- Financial model: real yield in your tax structure, and a «tenant has left» stress scenario.
- A review of the seller's drafts (sale contract, handover act, deposit or reservation agreement) and comments as «current wording / proposed wording» that you pass to the seller: transfer of the security deposit, notice to the tenant, seller's warranties.
- Recommendations on the payment set-up and advice until registration.
You deal with the seller, sign, pay and file for registration yourself.
What I check before the deposit
- Tenant: finances, courts, bailiffs, bankruptcy register, links to the seller.
- Lease: term, registration, exit right, indexation, deposit, actual payments.
- Owner: registry, pledges, seizures, bankruptcy, corporate approvals.
- Premises: permitted use, alterations, entrance, power, façade, share in common property.
- Taxes: VAT, property tax, ownership form (sole trader, company, individual).
- For auctions and pledged property: sale rules, what happens to the lease, grounds for challenge.
The result is a report and a model: the real yield, the risks and the price at which the property is worth buying.
Where the properties come from
- Auctions. Premises from bankruptcy estates: public offer, price reduction steps, deposit. There is a discount and there are risks, both can be counted.
- Banks. Repossessed property sold from a bank's showcase. Clean history, but the tenant has often already left.
- Direct owners. Owners who need money faster than six months of listing. They show up in registers and courts before they show up in listings.
On the open market the task is not to overpay and not to buy a problem. Discounts live in properties that need a lawyer.
Steps
- Listing review, free. You send a link. I tell you what in the listing does not add up and what to ask the seller.
- Report. Tenant, lease, owner, premises, taxes. A financial model with the real yield and a stress scenario. In writing, with the price at which the property is worth buying.
- Documents and payment. A review of the seller's drafts and comments «current / proposed»: price and terms in the contract, transfer of the deposit, notice to the tenant. You pass the comments to the seller. I recommend the payment set-up and advise until registration; you sign, pay and file.
Questions
Are you a commercial real estate broker?
No, our roles are different. A broker finds the property and agrees the commercial terms: price, timing, discount. I do the legal check of the property, the tenant and the seller and give a written report with the risks and a conclusion on whether to buy. You can work with a broker and with me at the same time: the broker handles the property, I check it before the deposit.
Which properties do you look at?
Street retail and premises with a current tenant in Moscow, premises at bankruptcy auctions and from banks' repossessed stock, premises sold directly by owners. You or your broker find the property, I check it.
What do you check about the tenant?
The company and its finances, court cases and enforcement proceedings, signs of bankruptcy, links to the seller, actual rent payments from bank statements, and the lease: term, registration, unilateral exit, indexation, security deposit. A chain brand on the sign means nothing by itself.
How do you calculate payback?
From actual payments, not from a line in the listing. Minus taxes in your ownership structure, minus vacancy when the tenant changes, minus operating and capital costs. The figure comes out lower than in the seller's presentation, but it is real.
Can I buy a rental business at an auction?
Yes, and there can be a discount you will not find on the open market. But you need to check the sale rules, whether the lease survives a change of owner, who actually occupies the premises and whether the auction can be challenged. I do this check.
How much do you charge?
A check of premises with a tenant is the individual package for commercial property checks, from 200,000 ₽: the scope and the fee are set before the contract with Weylex LLC (ООО «Вейлекс», INN 9715397784), and advice until registration is included. The first conversation and the listing review are free.
Send the listing and I will tell you what does not add up
I reply personally within a day. The listing review is free: which questions to ask the seller, which documents to request and whether it is worth going to see it.
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