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Due Diligence and Lease Audits in Multifamily Property Inspections

A little over a year ago, Armada was involved in the underwriting process for a multifamily property near Phoenix. One of our inspectors in Arizona noticed that the property management company conducting the inspection pulled out an acquisition due diligence checklist that looked suspiciously familiar—as it turned out, the property management company had borrowed Armada’s lease audit template.

Armada’s Acquisition and Due Diligence Department considers such imitation flattering. Since our department was established in 2015, we’ve had great success in due diligence in commercial real estate for multifamily apartments, offering not only the most thorough property inspections, but lease audits that provide our clients with the critical information necessary to make investments in income-generating multifamily properties. Among commercial real estate due diligence companies, we have established ourselves as industry leaders and experts in inspections and lease audits for multifamily apartments.

What makes Armada’s Acquisition and Due Diligence Department so adept at property inspections and commercial lease audits for multifamily properties?

We should begin with our robust property inspections, which provides a complete breakdown of the types of units in each multifamily—classic, partially upgraded, lightly upgraded, fully upgraded, etc.—and contains a detailed assessment, with thousands of photos, that captures the state of each and every unit in the building.

Our commercial real estate due diligence checklists for the inspection of multifamily apartments run well over 200 pages, and our team has been trained to not only look for the more conspicuous trouble spots, such as water damage, but also for “smaller” issues that don’t always show up on commercial real estate due diligence checklists: for instance, missing kitchen drawers, broken smoke and carbon monoxide detectors, and even snags in the carpet.

We apply such rigorous standards to our property inspections because these “minor defects” in individual units can add up to a lot in costs on the margin for prospective owners and investors.

The second pillar of our commercial real estate due diligence services are our best-in-class commercial lease auditing services. 

As it has been pointed out by numerous blog posts, lease auditing is a critical component of any comprehensive property inspection, but also the component that is most often neglected in multifamily apartment property inspections to the detriment of investors.

When lease audits are considered, they are usually conceived of as “ a tenant’s tool” to ensure rental expenses line up with the market. Indeed, the document on multifamily property inspections by the MBA (Mortgage Bankers Association), who consider themselves the resource in property inspections for multifamily apartments, and CRE more generally, is telling: their Reference Guide on Commercial and Multifamily Property Inspections devotes a single page (out of 124) to lease auditing.

When you’re buying an income-generating multifamily property, the leases determine how much money the property will generate (of course). For this reason, any acquisition due diligence checklist should include a substantive lease audit report.

The specific products that Armada’s Acquisition and Due Diligence Department offers are as follows:

  • Interior Unit Inspections
  • Exterior and Common Area Evaluation
  • Systems Inspection
  • Construction/Rehab Budget Review
  • Tenant Lease Review
  • Property-based Contract Review
  • Financial Review
  • B-Piece Property Inspections

When a client comes to us to perform a property inspection and lease audit for a multifamily apartment they wish to acquire, they can expect to receive any or all of the above items as part of our commercial real estate due diligence checklist. 

Our process-oriented approach follows the steps listed below.

  1. Initial Consultation

On our initial phone call, we’ll listen to assess your needs for property inspection and lease auditing for a specific multifamily apartment or your portfolio. We will go over our transparent pricing models, schedule, as well as the size of the team we will send to the property (or properties) based on the number of units that require inspection.

  1. Kickoff

Once a deal has been reached, the client will provide us with the rent roll and offering memorandum. A sample of this deliverable is available upon request.

  1. Project Timeline

A major benefit of partnering with Armada is the speed by which we work. We require a mere three-day notice—even less in some cases—to assemble our team at your prospective multifamily property investment. We need, on average, 3-5 days to complete our assessment, and your due diligence property inspection and lease auditing report will be available in 3 business days from project completion.

Armada’s Acquisition and Due Diligence department examines not only the physical condition of the property and state of the units in your potential multifamily apartment investment, but also its lease history so that you can project the income that a particular property will generate. The fact that we’ve acquired a reputation for providing our clients with a complete picture of their prospective multifamily investment has given us a distinct advantage as the go-to inspectors of multifamily apartments in the industry today.

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