How I Saved a Client From Making a $900,000 Mistake
I was contacted by a client that wanted me to help them with their due diligence on a Single Tenant Net Lease seller leaseback transaction. They were already under contract and had their own broker representation.
Before spending much time on the property I informed my client they were paying about $900,000 more than the price they should have been paying. I pointed out that while the cap rate was a market rate and it was an absolute Triple Net Lease, the guarantor was weak and the lease rate was substantially higher than the market rental rate for the property type in that particular area. Because of the relationship between cap rate, net operating income and sale price and because it was a “sale-leaseback”, the tenant / seller would actually come out substantially ahead by paying a higher than market rental rate and consequently selling the property at a much higher price.
I expected my client to either terminate the transaction immediately or renegotiate to a market sale price, but a few days later they reached out again to inform me that their own broker had provided them an analysis showing them that even though they were paying above market for the property they could still meet their required return. I asked my client to send me the analysis and what I discovered was extremely alarming.
The analysis had been manipulated in such a way that it appeared certain values were being taken into consideration, but they were not. Once the analysis was corrected it painted a drastically different picture for my client. I don’t know if my clients broker intentionally manipulated the analysis or if it was just incompetence, but I’d like to believe this broker understood his responsibility to represent his CLIENTS interests instead of his own and I am very grateful to have had the opportunity to point out the issues with this transaction prior to my client making a purchase they’d very much regret at a later date.
