Commercial lease due diligence for Michigan self-directed IRA property

An occupied commercial property may be advertised with a lease term, monthly rent, and capitalization rate. None of those numbers explains the whole agreement. The rent may change next quarter. The tenant may have renewal rights, an early termination option, a large improvement allowance still due, or a limit on expenses the landlord can recover. A side letter can matter as much as the original lease.

A self-directed IRA buyer needs two files to agree before closing. The lease file must show what the property owner owes and receives. The account file must show how the IRA will collect income, pay expenses, sign documents, and fund work without informal help from the IRA owner. Due diligence is where those files get tested against each other.

Build the lease file before trusting the rent roll

Request every executed lease, amendment, addendum, renewal, guaranty, assignment, consent, sublease, side letter, commencement confirmation, estoppel certificate, and notice. Include documents for tenants that have left if an unresolved balance, restoration duty, or claim remains. Ask the seller to identify oral understandings, disputed terms, and papers that are still being negotiated. An unsigned renewal draft is not a renewal, but it can reveal a live issue that deserves follow-up.

Michigan Compiled Laws section 566.106 addresses written instruments for interests in land other than leases with terms not exceeding one year. A buyer should not turn that statute into a do-it-yourself conclusion about whether a particular lease, amendment, option, electronic signature, assignment, or oral statement is enforceable. Give the complete file to the buyer's Michigan attorney and have counsel identify the controlling documents and missing signatures.

• Legal tenant name, guarantor, premises, rentable area, permitted use, and delivery date
• Commencement, expiration, renewal, expansion, contraction, purchase, and termination rights
• Base rent, scheduled increases, percentage rent, free-rent periods, credits, and prepaid amounts
• Operating expenses, utilities, taxes, insurance, repairs, maintenance, and capital-work obligations
• Deposits, letters of credit, guaranties, assignment rights, subleases, and lender-related documents
• Open defaults, notices, claims, concessions, tenant work, landlord work, and unfinished obligations

Recalculate the income from source records

Start with the rent roll, then rebuild it from the signed documents and payment history. Compare billed rent with collected rent. Match scheduled increases to the dates and formulas in the lease. Separate base rent from reimbursements, percentage rent, late charges, and one-time payments. If a tenant pays a rounded amount every month, find out whether that amount follows the contract or reflects an undocumented accommodation.

Review enough bank, lockbox, or property-management records to trace the receipts the seller is representing, with lawful privacy and redaction controls. Reconcile delinquent balances, unapplied cash, credits, free rent, prepaid rent, and disputed invoices tenant by tenant. Do not count a billed amount as collected income or assume an old receivable will arrive after the sale. Rent, reimbursement, renewal, and collection are not guaranteed.

For West Michigan property, the same exercise applies whether the space is a Grand Rapids storefront, a suburban office, or an industrial unit elsewhere in Kent, Ottawa, Muskegon, or Allegan County. The useful comparison is not the label on the building. It is the executed agreement beside the actual payment record for that space.

Test expense recoveries line by line

Phrases such as net lease or triple net are summaries, not expense schedules. Read the definitions and exclusions. One lease may pass through taxes, building insurance, and common-area maintenance. Another may cap controllable expenses, exclude structural work, limit management fees, use a base year, or require the landlord to absorb capital costs except in narrow circumstances. The lease also controls the allocation method, estimate notices, reconciliation timing, audit rights, and treatment of vacancies.

Recalculate the most recent reconciliation using the lease formula, invoices, tax bills, insurance charges, occupied area, and allocation schedule. Compare it with what was billed and collected. Ask about tenant audits, objections, credits, and reconciliations that have not been issued. A favorable operating statement can be temporary if the seller deferred a reconciliation or classified an owner cost as recoverable without support from the lease.

List every expense the landlord pays even when the tenant reimburses it later. The IRA still needs enough cash and enough custodian lead time to pay taxes, insurance, snow service, utilities, repairs, and contracted work when due. Reimbursement lag belongs in the operating budget. It should not be treated as free working capital.

Ask the tenant to confirm the current deal

A tenant estoppel certificate can test the seller's file against the tenant's understanding. The requested certificate may address the documents in effect, key dates, current rent, deposits, prepaid amounts, defaults, claims, options, and unfinished landlord work. The lease may prescribe the form, response period, permitted recipients, and consequence of no response. Have the buyer's attorney prepare or review the request instead of relying on a generic form.

Read the response for qualifications and omissions. A tenant who confirms the rent but lists a leaking roof and an unpaid improvement allowance has not given a clean confirmation. A certificate signed by the wrong entity may not answer the question. If the tenant refuses, misses the deadline, or gives an answer that conflicts with the lease file, counsel should decide what additional records, contract rights, or closing conditions the buyer needs.

Find obligations that do not appear in monthly rent

Commercial leases can place expensive work on a calendar that the rent roll never shows. Review landlord delivery requirements, tenant-improvement allowances, brokerage commissions, roof and structure duties, parking obligations, HVAC replacement, code work, signage, access, restoration, and casualty repairs. Match completed items with invoices, permits, lien waivers when appropriate, approvals, warranties, and tenant acceptance.

Options deserve their own schedule. Record notice windows and conditions for renewal, expansion, contraction, purchase, refusal, relocation, and termination rights. Ask counsel how a sale, casualty, condemnation, tenant default, lender action, or missed notice affects each one. Do not assume an option is harmless because its date is several years away. It may change the property's use, future rent, financing, or resale choices.

Review the tenant's permitted use beside zoning, certificates, permits, recorded restrictions, and actual operations. A lease can authorize an activity between landlord and tenant without making that activity lawful under public rules. The local authority and buyer's professionals should resolve a mismatch before the due-diligence deadline, especially when the tenant's use depends on a license or special approval.

Separate building access from regulatory conclusions

Commercial due diligence often requires access to roofs, mechanical rooms, occupied suites, utility equipment, and tenant-maintained areas. Read the lease's notice and access terms before scheduling inspectors or contractors. Coordinate through the seller and property manager, protect confidential tenant information, and record which areas were not inspected. A tenant's repair duty does not remove the buyer's need to understand the present condition.

Accessibility, fire and life safety, environmental conditions, and building-code questions need qualified review tied to the property and its use. The U.S. Department of Justice explains that businesses serving the public can be public accommodations under Title III of the Americans with Disabilities Act and that commercial facilities are subject to applicable design standards. That general guidance does not allocate a particular repair between buyer, seller, landlord, and tenant. The lease, property records, current conditions, and advice from counsel and qualified professionals must be read together.

If the property includes dwelling units, treat the residential side as a separate legal and operational review. HUD states that the Fair Housing Act prohibits housing discrimination because of race, color, national origin, religion, sex, familial status, or disability. Use consistent, lawful procedures for residential access, records, repairs, accommodations, and tenant communication, with Michigan counsel and the property manager guiding the process.

Trace deposits, contracts, and notices through closing

Create a schedule for cash deposits, letters of credit, guaranties, prepaid rent, and other tenant security. Confirm the amount, holder, account or instrument details, expiration date, transfer procedure, and any pending claim. Commercial and residential deposits should not be treated as interchangeable. Have the closing agent and attorneys determine how each item is assigned, credited, transferred, documented, and later administered.

Do the same for property-management agreements, maintenance contracts, warranties, utility arrangements, licenses, and vendor commitments. Mark what terminates, what may be assigned, what requires consent, and what carries an early-termination charge. Decide who sends each required notice and who confirms receipt. A contract listed in a data room does not automatically become usable by the IRA after closing.

Fit lease administration into the IRA process

Give the self-directed IRA custodian the proposed purchaser name, lease assignment documents, management agreement, expected deposits, and closing schedule early. Confirm who may sign tenant notices, amendments, estoppels, service contracts, and checks after closing. Set up the approved path for rent, reimbursements, refunds, deposits, insurance proceeds, and every property expense. The property manager's authority should agree with the custodian's requirements and the governing documents.

IRS retirement-plan guidance lists a sale, exchange, or lease of property, lending money or extending credit, and furnishing goods, services, or facilities between a plan and a disqualified person among prohibited-transaction concerns. It also describes improper use of an IRA by the owner, beneficiary, or another disqualified person as a prohibited transaction. Do not assume the IRA owner can lease a suite, guarantee a tenant obligation, perform maintenance, negotiate personal compensation, advance a property cost, or pay a bill and seek reimbursement. The custodian, CPA, and attorney need to review the particular people, entities, services, signatures, and money flow before anyone acts.

Build a realistic administration calendar. Commercial leases may require operating-expense estimates, reconciliations, renewal notices, insurance certificates, inspections, tax statements, repair notices, and responses within fixed periods. Assign each task to an approved person and keep evidence of delivery. A valuable lease right can be lost because an ordinary notice went to an old address.

This article is educational, not legal, tax, financial, accessibility, code-compliance, fair-housing, property-management, retirement-plan, or investment advice. No property, tenant, lease, ownership structure, or strategy is approved or endorsed by the IRS. Have your own self-directed IRA custodian, CPA, Michigan attorney, inspector, property manager, insurance professional, accessibility and building professionals, local authorities, lender, and other qualified advisors review the account, leases, property, occupants' rights, and transaction before taking action.

Leave closing with an administration file

Keep the executed lease set, attorney's lease summary, estoppel responses, rent and reimbursement reconciliations, deposit and guaranty records, option calendar, notices, inspection reports, permits, vendor contracts, insurance documents, custodian instructions, management authority, and closing statement together. Add the contact and notice details stated in the actual documents. The next rent increase or repair request should be handled from the file, not from someone's memory of the deal.

Primary sources for this review include Michigan Compiled Laws section 566.106, IRS Retirement Topics - Prohibited Transactions and Retirement Plan Investments FAQs, the U.S. Department of Justice's Title III ADA guidance, and HUD's Fair Housing Act overview. They provide a general framework. The rights and duties for one Michigan commercial property come from its complete lease file, present condition, applicable law, public records, and the buyer's own qualified professionals.

Rennie can help identify Michigan commercial property and coordinate lease records, professional access, and offer deadlines on the real estate side. Lease interpretation, legal compliance, building conclusions, property management, and retirement-account decisions stay with the buyer's own advisors and public authorities.