Two weeks before closing, the lender calls and tells you the proceeds dropped. The million dollars you lined up is now 1.4, and you have about ten business days to find the other $400,000.
In multifamily, that call almost always traces back to the same window. The 60 to 90 days between contract signature and closing, when the seller still controls the property and has very little reason to run it well.
Most buyers spend their negotiating energy on price, earnest money, and the length of the inspection period. Those are the big rocks, and they belong in the LOI. But the clause that decides whether your closing survives is buried much deeper in the purchase agreement, in a section most people skim.
“Ordinary course of business” is not a protection
Open any commercial contract and find the operating covenants. The first draft is going to say something close to this: seller shall operate the property in the ordinary course of business and maintain existing staffing levels.
That’s it. That’s the whole protection.
It doesn’t define what ordinary means. It doesn’t set a performance standard. It doesn’t say what happens if the property is worse on closing day than it was on the day you signed. A seller who has already mentally spent the sale proceeds can stop answering maintenance calls, let a leasing agent go, and stop chasing delinquency, and they have not technically breached anything.
So operators start adding a physical occupancy floor. Usually something like: occupancy shall not drop below 90% at month close-out. That’s a real improvement over nothing, and it’s where most buyers stop.
It’s also the clause sellers have figured out how to work around.
A 90% occupancy floor gets held up by dropping rent
Think about what you’ve actually asked for. You’ve asked a seller to hit one number. You have not told them how to hit it.
If leasing slows down in month two, the seller has an obvious move. Hold the occupancy number by cutting rent. Ten leases signed at $200 under market rent, a couple of concessions on renewals, and the occupancy line reads 90.4% on the month-end report. Contract satisfied. Nobody breached anything.
You still lost, and you’ll find out how much when the lender re-underwrites.
Those leases don’t expire on closing day. You inherit ten units that are $200 light for the next twelve months, and every one of them becomes a loss-to-lease problem you have to work through with renewal increases and turns. The occupancy floor you fought for became the thing that made your first year harder.
Your lender sizes the loan on income
This is the piece newer buyers miss, and it costs the most.
Occupancy is a number you and the seller argue about. Income is the number the lender underwrites. Before closing, your lender is going to ask for a final T12 and a final rent roll, and they’re going to re-run their sizing off those documents.
If net rental income has slipped over the trailing months, DSCR compresses. To hold their coverage requirement, the lender lowers proceeds. Your loan-to-value drops, and the difference lands on you in cash.
The timing is what makes it brutal. Final documents go to the lender at the end of the process, so the re-trade shows up one to two weeks before closing, after you’ve spent months telling investors you need a million dollars and after your due diligence money is long gone. Now you need 1.4, and you’re calling people you’ve already called.
That’s the gut punch. And an occupancy covenant does nothing to stop it, because the seller never broke it.
Write the floor around net rental income instead
The fix is to tie the covenant to the number the lender is actually using.
Right after the ordinary course of business sentence, add contingencies for both physical occupancy and net rental income. Occupancy stays at or above 90% at month close-out. NRI stays at or above the figure your lender used to size the loan. That second one is the important one.
Then close the side doors, because a determined seller will find them:
A rent floor on new leases. No new lease signed below a stated rent. This is what stops the ten-leases-at-$200-under move.
A cap on new lease terms. Twelve months maximum. You do not want to inherit a stack of 18-month leases signed at soft rents right before you take over.
No concessions without your written consent. Free rent is rent reduction with a different name, and it lands on the same line of your T12.
Approval visibility on new applications. Sit down with the leasing agents and the property manager after the inspection period ends and ask what their approval criteria are. Two and a half times income, no prior evictions, whatever the standard is. Then have it written into the contract that you see the applications before those leases get signed.
No new contracts, no removal of personal property, and notice of any new litigation or casualty. Standard, but they belong in the same section.
None of this appears in a first draft. It appears because your attorney put it there and pushed for it. Which is the argument for controlling the first draft when you can, and for making sure the attorney you hire practices commercial real estate in the state where the property sits.
What’s your actual remedy if they break it?
Here’s the honest part, and it’s the pushback any experienced operator will give you.
The covenant is only as good as the remedy attached to it. If the seller busts the NRI floor 20 days before closing, you are not walking away with a shrug. You’ve spent money on inspections, legal work, and lender fees. You want to close. What the contingency really gives you is a documented, contractual reason to reopen price, so the conversation becomes a negotiated reduction instead of you absorbing the whole gap in cash. Make sure the remedy language is spelled out and doesn’t just dead-end at your right to terminate.
Sellers and their attorneys will also fight this. Some will push back hard on any performance covenant that survives past the inspection period. That’s a real cost of asking, and on a competitive deal it’s one more thing you’re spending negotiating capital on.
It still isn’t foolproof
Tenant quality is the gap none of this fully closes. A seller who wants to hold occupancy can approve weaker applicants, and reviewing applications catches some of that but not all of it.
The backstop is the NRI floor itself. Put enough non-paying residents in the building and net rental income drops anyway, which trips the covenant. It’s indirect protection rather than prevention, and it’s better than the single sentence the contract starts with.
If this is your first deal, don’t try to hold every one of these at once. Get the NRI floor and the rent floor. Those two carry most of the weight. Add the rest as your attorney relationship and your negotiating position get stronger.
Contracts are a dry subject right up until you miss something and it costs you six figures. Then they get interesting fast.
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Vince
