Magazine article The RMA Journal

So Your Loan Involves a Lease. Now What?

Magazine article The RMA Journal

So Your Loan Involves a Lease. Now What?

Article excerpt

IT'S A RAINY Wednesday morning when Christine sits down in your office and flops a lease agreement in front of you. You haven't had your second cup of coffee yet, but Christine looks like she's in a hurry. She asks, "Will this lease work for our loan?"

Wait, what?

Whether you're dealing with a commercial real estate loan or a working capital loan, leases are a commonplace feature of our lending universe. That said, landlord-tenant issues vary dramatically, so different tools are needed depending on the facts.

Landlord waivers or subordinations. When lending to a borrower whose personal property collateral is housed under someone else's roof (common example: a warehouse), most state statutes grant landlords the ability to lock the doors and, under certain circumstances, sell the tenant's contents to satisfy unpaid rent obligations. Those landlord rights need to be subordinated or waived to ensure a liquidating lender can enter the premises, access the building, remove collateral, and possibly even conduct a liquidation sale from the premises. Landlord waivers or subordination agreements can come in different forms and can contain different features, many of which are negotiable.

Do you need a landlord waiver or subordination in every situation like this? It depends on the value and importance of those contents. But if you're ascribing meaningful value to those contents, and if you really want the right to remove your junk (sorry, "valuable collateral") out of that building, there's no more predictable way to preserve those rights than with a direct waiver or subordination from the landlord.

Tenant estoppel certificates. Let's change the facts. Now, instead of lending based on the value of a tenant's personal property assets, you're issuing a commercial real estate loan to a landlord-borrower with tenants on the mortgaged premises. Whether it's a purchase or a refinance, how do you know that onsite tenants don't harbor grievances (potentially expensive grievances) against the landlord? The answer is a tenant estoppel certificate in which the tenant makes a one-time certification that it does not possess claims, offsets, or defenses against its landlord and that its rent has been paid current. However, remember that tenant estoppel certificates are like Polaroid pictures: they contain facts at one moment in time. Naturally, those facts and circumstances could change in the future.

Do you need a tenant estoppel certificate from every tenant? Maybe, maybe not. It depends on how important certain leases are to your transaction.

Subordination, non-disturbance and attornment agreements (SNDAs). SNDAs are one of the most commonly misunderstood, and sometimes misused documents in tenant-related financings. Here, as is the case with tenant estoppel certificates, you're lending to a landlord borrower. …

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