By BRE Law Group
Income-producing real estate is only as valuable as the cash flows generated from leases. As a result, lenders review proposed leases with a cautious eye, focusing on these 10 issues:
1. Ambiguous Rent and Term Commencement Dates. If the rent and term commencement dates are tied to complex formulas or to contingencies that are not properly drafted, the lender may disapprove the lease.
2. Tenant’s Right to Offset Rents. Tenants should never have the right to offset rents (e.g., repair and deduct rights).
3. Capping Common Area Operating Costs. The lender’s goal is to collect operating expenses from tenants and to break even. Capping operating expenses can result in unreimbursed expenses, which reduces cash flows and the value of the asset.
4. Tenant Termination Rights. Tenant termination rights are the ultimate threat to cash flows and, therefore, should be carefully drafted to make the landlord whole or avoided altogether.
5. Tenant Expansion Rights. Expansion rights in and of themselves are not a problem. The possibility of poor lease administration resulting in multiple tenants having rights to the expansion premises causes the lender to be concerned.
6. Tenant Financials. Lenders like financially strong tenants and like to have the right to receive updated financial statements throughout the lease term.
7. Insufficient Tenant Insurance. The lender must be named as an additional insured, and coverage and limits should be up to date and able to be adjusted by the landlord during the lease term, if prudent.
8. Estoppel Certificates. Lenders want the right to require a tenant to sign estoppel certificates when requested. They also want to see enough teeth in the enforcement provision to ensure tenant compliance.
9. Tenant Assignment Rights. Reasonable tenant assignment rights are not problematic. However, assigning tenants must not be released from liability without lender’s consent.
10. Tenant Right to Rebuild or Restore. Unless the lease is a long term NNN single tenant lease with a credit worthy tenant, tenants must not be given rights to rebuild or restore their leased space in the event of a casualty. Lenders want complete control of insurance proceeds following a major casualty.
Attorneys, brokers and lease administrators should keep these 10 key lender provisions in mind when negotiating, drafting and administering leases.