The recent economic downturn provided a valuable lesson to commercial mortgage lenders: you can’t rely on the rent roll alone to get a true picture of a commercial lease property’s revenue stream, particularly when the property involves retail lease agreements.
Lenders should pay particular attention if retail lease agreements include the following:
Offset/Self-Help Rights. Offset and self-help rights in commercial lease agreements allow tenants to make repairs if a landlord fails to do so, and offset the cost against the rent. This can affect the ability of a borrower to maintain timely loan payments or endanger property value. The exercising of these rights by a tenant can prove particularly troublesome for a lender if the property goes into foreclosure or short sale.
Co-tenancy. It is not unusual for a retail lease agreement to include an “out” for the lessee if the lease is predicated on an anchor tenant or certain occupancy thresholds. When the economy took a turn for the worse, many shopping centers were left empty because tenant lease agreements included this type of clause. This then led to borrower defaults. Lenders should be aware of the risk factors that co-tenancy agreements bring when performing an underwriting risk analysis.
Temporary/seasonal leases. In a dicey economy, shopping center owners can become extremely flexible on leasing to temporary or seasonal tenants to fill space. Examined alone, vacancy rates can paint a false picture for lenders, who should examine each individual lease to obtain a true picture of a building’s overall vacancy rate.
Kick-out clause. If a retail tenant has a kick-out clause in the lease and fails to meet a minimum sales volume, they can use the clause to terminate the lease. This can make it more difficult for a borrower to service the debt and interfere with the property’s income stream.
The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to firstname.lastname@example.org or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.