Whenever a Lender considers lending money to a real estate project that is or will be leased to one or more tenants, it is important for the Lender to review the project from the standpoint of a landlord. In the event of a loan default, the Lender may have to step in and fill the shoes of the landlord.

Some of the items a Lender should consider when reviewing leases include the following:

  • Rent – How is rent calculated? What is the minimum rent due? Is the rental amount based on a percentage rent? Is there a provision for additional rent in the lease? Are the terms of any future renewal of the lease, or expansion of the premises already included?
  • Common Area Maintenance (CAM) – How CAM charges are determined varies greatly from lease to lease. Lenders should consider what maintenance is included in the CAM charges and whether that may change over the term of the lease. Other CAM-related issues to consider are if and how CAM charges may increase or decrease, whether there are any caps on the amount of CAM that can be charged under the lease, and the effect of vacancies on the CAM charges.
  • Financial Strength of Tenant – The success or failure of projects often depend on the tenant’s ability to pay rent. If the property securing the loan has a single tenant or a few main/anchor tenants, the anchor tenant’s ability to provide a steady income stream to the borrower can be crucial. When reviewing such leases, it is also important to consider the financial strength of any guarantors of tenant’s obligations under the lease.
  • Tenant’s Termination Rights – Lenders should pay careful attention to a tenant’s termination or rent abatement rights. If a landlord default gives an important tenant the right to terminate the lease or abate rent, the Lender may want to require notice of this default and time to cure the default, through the execution of an appropriate “SNDA”. Co-tenancy provisions can give a tenant the right to terminate its lease if another tenant ceases to operate or if occupancy falls below some level. All co-tenancy provisions should be carefully reviewed.
  • Subordination, Non-Disturbance and Attornment Agreement (SNDA) – Lenders should consider requiring an SNDA by all significant existing and future tenants. An SNDA subordinates the lease to Lender’s mortgage, ensures the tenant that its possession will not be disturbed upon any potential foreclosure by Lender, and gives Lender comfort that upon foreclosure or deed in lieu of foreclosure, the tenant will continue to perform any obligations under the lease, substituting the Lender for the tenant’s original landlord. Each SNDA must be carefully reviewed to ensure that the Lender’s rights are protected and that the Lender is not undertaking unexpected liabilities for defaults by the borrower/ landlord.
  • Miscellaneous Provisions – Some leases will give the tenant a right of first offer or right of first refusal to expand, relocate or purchase the property. Exclusives or use restrictions on the property can also be provided in certain leases. These types of provisions as well as Landlord remedies upon tenant defaults should be carefully reviewed. Each lease can contain a variety of provisions that could affect the cash flow available to service the loan to the borrower/landlord. As a result, each significant lease needs to be reviewed and analyzed with care.
  • Loan Documents – In addition to assigning to Lender the cash flow from each lease, the loan documents should provide parameters pursuant to which future leases can be approved by Lender. In doing so, the Lender may want to leave some flexibility so that a borrower’s ability to appropriately lease the project is not impaired. The process of approving future leases should be carefully discussed between Lender and borrower to ensure a smooth operation of the project.