We know commercial real estate is all about the rents – and the credit of the tenant, which some times is enhanced by the tenant giving the landlord a letter of credit.
David Staas and Michael Thomas recently clued me in on several lessons learned by commercial mortgage lenders, on the topic of letters of credit given by the tenant to the landlord (i.e., the lender’s borrower).
- Are there new approaches being taken by commercial mortgage lenders and servicers when a tenant gives the landlord a letter of credit?
Here are two that might surprise you:
- Loan documents: as part of lender’s lease approval process of new leases, and as a new covenant in the loan documents, some lenders now require the landlordborrower to assign the letter of credit to the lender, and even add the name the lender as an additional "beneficiary" (on the letter of credit) during the term of the loan
- Subordination and Non-Disturbance Agreement: in the SNDA, the tenant not only agrees to "attorn to" the foreclosing lender as the new landlord, but now must also agree to get the letter of credit reissued to the lender (if and when the lender takes title to the building). In other words, the tenant must agree to reissue any letters of credit given to the landlord, as security for the loan.
So, landlords and tenants, mortgage lenders are saying "Hand it over."
Kudos to Michael and David for the info.
If you have other tips, lessons or tricks involving commercial leases and letters of credit, then please post or comment below.