Whether you’re a loan originator, or a loan servicer, reviewing a commercial lease (or amendments) becomes more challenging in tough real estate markets simply because there are more tenants in distress – and you need to identify them. So, are there lease provisions that could indicate a distressed tenant? Below is a short list of some lease provisions which could point to a tenant in distress. And a distressed tenant could domino into an entire project being in trouble. Commercial real estate finance has several obvious building blocks: the tenants, the leases, ownership’s commitment to the project and the competitive market surrounding the project. Knitted together, these constitute the fabric used to fit (and KEEP) the mortgage with the lender’s platform. But understanding each element, in order to evaluate the merits of financing the project (prior to funding the loan) or as part of monitoring the loan during the life of the loan, can be very difficult in rough or troubled markets – like the market we’re in right now. These provisions will appear in a new lease, or in amendments to a lease. These could be markers or signs that the tenant has been troubled in the past – and a warning of possible danger in the future.
- expansive or permissive subletting or assignment rights
- no covenant to operate (retail tenant)
- new security deposit or credit enhancements (such as letters of credit)
- new landlord remedies, including eviction provisions
- revisions to percentage rent, and more frequent reporting of gross sales (retail tenant)
- “deferring” rent to a tenant’s “busy” season (when it collects most of its income)
- lease amendments that terminate rights “valued” by tenants, such as signage, expansion, co-tenancy, exclusive uses, etc.
- adding new guarantors to the lease
The absence of, or changes to, these provisions tell a story. Like footprints, they are markers. Then use Google Reader to gather information on the tenant from the news, blogs and twitter. Call this forensic leasing. Learn to read them because there could be a “bigger” message: when you see these markers in one lease, look for them in other leases. This one domino could fall onto another domino . . .
. . . and the entire project could do a lay down. If you have other lease provisions, or any other comments, please share them below.