As every lender knows, leases are the economic life’s blood of a project and are often the single most important determinate as to a borrower’s ability to repay a loan. A lender will often call on its counsel to review the lease or leases (“lease” or “leases”) that affect the property securing the loan to distill the lease into a quickly digestible summary and, more importantly, to identify specific issues or concerns to the lender.

Initially, lender’s counsel undertakes in its review of a lease to confirm that it has a complete copy of the lease and any amendments, side letters and other writings that affect the lease, including existing non-disturbance agreement and previous tenant estoppels, as on occasion, those documents contain provisions that amend the underlying lease. A cursory review of the lease documents will sometimes disclose the existence of other amendments or agreements not provided for review by reference thereto. An incomplete lease or missing lease documents should be brought to the attention of the client so that a request can be made for such documents.

As counsel digs into a lease more thoroughly, counsel will confirm for lender, in the form of an abstract, memo or a simple email, the general factual terms of the lease such as: (i) the tenant’s name (is it a large national tenant, or an affiliate thereof, or a local operator), (ii) the size and shape of the leased premises; (iii) the lease term (is it a new lease or an existing lease and, if so, what is the remaining term), (iv) the rent (is it fixed rent, base rent plus pro rata contributions to CAM, taxes and other operating expenses, and/or percentage rent (a combination of percentage rent with base rent is not uncommon in retail leases). The lender, through its underwriting process, often already has a good handle on the foregoing factual lease matters, especially the lease economics.

Accordingly, in addition to confirming the factual details of a lease, and perhaps the key role of lender’s counsel’s, is to identify for the lender any unusual, unique or potentially burdensome terms such as economic terms, which would affect negatively affect the income stream of the project (think tenant off-sets or credits) or landlord performance obligations (such as landlord’s work or tenant allowance obligations).

An example of a performance obligation of significant concern to a lender is Landlord’s construction obligations for an initial build out of the tenant’s premises. Closely related to Landlord’s work obligation, but more of an economic concern, is Landlord’s obligation to pay a tenant allowance for all or a portion of the tenant’s work for its own build-out. In certain circumstances, Landlord will have a combination of both of these obligations under a lease. In either case, counsel will need to identify with specificity to the lender, the landlord’s work relative to the tenant’s work, identifying any ambiguities as to the scope of work for each, the time of performance for each and budget amounts allocated to the landlord’s work and/or tenant’s allowance, as loan proceeds are typically the funding source of landlord’s work or tenant allowance obligations under the lease.

Keep in mind that while the lease terms for landlord’s work and tenant allowance under a lease may be satisfactory to the lender, the lender will be nonetheless be concerned with having to pay or perform the landlord’s work or tenant allowance upon a foreclosure, essentially becoming a guarantor of the landlord with respect to those two issues. However, upon taking title to the project, a lender may decide that exiting a half-completed project is its best strategy. As such, only in rare circumstances will the lender agree to assume landlord’s work or tenant allowance obligations upon a foreclosure.

Effective lender’s counsel will not only identify these types of issues, but assist the lender to create cost-effective and timely solutions to such issues. Upon determining the best solution for the any issues that the lease presents relative to the lender’s interest, counsel is called upon to draft and negotiate the necessary document(s) to address such issues, which could take the form of a lease amendment, a non-disturbance agreement or, on occasion, provisions within a tenant estoppel certificate.

When underwriting a loan, understanding the leases affecting the lender’s collateral is of vital importance. The attorneys of Rosenberg Martin Greenberg LLP have broad ranging experience with development, leasing, and lending matters and are ideally suited to guide a lender through the lease review process.