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If you own investment commercial real estate you may already be familiar with estoppel certificates. Why do most banks and lenders require them before they finance your investment property?
An estoppel certificate is a certification from a landlord and a tenant which outlines certain facts that exist between the two parties with respect to the terms and conditions of the lease that the lender can rely upon. Lenders are looking to verify from both parties specific information such as the amount of rent being paid, lease terms and duration, any predetermined lease extensions, amount of security deposits and terms of such deposits, expenses that each party is responsible for, and that there are no existing defaults or oral representations under the lease by either party. The estoppel certificate offers protection for the lender and brings all parties together to verify all aspects of the current lease arrangement.
The lenders primary concern is the repayment of their loan. Because the repayment source for a loan secured by commercial real estate is typically from the rents it receives, an estoppel is generally required from all tenants regardless of whether they are paying month-to-month or have a lease for an extended term. The estoppel verifies the lease terms but also offers protection and keeps the borrower honest.
Most lenders will have their own estoppel certificates that they will require the borrower and their tenants to complete. While it will not change the existing lease terms, it usually will include specific language that may create new terms between the tenant(s) and the lender under certain circumstances such as a foreclosure. The lender may have different clauses in the estoppel depending on the property type and current lease agreement.
Most estoppel certificates will include subordination language, non-disturbance language, and attornment language. Subordination language assures the lender that their mortgage has priority over a lease. This is very important especially if the borrower is occupying space in the subject property. When the borrower(s) will occupy some of the space in their building, many lenders will require the borrower(s) to draft and execute a lease between themselves and their business occupying the space. This will allow the lender to be able to enforce the lease if they need to take back the building. Non-disturbance language assures the tenant that the lender or subsequent owner through foreclosure will not disturb the tenant’s possession as long as the tenant is performing in accordance with their lease. Attornment language is included to ensure that the tenant will recognize the lender as the new landlord if the borrower(s) default on their loan. This protects the lender so that in the case of a foreclosure, the tenants do not vacate the premise and leave the lender with a vacant property.
As a borrower, familiarize yourself with an estoppel certificate so that you clearly understand what it is and which clauses are included in your estoppel. Your understanding of this will also help you when you need to explain to your tenants why they have to sign the estoppel certificate and how it protects them