Presenting a live 90-minute webinar with interactive Q&A Key Commercial Lease Provisions and SNDAs That Concern Lenders in Mortgage and Leasehold Financing Identifying and Correcting Red Flags That Negatively Impact the Lender's Collateral Package THURSDAY, DECEMBER 17, 2015 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Iryna Lomaga Carey, Partner, Kurzman Eisenberg Corbin & Lever , White Plains, N.Y . Ren R. Hayhurst, Partner, Bryan Cave , Irvine, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Legal and Practical Commercial Leasing Issues For Real Estate Lenders Ren R Hayhurst ren.hayhurst@bryancave.com 949-223-7125 Iryna Lomaga Carey icarey@kelaw.com 914-286-6372
Overview of Commercial Leasing Issues • Commercial Leases – Distinctions Between Credit Tenant Leases vs. Other Commercial Leases • Process of What to Review and Focus on with Standard Commercial Leases • Ground Leases – Pad or Parcel Ground Leases Between Borrower and Ground Tenant – Borrower as Ground Tenant • Distinction Between Ground Lease Assignment and Leasehold Mortgage 6
Key Distinctions In Property Types • Commercial Retail vs. Multi-Family Loans – Owner-Occupied vs. Single Tenant Buildings – Multi-Tenant Issues • Major vs. Minor Leases • Insurance Provisions – SNDAs vs. “Super” Estoppels – Financial Covenants Relating to Recourse Issues – Ground Tenants vs. Retail/Commercial Tenants • Key Lease Review Issues 7
Key Lender Underwriting Concerns • A lender is granted a lien or deed of trust on real property. – Underlying leasing distinctions for multi-family vs. commercial deals • SNDAs and estoppels; Major vs. Other Leases (approval issues) • Owner-Occupied Property. – Two entities involved (owner entity vs. occupant entity under identical ownership) vs. single entity as owner and occupant • Single Tenant Property. – Key Issues Include – Insurance provisions; replacement of single tenant; re-purposing of property for multiple tenants • Multi-Tenant Property – Key Issues Include – Special tenant rights - such as purchase or expansion option, “go dark rights”, exclusivity, “incentive” payments, etc.; tenant mix – power center vs. anchor tenant and small shops 8
Approach to Reviewing Commercial Leases • Key Commercial Lease Provisions for Lenders – Payment of Rent – • Rent Abatement • Rent “Subsidy” • Free Rent Period(s) • Security Deposits – Lease Term – Any renewal or extension options during loan term – “Go Dark” Provisions – Purchase Option or “ ROFO ” – Leased Premises Expansion Rights – Future Lease “Incentive” or Other “Partial Refund” Payments by the Owner to the Tenant 9
Approach to Reviewing Commercial Leases Part 2 • Funding for Construction of Tenant Improvements – Payment by Owner with Reimbursement Obligations of Tenant – Payment by Tenant with Reimbursement Obligations of Owner • Development, Leasing or Below Market Rent Restrictions – Development Agreement Requirements – Fair Housing Requirements – Letter of Credit for Infrastructure Improvements 10
Introduction to Ground Leases • Ground Lease – Subordinated Or Not? • Elements of Standard Ground Lease Arrangement – Acknowledge Leasehold Mortgage – No Lien on Fee – If So, Must Accept Terms of Mortgage – Notice and Cure Rights For Lender (No Termination; Curable or Not) • Foreclosure Rights Related to Cure • Bankruptcy/Termination – New Lease/Direct Relationship – No Acceptance Of Rejection or Termination Of Lease • Application of Insurance or Condemnation Proceeds • Ground Lease “Mortgagee Protection” Provisions – How should Lender address its requirements if they are essentially included in the lease – e.g., what type of privity agreement is required, if any? 11
Approach to Reviewing Ground Leases • Is Borrower Ground Tenant or is Borrower the Fee Owner and Ground Lessor? – If Borrower is Ground Tenant – • Reasons for Using Leasehold DOT vs. Lease Assignment • Reasons for Ground Lessor Consent and Estoppel • Elements of Ground Lessor Consent and Estoppel – Approval of Leasehold DOT and Agreement for Mortgagee Protections • Including Notice and Cure Rights; Time to Foreclose if Necessary for Cure – Termination Issues, Both Pre- and Post-Bankruptcy • These are Legal Rights Which Cannot be Waived, so Must be Addressed to Permit Continuation of Lease Between Lender and Ground Lessor – Rights Regarding Lien Against Fee Interest • Prohibition or Requirement for Acknowledgment to Consent and Estoppel by Fee Lender 12
Approach to Reviewing Ground Leases Part 2 • If Borrower is the Fee Owner and Ground Lessor – Reasons for ARNDA vs. SNDA • ARNDA Creates a More Interactive Relationship to Preserve the Ground Lease, Which Often is the Key to Property Success • Elements of ARNDA – Contains Standard SNDA Provisions – Addresses Broader Tax Obligations, Insurance Obligations and Other Construction or Quasi-Ownership Rights Inherent in Ground Lease – Includes Additional Ground Tenant Protections, Including Bankruptcy Related Protections Similar to Ground Lessor Consent and Estoppel, Development and Construction Obligations, etc. 13
Introduction to SNDAs and Estoppels • Lease/Mortgage Subordination Generally – The “first -in-time, first-in- right” rule • Lease Subordination Clauses – Automatic, unconditional subordination – Subordination conditioned on non-disturbance protection • The SNDA Agreement – Subordination – Non-Disturbance – Attornment – Lender Protections Notice and opportunity to cure lease defaults Lender exculpation Lease modifications require lender consent 14
SNDAs and Estoppels – Practical Considerations • Practical Considerations – Offering non-disturbance protection to future tenants and/or tenants that are affiliated with the borrower – Recorded memo of lease: Does it always require a recorded SNDA? – Cost-benefit analysis of obtaining/requiring SNDA – Use of expanded estoppel (i.e., the unrecorded “super estoppel”) • General distinctions between SNDA for Commercial Lease and Ground Lease – Acknowledgment of Underlying Commercial “Sublease” in Ground Lease Arrangement • Treatment of Lease Guaranties – Lease Guarantor Acknowledgment and Consent 15
Lease Subordination Issues – Overview Subordination, Non- Disturbance and Attornment (“ SNDA ”) • SNDA provisions usually control the rights and remedies of the foreclosing lender (new landlord) and the tenants. • Subordination: If a mortgage or deed of trust predates a lease, then the lease would be terminated upon foreclosure. In most jurisdictions, if the lease is prior in time to the mortgage or deed of trust, there would not be termination upon foreclosure. SNDAs can alter the priorities. • Sometimes a lease contains a subordination provision which entitles foreclosing lender to terminate at its election upon foreclosure. These are often contained in loans were the originating lender required it as a condition for a loan. SNDAs signed by tenants often contain subordination provisions. – Inadequate because it does not typically address all issues, but also does not create a “privity” relationship between Lender and Tenant 16
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