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Commercial Leases And The Estoppel Certificate
Why the need for an estoppel certificate?
Simply put, the estoppel certificate is an instrument of assurance. The assurance is that what a landlord says about his lessees is true. When a landlord puts his commercial building on the market for sale, part of the due diligence a buyer will require involves obtaining estoppel certificates from each and every tenant of the landlord for his particular building. While this is rarely done in residential real estate, getting a tenant estoppel form properly filled out and signed is imperative in commercial real estate..
Traditionally, a standard commercial lease will include the right of the investment property owner to obtain this signed landlord waiver from his tenants. These fully executed documents, known in estoppel real estate parlance as estoppel certificates, provide a potential buyer of the seller’s property with honest data about the leases they have in place with the current landlord.
The landlord waiver form is then used as part of the overall due diligence by the buyer. And many times, their lender will want to review these estoppel certificates prior to extending a mortgage to the buyer. They help the lender feel comfortable about the rental amounts and terms that are in place with the seller’s building. Usually, the lender’s underwriting department will perform the review of the documents to ensure accuracy before a loan will be granted. Unlike residential real estate, commercial property rental leases are usually for much longer periods of time. However, like in residential investment property sales, these lease assignments are critical to the new owner when a building is sold.
Provisions of the estoppel letter
The estoppel certificate (also known as the estoppel letter) is traditionally filled out upon the request of the landlord. In effect, the tenant certifies that their current rental agreement and its provisions are honest and truthful. Items usually found as part of the estoppel certificate include the veracity of the lease, when it began and when it ends, what security deposits are being held by the landlord, whether the tenant has assigned the lease to another party at the time of the estoppel letter, and whether the tenant has pre-paid any rent over and above his existing monthly rent.
The main purpose of the estoppel certificate is to protect the seller of the building. It basically places the onus on each tenant that their existing lease is correct. This makes the leases fully verifiable for purposes of the new owner, as well as their lender. Most estoppel forms create an out for a tenant’s liability here – many times they will say that the tenant is certifying the lease “to the best of tenant’s knowledge.” You can check out such verbiage by looking at the California Association of Realtors commercial lease agreement as just one example (http://www.car.org/legal/standard-forms/) . The tenant estoppel form is an important landlord waiver when it comes time to place his commercial investment property on the market for sale. Ultimately, it makes a sale much easier for the seller.
photos courtesy of campbellpropertymanagement.com, oc.hughesmarino.com, realogicinc.com, www.snipview.com
Filed Under: Commercial Investments, Featured Tagged With: . commercial lease agreement, California Association of Realtors commercial lease agreement, commercial lease agreement California association of realtos, commercial property investment, estoppel certificate, estoppel real estate, landlord waiver, landlord waiver form, property investment, property investor, tenant estoppel for
Commercial Property Investment Comeback
Savvy property investors remain wary of the current housing rebound. This is mainly due to heavy institutional investing in rental residential properties over the past couple of years, which have acted to buoy up the previously moribund housing arena. And with almost one-quarter of all recent home purchases being gobbled up by said institutional investors, where should the average property investor be searching for high returns these days?
Clearly, this new housing marketplace, especially in previously hard-hit areas like Miami, Phoenix, Las Vegas and parts of southern California, continues to show such marked gains as to make the underlying economic factors for new-buy positive cash flows untenable, due to the rapid increase in property valuations. Simply put, in many markets, there are no bargains to be found right now where the metrics make sense, and that will throw off enough positive cash flow to yield even a modest Return On Investment (ROI).
The current trend away from residential rentals
Large investment firms have already begun to stop their residential buys due to this inflation in market values, and smaller investors naturally are shunted to the sidelines when the cash flows make no particular sense for them, at least in the short term. In fact, many large institutional investors may already be starting to unload some of the foreclosures they previously bought (and are now weaker-performing residential properties), but nevertheless have soared in valuations since they were bought over the past two years. They are now selling them and re-investing their profits. And where are they reinvesting, you might ask?
Commercial property as prime reinvestment arena
Large commercial investment companies, such as Simon Property Group, are doing much more buying and development of new retail outlet malls across the world of late. They are creating new mall centers, purchasing existing ones, as well as creating mergers with other commercial institutions to meet the expected need for more retailers world-wide over the next several years. Smaller investors have the ability to buy in with shares of these large commercial companies, as well as investing on a small scale locally, in their own local communities, by sticking with local commercial retail space buildings to meet the expected demand for new retail space.
Technology sector investing
Another area smaller investors should consider is commercial data center building investment. Technology growth continues to expand in the real estate sector of late. And new data center investment is way up to meet the demand. One particular technology real estate company is CyrusOne, which specializes in the creation of new data centers world-wide. The current expansion in the data industry continues to fuel the need for more construction of facilities to house these huge data centers.
So smaller investors should look to the potential returns from investment in these companies that specialize in data building investments as another way of bypassing the current dearth of high-ROI producing residential investments. With the housing industry making a sketchy comeback, and underlying metrics in the housing arena being very suspect, it’s time to consider commercial real estate alternatives in the interim.
photos courtesy of worldpropertychannel.com, quickenblog.com, dcmud.blogspot.com, intomobile.com, hpcwire.com
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