Existing Government Lease as colatteral for commercial mortgage?

Question

:D Can a commercial office building, for sale, be acquired by financing the property at appraised value AND using a federal government tenants lease (5-10 years ) as collatteral or down payment on the mortgage for the buyers acquisition without using buyers own capital? Appraised value of building: $5,000,000.00  Yearly Income: $5,000,000.00 est. What kind of lender would you suggest for this?

Bill Gulley · Answer

Hi, alot of opinion above. Don is right on target. You'll need capital and since the lease is considered for the repayment of the loan anyway, it can not be factored again for purchase money.

The federal government leases private property all over the country, through various agencies. The FBI, the DEA, Department of Agriculture as well as quasi government entities such as the FDIC. If it becomes necessary for any such lease to be terminated, whic is very rare, the agency pays the termination fees to do so. No federal government lease has been broken simply because funds were not appropriated and the agency walked away scott free.

After you have ownership of a property and financing is in place, if a collateral assignment of leases has not been made in the financing agreements, a lease may be assigned for it's present value, like any other annuity income, again if the lease is not unencumbered or not assigned under any other loan. FInding the lender who will accept such an annuity is another matter. Leases are not factored as much as they may be used as collateral for a loan, with an assignment of the lease being made. There are still individual investors that will do small loans based of rents with the loan being secured by the leased property as well. To my knowledge, banks no longer make such arrangements. Maybe a "small" finance company.

Let's say you own a property and you have lousy credit and can't get a conventional loan. I show up and I look to the credit of the tenant and payment history, not your credit. I make a loan to you and take the property as collateral as well as an assignment of the lease and collect payments from the lease. I would not be doing this as a purchase money loan since the first mortgage lender will have a lien on all leases.

You can assign the lease payments for repayment of my laon to you. If you default on your first mortgage, for exsample, the first lien holder may be entitled to receive those rents from the date of default. So if I were receiving payments from the tenant and you were in default, I would be obligated to allow the superior lien holder to collect tyhe future rents and my loan to you may then go into default if you didn't pay me.

See, that's why these transactions are non-conforming and rare unless you find someone willing to do this type of transaction. Good luck, Bill

Darryl Dahlen · Answer

Office buildings are not exactly viewed as desirable properties right now given their poor performance and the glut of inventory in most markets.

That being said, if the financials are historically stable, and strong, you can obtain financing on an office building through conventional means (banks).

A lender will look at who the tenant(s) are, they type of lease in place (N,NN, NNN), and the remaining time on that lease. They will also look at the lease itself in order to see what the exit/default clauses are along with any provisions for renewals/extensions.

A lender will also look at who the tenant is. Obviously, a name brand anchor is much more desirable than a start up company. To that end, having a tenant that is the government is a plus AND a minus.

The plus is that the lender can safely count on the rent being paid each month. The minus is that if the government wants to break the lease due to budget cuts, re-alignment, etc., it can, and will, and there isn't much anyone can do about it.

To answer your question, the lease  cannot be monetized. It is a contract between landlord and tenant for a rented space that is already collateralized by the 1st position senior debt lender.

Since you didn't offer much in the way of details, I'd hate to speculate what you could expect in terms of financing. Still, I think you'd be very lucky if you found a lender who would offer an LTV of 70-75%.

Don Konipol · Answer

A lender may look more favorably on a property that has existing long term leases with quality tenants, may even be willing to offer a higher LTV, but this will not eliminate the need for capital contribution by the buyer.

Don Konipol · Answer

There are properties with very long term leases to AAA credit tenants where the income from the property is so high that a lending institution will make a loan based almost solely on the renrtal income stream.  In the past some of these loans did approach 100% financing.  In today's market 100% financing is not possible, the lending institutions still want the borrower to have invested capital. The way these credit tenant triple net leases work out, 100% financing would usually result in a negative cash flow for the property owner.  The property owner is gaining forced equity (thru the paydown - principal payments on the note) and tax benefits of depreciation. A transaction which would allow 100% financing and no negative cash flow with a credit tenant does not exist - I wish it did, as I would jump on it!

Dan Krause · Answer

:D WEll then-what is a Credit Tenant Lease loan? There are companies that structure deals based on future rental payments. If you look up the CTL term on the internet? Thanks, Dan

Darryl Dahlen · Answer

Good input Bill.

When I mentioned that having a government agency as a tenant could be a double edged sword it was because I had a deal where the one and only tenant was the Social Security administration. The lender is one the one who liked, and disliked, them as a tenant for the reasons I mentioned.

Granted, I think the risk of any such tenant defaulting, or breaking, a lease would be small, but I thought it was worth passing on.

Vikram C. · Answer

Are you suggesting that the appraised value is equal to one year's rent or is there a typo in your numbers?

There was a forum discussion recently about factoring rents and the general consensus is that it is not possible in the U.S.. On the other hand, since commercial properties are valued based on their income potential and risks, a strong government lease should make it quite a bit easier to obtain financing to acquire it.

Existing Government Lease as colatteral for commercial mortgage?

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