Summary of Real Estate Lender Concerns


Typically, real estate lending is primarily “asset based” as opposed to “credit based.” Thus, a real estate lender frequently will first focus its credit analysis on determining the income stream which is expected to be generated from the secured property before looking at the credit of the borrower. If the financing is “non” recourse, this will certainly be true.

For income producing property, the rent the borrower receives from the leases will produce the cash flow required by the borrower to pay operating expenses for the property and to service the debt. Therefore, the ability of a borrower to obtain a loan on income producing property will depend upon the occupancy of a minimum rentable area of the project by creditworthy tenants under leases. In addition, because the lender is making the loan with the expectation that it will become the landlord if the borrower defaults, the lender will require that the terms of the leases be landlord favorable. The lender will also, among other things, review: (i) the financial strength of each tenant to determine the ability of such tenant to pay rent when due, and (ii) each lease to determine if any lease contains provisions which allow for a reduction of rent or the termination of the lease upon the occurrence of certain events.

It is important that a landlord execute “financable” leases both to preserve the owner’s ability to finance the project now or at a later date and also to maximize the owner’s ability to sell the project to a third party.

Due to the lender’s requirement for a predictable cash flow from the leases, the lender may impose covenants in the loan documents with respect to: (i) the minimum economic terms of new leases, (ii) the approved “forms” of new leases, and (iii) prohibitions on the termination or modification of leases or the waiver by the borrower of any of the tenant’s obligations under the leases. To protect the lender’s ability to get at the cash flow upon a default by the borrower under its loan, the lender will take an absolute assignment of the leases and rents and provide in the loan documents for an appointment of a receiver, as a matter of right, to collect such rents upon a default by the borrower. The lender will also obtain a covenant from each tenant to pay rent directly to the lender if the lender so notifies the tenants.