The Art of Abstracting – Tenant Termination Rights & Co-Tenancy Provisions

Lease abstracts are an integral part of the commercial real estate (CRE) cycle. Developing and maintaining the integrity of lease data on a timely basis is essential to providing a solid foundation for due diligence purposes, property ownership/investment and management. If the provisions in a lease are not abstracted accurately, there can be significant negative consequences for all parties involved in the CRE cycle; however, fast, accurate lease abstracting is not always readily available. Mining through numerous pages of complex lease documents and deciphering legal terms into a digestible summary is an art form which requires lease abstract specialists and demands hundreds of man-hours – something most lenders, owners/investors and managers either do not have or cannot afford.

The level of detail and number of provisions needed in an abstract can vary depending on the end-user. For example, clients on the due diligence side generally need an accurate and concise snapshot of just the financial provisions of a lease, whereas owners/investors and managers may need more detailed information in addition to the financial terms to properly manage and administer their lease portfolio. In order to receive quick and accurate lease abstracts, all parties in the CRE cycle should look for an abstracting partner that utilizes CRE subject matter specialists with legal expertise, have vast abstracting knowledge and robust data management and integration capabilities.

Issues
While lenders, owners/investors and managers may have different abstracting needs, the financial terms of a lease are at the core of every real estate transaction. Below are some of the most important elements to keep in mind to abstract accurately regardless of the ultimate end-user:

  • Overlooking tenant termination rights could be a deal killer: Tenant termination rights are the most important part of a lease abstract. Termination rights usually involve the tenant’s ability to end the lease for a variety of reasons, including if the (retail) tenant fails to achieve a gross sales amount for a certain period or if the landlord rents space to a tenant which violates the tenant’s exclusive right, among others. On the due diligence side, it is essential for these termination rights to be identified during the underwriting process, since these can lead the lender to restructure the deal or kill the contract altogether. If the tenant exercises one or more of the termination rights, the cash flow of the property would decrease, thereby impacting the borrower’s ability to pay the debt service on the loan. For owner/investors and managers, missing a termination right can have negative consequences for many years. For example, if an owner/manager is unaware of a termination right in an exclusive use provision because an abstract fails to capture it, he/she may unwittingly enter into a lease with a tenant whose business use is prohibited by this clause. This can cause the tenant with the exclusive to exercise its termination remedy, causing a loss of cash flow and potentially affecting the ability to sell the property.Because tenant termination rights are not always highlighted in a lease, an inexperienced abstractor may miss one. These provisions are often included, many times intentionally, in an unexpected section of the lease. Experienced abstractors know to be on the lookout for these rights anywhere in the lease and understand what keywords to look for so as not to miss them.
  • Inaccurate co-tenancy summaries can impact income and sell-ability: A co-tenancy is a lease provision that conditions the continued occupancy and/or rental obligations of one tenant upon the occupancy of one or more other tenants. This provision is typically found in a retail center environment and commonly allows a tenant to terminate its lease if an anchor or a specified percentage of other tenants discontinue operation or leave the premises. It is imperative to capture these provisions accurately as the income stream from the property and the ability to sell or refinance can be severely impacted if a co-tenancy provision is triggered and a tenant or tenants exercise the remedies provided. While co-tenancy provisions can be easily identified in a lease, summarizing them in a way that a lender, owner/investor or property manager can easily understand without compromising the full meaning of the provision is a challenge and takes a level of expertise to do well.

There are many nuanced elements of which a lender, property owner/investor or manager needs to be aware when entering into a real estate deal or managing a property. With the increasing amount of data tied to lease contracts, it is ideal to have a combination of legal and real estate expertise for lease abstracting. Firms should be looking for the real estate subject matter experts with legal expertise who can provide accurate and timely lease abstracts they can trust to lean on during the transaction process.

About Situs Lease Abstracting Offering
As a leading provider of commercial real estate advisory services and innovative solutions to the global financial services industry, Situs is uniquely positioned to provide the accurate and timely lease abstracts for owners/investors, property managers and lenders. We understand how a property operates and what the key issues are when managing, leasing or selling a property. Our extensive work in the real estate market provides with us subject matter expertise needed to understand how a lease will impact the performance of a property.

Situs does not abstract in a vacuum. As a real estate advisory company, we have a deep understanding of property leases and the impact abstract information has on due diligence, ownership and management, and therefore, we are able to capture the data in a way that is useful.

In addition to capturing the data from the leases, Situs creates an issues list highlighting any discrepancies a client might have in their rent roll as compared to the leases. Situs produces abstracts in a template that allows the extracted data to be seamlessly integrated into clients’ operating systems.

We are a real estate company with an experienced team dedicated to providing lease abstracting services – our experts have a thorough understanding of a lease from a real estate perspective and how potential issues in the document can impact the performance of a property.

To download the PDF version of this case study, please click here.

For more information, contact:

Zenobia Tambuvala
+1 713 328 4411
zenobia.tambuvala@situs.com

Cheryl Clark, Esq.
+1 713 328 4493
cheryl.clark@situs.com