Navigating Tenant Issues: Lending to a Borrower with Tenants

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In this webinar, Partner Nema Daghbandan, Esq., and Associate Melissa C. Martorella, Esq., both of the Banking and Finance Department at Geraci Law Firm, discussed the complex relationships between borrowers, lenders, and tenants. Topics include rent control, negotiating with anchor tenants as well as SNDA, enforcing rent assignments, and more crucial information to keep in mind with these loan transactions.

We apologize for the sound quality and cannot guarantee the captions fully represent the spoken words. If you have any questions about the content, please reach out to Nema or Melissa.


Nema Daghbandan:

So many of you on this call, we'll be attending that conference. Look forward to meeting you in person there. Melissa and I will be in attendance. We'll be attending the conference in Portland. There's also a conference that'll follow shortly thereafter in Savannah. For those of you who have not attended these are fantastic conferences, just really well put together, great information. I know they're always getting power players, just the regulators out there. Just such value we've been able to get and we're just really looking forward to meeting you in person. For the people who we have not already met on the call over there at the conference, I'm Nema Daghbandan. I'm a partner here at the firm. I manage the firm's banking and finance practice. Generally speaking, that just means I provide compliance advice to lenders nationwide as they're thinking about making a loan, discuss with strategy and the tactics and the negotiations behind that loan, some of the pitfalls and things that a lender should be concerned about. And then we draft the loan documents and kind of separate the process through to the degree that that loan has any issues all along the way. We modify, forbear, expand, and otherwise amend the loan just to make sure that that money doesn't not come back in the door.

Hi everyone. And my name is Melissa Martorella. I'm another attorney on the banking and finance team with Nema and I do a lot of the same things, state compliance issues, loan documentation, and a lot of the other agreements that come out of the set of loan documents. Alright, we're going to a broad brush here. So there's really four topics and there's a lot of meat within these topics. So there's four major topics that're going to be discussing today. The first is the estoppel and SNDA process and negotiations. We'll talk a little bit about what those documents are, what to expect when negotiating with those and certain contingencies you might face depending on who the tenants going to be. The second issue at play is going to be dealing with assignment and beliefs, specifically the operations in the loan documents, how certain borrowers may want to negotiate those.

Some of the creative solutions we thought through in terms of working with a significant borrower who really understands those issues and may need some flexibility with you when working through the rights you have as a lender through your assignment of lease. The third one here is enforcing an assignment of rent. So oftentimes, as you all know, your loan documents contain an assignment of rent position, but there's a great amount of confusion that we've noticed with our clients where they don't really understand how to enforce an assignment of rent. They don't know whether they send letters or have to go to court or what that looks like. So we'll kind of talk briefly about how to actually enforce an assignment of rent and last, it's just a myriad of special circumstances. So the stuff that we deal with on a fairly frequent basis, such as what to do when there's an illegal use or a potentially illegal use.

So for example, what to do when there may be a cannabis related tenant even though that you're in a state where that might be legal, but you may have a federal law issue and just other kind of special circumstances we run into. And other questions you may have, you may want to think about when working, what they borrow with tenant. And finally here, a couple of housekeeping items. The first one is that we are always asked, can you get a copy of the slide? You can, but we also want a little something here as well, which is we will send you a survey to all the participants after the call if you fill out the survey, which basically all we really want to know is good, bad or indifferent and want to get a little bit of feedback for you and make sure that we are providing value to you.

But if you do complete the survey, and the last question on there is do you want a copy of the slides? And you can include your email address there. We'll happily email you a copy of the slides. The second thing that we always run into in these webinars is we definitely want this to be an interactive process for you and we want to make sure it's valuable to you. So please, there is a question box where you can complete questions in real time. We will not address those in the middle of the PowerPoint. Instead, we'll wait until the very end of the PowerPoint or we'll go through your questions and answer as many as we can in the time allotted to the degree that we are unable to answer your questions during the webinar. We will go ahead and do this at the end of the webinar.

After the webinar we tend to send out emails to clarify any questions that we could not get into. But without further ado, we'll go ahead and kick it off. Awesome, thank you Nema. So just to kind of kick this off here. We're going to start talking about estoppels and what those are and why they're relevant to you as a lender. So when you're going through and you're considering making a loan on a property that has several tenants, obviously one of the things you're going to be asking your borrower, most likely the landlord at the property, who are your tenants? Do you have the leases? What's the state of those leases? You have a rental, that kind of thing. The estoppel is really your opportunity to have a third party verify the facts that the borrower/landlord provided to you. You're going to have the tenant fill these documents out and basically it's going to confirm that the lender will be provided all of the accurate leases at the property that way if it turns out that one of the tenants had negotiated their lease recently and they amended some of the terms, this is the opportunity to say, Hey, FYI, there's an updated lease here. Just want to make sure that you have it. In addition, you're going in this document, the tenant's going to say, Hey, here's my monthly rent. Here's the term of my lease. Here's anything else that you might want to know as a lender just in case one, if you are relying on the debt service of this, or I'm sorry on the income of this property to debt service your loan, you want to make sure that you have an accurate representation of that. And then two, in the event of a foreclosure on this property, we know exactly what you're entering into, what the terms of the leases are with your tenants. In addition, the tenant here will write on the estoppel if there's any security deposit that they made to the borrower/landlord upfront and whether they've advanced any rent payments.

If so, this is just a way for you to have a record of what those amounts are and what the tenant has paid and what the borrower might be holding. Also if there's any current default under the lease. So I don't know, perhaps the landlord was supposed to help the tenant provide some sort of improvement at the property and the landlord has breached that obligation. This is the tenant's opportunity to let you know as the lender so you know exactly what you're walking into. Same thing, maybe there was a water leak and the landlord just simply has not dealt with it. This is the opportunity for the tenant to let you know more about the conditions of the property. And then the last big thing that the estoppel is going to discuss is whether that tenant has any purchase options or right to extend the lease. Usually these are in the lease documents, but just in case there's an agenda that deals with this, this is the tenant opportunity to say, Hey, FYI as you have this right or this option. And then you can decide in your underwriting how you want to manage that.

The other component that goes towards having tenants at a property is a document called the SNDA. This stands for subordination non disturbance in the attornment agreement. Basically there's three components to this form. If you had a very basic SNDA, you want to make sure that these three items are in there at a minimum. We'll go into a little bit more depth here about the extra items that you'd want have in an SNDA, but at the very minimum, the first item is subordination. So basically the tenant is going to sign this document and say, I understand that my lease is going to be subordinate to your security interest lender. So that means in the event of a foreclosure, that lease, even though it was entered into prior to your mortgage or your receipt of trust, that lease is going to be subordinate to you. And that means you can wipe that lease out at foreclosure so you don't have to take the property back.

Subject to that lease. The next component of this though, especially with tenants, if you like those tenants and you want them remain with the property is, so this says, even though upon the foreclosure your lease is subordinate to the lender's lien, even though we're going to wipe you out, tenant, we agreed to let you stay here. We're not going to disturb your lease interest. We don't have a formal lease in place right now, but we're going to let you remain at the property. We're not going to disturb your lease of the property. That's that kind of non disturbance component of the SNDA. And then finally we have a attornment. And this really goes hand in hand with the non disturbance component which says, okay, we wiped out your lease, but we're going to let you stay here, but we can't just let you stay here without a lease. So I the lender, I'm going to allow, I'm going to say, Hey tenant, we can enter into a lease on the same terms with you tenant after a foreclosure. And that way you just have a real clean line of succession here with who owns the property, the relationships between the parties and protect your lien interest as well as the lender.

And so oftentimes we are asked, and in particular for lenders who are not typically used to making either commercial real estate secured loans, there are other loans in which there are significant tenants in place. Oftentimes we're doing what Melissa just did, which is kind of explain what is an SNDA. But the necessary question we always get after is do I need it? Do I care? I understand the legal context behind it, but effectively one thing we're always trying to make sure that we advise on is both legal and the practical implications. So why do you care ultimately, what does the document ultimately do and why do you need them or maybe you don't need them and you can make the business judgment decision on a case by case basis. So there's really three things that we believe are the ultimate X factors and there's other factors that you're going to find in a subordination agreement, but these are really the three that we believe are the paramount reasons for getting an SNDA.

The first is that the document is signed by the borrower, by the tenant, and also you as the landlord, sorry, you as the lender. So what you get there is you are getting three parties in agreement and first one, and there's affirmations from the tenant. There's affirmations from the landlord who is your borrower, and they're all making positive reps and warranties about the state, the family leases as well as other affirmations. So the first one here is you now have a tri-party agreement and a part of the benefit of default of foreclosure here is the tenant intent. Later come back and say, oh, by the way, I'm owed aton of money from the landlord. There's always defenses I have. The boiler was broken and you owe me $300,000 in ti. All of that is dealt with at the BA stage because they have to make positive affirmations at that point.

And they also state and it will draft it. FDA will state that upon the vendor P is that you the lender, do not take subjects to any of those defenses in the first place. So there really isn't, if there's a dispute, it's a dispute between the borrower and the tenant. It's not a dispute between the tenant and you and their new landlord since you are the lender. The second issue here is that it provides you active notifications. So an SNDA has a notice and cure requirements built into it. And what that means is the moment that either the tenant is in default under the lease or the landlord is under default under the lease, they necessarily have to provide each other notice of such default. But through an SNDA, they also have to provide you notice of such default. So you are now actively going to be involved in understanding what's happening at the property and ahead of any sort dispute.

So oftentimes the reason why you end up needing the foreclosures is because there is some sort of underlying dispute. So you have a major tenant or you have an offset tenant who stops paying the rent payments. And ultimately that means that the lender can or the borrow can no longer debt service alone. And so it starts giving you a window into what's happening at the property that you otherwise would not have because neither the borrower nor the tenant owe you anything outside of having some kind of written agreement. And the third one here, and really mission critical is that the fact that the lender must consent to any sort of modifications to the underlying leases. And so you can't have a situation in which the borrower and the tenant end up in cahoots or otherwise try to get cute and modify and enter into a $1 lease or enter into some kind of weird arrangement, which could really cancel or harm your position as the lender after foreclosure because you effectively have to continue to operate under their terms post foreclosure if you could not enter with subordination.

And so what this does do is give you an ability to make sure that the, and also it gives you an opportunity to understand if the market in which the leases are occurring you can understand is they're modifying, the things are, do they have to offer concessions, ortis or other stuff to try to IDE tenants so you can get a really good understanding of what's happening there at the poverty. So the next question always is, well, okay, I can't do this. We don't have enough time to do this. We can't get the SNDA in place. So what do I need to be concerned about? What are the big issues? So the first one here, and the biggest one is there's no subordination to take flag. So a lease interest that is entered into prior to you reporting your deed trust to your mortgage is going to take a superior interest to your trust or mortgage.

And what that means is that when we propose, it still exists. So whatever rights that tenant has under that lease exists against you with a landlord. You never did anything to your foreclosure just as much as, for example, if you were a junior lien and you tried for proposing, that doesn't impair otherwise modifying of the rights as the senior lender. So it's the same position you would've been in. And the second issue, which is what we kind of on earlier and what I think is particularly important is that we can continue to modify the terms of these lease without consulting you or otherwise involving you as a lender. And I think that that could end up in a very precarious situation in which you foreclose the property and all of a sudden you see that you've got some sort of tenant met on your hand.

So that's kind of the big overview of SNDA. So those subordination agreements with a lease that allows them to stay in place afterwards that you'll enter into a new lease with that tenant. There's also just a straight up subordination agreement or a true subordination agreement. The difference here is it doesn't have the NDA language, it doesn't have non disturbance and it doesn't have a attornment language. So it means that's the lease upon a foreclosure and the lease is subordinate to your security interest, but then at the same time upon a foreclosure, that lease is wiped out and you can immediately evict the tenant. There's no non disturbance and there's no attornment. So you have no post foreclosure obligation to that tenant upon that foreclosure. Why would you use one of these instead? Big picture. We typically recommend these when the borrower is also one of the tenants at the property.

So an owner user type situation, if you're a borrower defaults on your loan and you foreclose on them, I think it's probably highly unlikely that you then want them as a tenant at your property. So this really helps you get that borrower completely removed from the property upon that foreclosure. And then in general, you don't typically work outside of those situations mostly because what tenant is going to agree to that kind of thing. So that's why we have the S, which is a little bit kinder to unaffiliated tenants. You might want to remain at the property.

So the next topic here is sometimes you're going to have tenants that just sign the SNDA. They're good to go, they want to get it over with, they don't really care. Somebody walks in with a document, they sign it and move on with their life. Other times though, you're going to have tenants that dig into this a little bit and they'll lose the document, review it and say, Hey, I don't like these couple of provisions here. I want to negotiate. So when that happens, we have up here a couple of the most common items or points in an SNDA that a tenant is going to come back and cite you on. So just kind of be aware of those items and know how you want in they're bucket. Here are the first one. The tenant can't abandon or otherwise terminate the lease unless they've given notice to the lender of the default and also an opportunity to cure.

So in other words, it's that water leak happens during the course of your loan and the landlord, the tenant's been complaining to the landlord, the landlord hasn't fixed it. The tenant's like, forget this, I'm going to leave. It's a breach of my lease, I'm leaving. They cannot do that unless they first provide you the lender notice of that default that there has been this water leak and also provides you an opportunity to cure that water lease. Unless they do that, they cannot abandon the property. Another one here is they're representing that there are no purchase options or other rights of first refusal or any other option existing. And if there is such a right that exists in their lease, that right is subordinated to your security interest. This is really important just to let you know what's going on at the property and you know what rights the tenant might have and making sure that your right as lender are always senior to your borrowers and the tenant's rights.

The other bucket of items, but items tenant most likely or most often negotiate in an SDA are the post workload or vendor liability or really will we say that the lender does not have liability and we might say, Hey, we seem a little unfair or aggressive, we want to negotiate through these. We don't recommend stripping these entirely from your SNDA, but I think most tenants are able to negotiate through these and come to a middle ground. That being said, these are big points and this is the standard for well drafted SNDA. You should type back on these. If the tenant trust the push the first one here upon a foreclosure, there's not going to be any liability for the previous landlord slash borrowers act. So in other words, if there was some sort of default or something that the landlord did during the lease term while they still owned the property, when you take that property over foreclosure, you have no liability for whatever that action was.

The idea behind this is that the tenant still has rights to pursue any claim against that landlord even though they're no longer their landlord. So we want to make sure they go after the right party here and not a lender. Second is that the lender's not going to have any liability for any tenant improvements. So the landlord, the previous landlord may have agreed to complete for any tenant improvements at the property for tenants, but when you come in with foreclosure, you're not liable for any of those items. You might consider negotiating those after the fact to enter into a new with those tenants under the SDA, but anything that the previous landlord obligated to do where you are not liable to do next, the lender is not going to be subject to any offsets or defenses under belief. So if there was a default of some sort and the landlord and the borrower, kind of the landlord and the tenant might've worked something out, when you take over that property, you are no longer obligated to fulfill whatever that agreement was.

Next, the lender is not going to be bound by any amendment modifications of lease if you haven't given your prior consent. So you're entering into this SM A at loan closing, gotten the tenant estoppel that says it's a five year lease at a thousand dollars per month, but then in the middle of the loan period, the landlord and the tenant entrance in use that says, Hey, we're going to reduce the loan term and you're only going to pay me $300 a month. That's a pretty material change to the lease documents and if you didn't consent to it, you're not bound to it. You want to make sure that you're not liable for any changes here unless you consent it to them. And then finally, we want to make sure that you as the lender, if you take this property over through a foreclosure sale, that you are not liable for any security deposit. The borrower likely had access to those you wouldn't as the lender. And we want to make sure that you are not on the hunt for returning fee security deposits, but you never have it in the first place.

A sub component of negotiations over an SNDA or when you have anchor tenants in place, these are typically national tenants, a Verizon store, a big department store, some sort of fast food chain, the names that you know what that company is, it's not a non and pop credit store. Typically when you have tenants like this, they're going to have their own council and they're also going to have their own forms. So they're going to say your SNDA is always not a lender, but we have our own if you want to see ahead of time, if that's the case, there's usually an addendum to the lease agreement between the borrower and the landlord. And one of the addendums is typically what kind of SNDA their form SNDA that they're willing to enter into. That being said, you can typically negotiate them. Some will be more difficult to negotiate than others, but you can try to push on a few points. And the reason I would say to do this is because that form SNDA that they have is typically just an SNDA. So it just has subordination language, it just has non disturbance language and it just has a language. It doesn't have a lot of those rights for the lender post foreclosure. It doesn't have a lot of the resting warranties by the borrower, so you really want to try to build some of those backend.

In my experience, the council that you're working with for these big tenants, they tend to be a little bit disorganized. So oftentimes what will happen is you'll say we, our sample SNDA, you might mark it up a lot and then we'll come back and say, well give us your SND and so we'll draft our SNDA and we'll send it over to them and they'll say, this is unacceptable, you have to move our SNDA. And it goes back and forth. So basically at the end of the day, it's going to take time, especially with these big tenants. So the big takeaway that I have here is as soon as you know that you have one of these national tenants at the property location that you start talking to them right away because it can take, because sometimes it's sticking several months to negotiate these out just because of the delays that it takes. They also have a very high bargaining positions. They know that they're important. They're usually one of the largest tenants aspects of property. They're usually paying a lot of rent and they know that they have a strong bargaining position plus they don't have to subordinate. So it can really hold up your loan. You really want to make sure that you go in and protect your rights hearing and to the staff as possible in the process as possible.

So because of what Melissa is described in particular with anchor tenants, but even without anchor tenants, oftentimes what occurs is, and this is particularly relevant to purchase transactions, is that you are unable to obtain all the NDAs and the estoppels and effectively you have some influence occurring which is stating, look, we need this loan to fund, we need this loan to close and we cannot wait to obtain these NDAs or estoppels. And so you have to determine at that point from a business judgment perspective, what do you want to do? And so oftentimes these SNDAs become what are called post-closing items seems that after the loan there's some expectation that after the loan closes, we'll continue to get SNDAs or ops. And so typically some time period of 30 to 60 days after long closing, but the problem you have here you've already experienced, which is you've given the borrower the money and the moment the borrower gets the money, all of a sudden the borrower who is very nice and very friendly and very cordial and was extremely prompted getting you what you were looking for has gone dark.

Where tenants go dark, no one really cares. They're not picking up your phone calls anymore and they're sending you your monthly coupon and you don't really want to throw them default over there. And so you kind of have really two options here to continue to maintain some type of leverage. The first is creating a post closing condition, which is tied into an event of default, which basically states you have borrower, you have X number of days to provide these three SDAs or estoppels, and if you don't, it's an additional then default, right? And then you can send them a default letter after that time period and try to get them to act. But chances are you as a lender are probably not interested in defaulting alone that just originated. And so not necessarily the best idea, although can do it from a financial and economic perspective, it's actually holding back funds so that you actually still do have some real leverage because at that juncture it's conditional upon the release of those funds and it can vary and we've seen it from little as 10,000 upwards of $50,000, not enough to blow up the transaction, but enough to make them want to get the past the form because they're holding real cash.

And so creating a reserve type system where you will release the remainder of the fund contingent upon receipt of the SDAs. And then the last point here before we move into the next section is that the one thing that we oftentimes see, and the reason why these become post close items is that underwriting is not speaking about this issue. And so they're looking at the property valuation, they're looking at the credit of the borrower, and oftentimes people are overlooking the fact that you're going to have the best MBAs op. The SNDA is are recorded documents, they're going to have to be notarized, they're going to to have be negotiated. It's typically one of the longest, not the longest parts of the process. And so when we're bought into a loan transaction that's commercial in nature in particular, there's really two things we're always asking for.

One is the copy of the title report and two is copy of all the releases because we want to get those two issues front loaded and dealt with right away because we know that those two issues will oftentimes create massive closing delays. And so we're always trying to stay in front of it. What I would say is to degree that you have the situation is making sure that you should either have your own format MBA or software that you're ready to go and handing those out just as much as, for example, if you're a closing the state that required a survey, it would behoove you to jump in front of that and start connecting with the title company to get a survey order because those sorts of things can take, especially in certain states, you can have weeks and time or it take a long time to get 'em back. And so similarly we've seen with S and Apple where you'll be in the middle of a negotiation and you have your red line going back to their council and they don't respond for two or three weeks even though your loan close to fill them three weeks. And so we really recommend that as soon as underwriting starts originating here, that you really do get your stoppel and S NDA sign.

The next question here is, as we kind of briefly discussed, is the SDAs and the stoppel where you get in touch with the tenant, the only real time where you as a lender have any involvement directly with a tenant because otherwise everything is with your borrower. And so pretty much any set of loan documents will have a discussion about assignment of rent and assignment releases. And there are typically two sections that you find in most loan documents. And the first will state that a landlord cannot enter into future leases at the property without your consent. So effectively they would have to provide the of the lease to you and you as the lender that consented the lease. From a practical perspective, any lease entered into after your mortgage or date of trust reporting would be subordinated by nature of the fact that they entered into after you.

But at the end of the day, if you will not know or will not be able to really know what's happening until, unless your borrower is presenting you with these leases. And the second thing is that the borrower typically is prohibited from modifying current leases. So by default I would say if you open up your loan documents right now, I suspect you would find those two provisions no matter which loan document provider you're using. The problem that comes into play in particular with sophisticated borrowers and larger commercial real estate transactions is that this is not something your borrower wants to do. They do not. They want to borrow money from you and they do not want you meddling in their lease negotiation. So they're not interested in having you review every single lease. They do not want you to have to approve those leases because they want the control over that negotiation process.

And sometimes they're rightfully so in doing so. And oftentimes this is so significant that they'll actually cancel or otherwise get out of the transaction of this because they think that you're going to be a difficult lender to work with and you placed them into an uncertain situation where they don't think that they will be successful exiting out of the property because they will not be able to enter into lease that they would need to enter into for their purposes. And so there are typically you have a situation that arises like this. So for example, addressing future leases, there are typically ways we negotiate down the loan documents a little bit to provide the borrower and ability to transact because at the end of the day, if you as a lender don't care about certain things, so for example if it's a commercial center, you may not care that someone who's running out 400 square feet a little spot there.

You probably don't want that much level control and it may actually be an administrative burden for you as a lender in the first place. You don't really want to have to consent to those leases. Similarly, if it's just going to be a month-to-month lease, you as a lender may not care one way or another, may not want to have your people burden your time burden. And so there's really three solutions that we've seen here that work well for future leases. One is actually attaching kind of a sample form of lease or negotiating a sample form of lease prior to entering into loan documents. But you can actually kind of say, look, borrower, as long as you're using this form lease here, we're fine for proceeding. We know what this gauge, we know that it's got the right protections for us as lender, we've seen that arrangement as well.

The second is talking about square limitations, which is effectively, unless this is touching greater than 5,000, 7,000, whatever the right amount is for you from an underwriting perspective and from spective is unless the tenant is going to occupy more than the amount of space, we don't need to know. I know that you're 300, 500 square plus tenant, I'm okay with you entering into the amount of the lease is not significant amount that I'm going to be concerned about it. And then the last one we just discussed is if it's a month, month tenant, again we do not need to be involved in that side of it. The second element here is can a tenant modify leases without the consent of the lender? And so here is typically the borrowers prohibited from otherwise changing the lease. They can't extend, they can't offer an option to purchase or otherwise damage your potential life as a lender.

And so they're usually the fixed from doing so. But similarly, oftentimes with a sophisticated borrow in particular state is, look, I need the ability to transact. I've got 30 tenants of the property, I can't wait for you lender and your process of spending 30 days and trying to figure out whether I can enter into a basic extension of my lease. So there's two elements. One is one of the reasons why we want SNDA is that the tenant, your borrow runner is loan document is obligated to not modify the leases, but your tenant doesn't owe you anything unless you have an SEA in place. So the nice thing about having an SNDA is the tenants and the borrower are both agreeing that they will not modify the, so that's another reason why to have SNDA. But typically that you want to give the borrower from ability to transact.

One of the things that we typically do is we'll negotiate this section down a little bit, which will basically state that you cannot modify leases generally speaking, but there are some types of modifications that we'll permit you to do. So for example, if extensions of times based on such, that's already dates in, increases in rent amounts that are already based in there. So other non-material terms. So for example, they can lease out additional square footage or otherwise subject for maximum some other non-material areas where you would feel comfortable as a lender permitting them to modify with their without your. But those are the types of things that we often negotiate when dealing with an assignment of rent.

Kind to touch upon the assignment or rent side a little bit and how you would enforce one of those. Typically in your loan document package, we'll see this presented in one of two ways. First I've seen it where the assignment of rents is a separate document from your security instrument that's recorded. It doesn't have to be. So the other option is that it's based into the date of trust or the mortgage. Either way is appropriate as long as the language regarding the assignment of rent is in that document. But then how do you enforce it? So the borrower has the right to retain the rent at the property as long as the loan is performing. So as long as the borrower is current, they don't have any defaults, anything like that, you're not entitled to those ranks. That being said, when there is an event of default, the lender is able to start enforcing this provision and you can do that in one of two ways.

The first way is to send notices to the tenants that they're now obligated to pay you the lender, their monthly rent payments under the document. So first there's a state law, there's typically state law that governs this. I know California has a very specific code section on this and it's a very easy form notice that you have to give to the tenants to demands that they pay the rent to you fairly straightforward. I know a lot of other states are similar in addition to that kind of standard demand to your tenants or to the tenants that the property, if you did enter into that SMAA good SNDA would have already required the tenant to pay the lender the rent due under their lease upon notice to that tenant of an event default under the loan. So if you have that well drafted SNDA that that's already a nonissue and you just have to give notice to that tenant and you can start directing them to pay you their rent.

The second option that Nema will talk about a little bit more in depth is you can get a receiver appointed through the courts. It's a little bit lengthy of our process and it's time consuming expenses, but it is second option to enforce this. We're kind of diving into that second option. So this is also one of the more common calls I we'll have here, which is effectively is how do I obtain the receiver if the borrower stop paying, just show the property and start collecting the rent. What do I do? I know that there's sufficient cash flow. I underwrote this loan, I saw the rent roll and I have a clear interest in his rent, so how do I get them? And so the most effective method of obtaining the rent is through obtaining a receiver. And so the process of obtaining a receiver does require court action.

And what that means is that you do need to go to the court and petition typically done through a process in which you try to obtain what's called a temporary restraining order in which you get paid a receiver appointed notice. You go in on very brief notice and obtain a receiver on the property. Oftentimes a lender has the misapprehension that the receiver is really their receiver or acting at the lender's benefit. In fact, what really happens here, and this is much more akin to what you would see for example in a chapter seven bankruptcy, the receiver really steps into the shoes of the borrower. They act as a responsible borrower should do here. And so what they're going do is they will determine deferred maintenance issues and otherwise operate the property. Proven borrowers will do, they'll continue to obviously make your payments under the mortgage, but at the end of the day they are not your receiver, they are a court appointed receiver and they are going to take directions from the court order.

So the big drawback of the receiver is typically one of costs. So receivers have their own professional fees, they're typically paid hourly. They may often need to bring in their own team. So for example, particularly for properties that may have interesting uses, so for example a hotel or other kind of property that's going to require significant management or otherwise staff and you're paying for those or security, there's all sorts of additional costs you may occur in addition to the receiver. And so usually when we are counseling clients in the situation that whether it makes sense to same receiver, you need a significant cash flow occurring at the property through rent to support a receiver. Otherwise it's generally ineffective to place a receiver because the receivers won't be ing up all these bills and they will look to you the lender to pay them even if they're not rent supporting the receiver costs.

And so one last consideration here that is particularly important is when you are making a loan that is unique in the collateral. So for example a hospital, a nursing care facility, something that requires a license to operate, your average receiver will not be able to step into the tube of that property. And so you have a significant issue in which you will want to make sure that you have, and this is one thing you want to want to do during underwriting and your due diligence is actually starting to think about if this property goes sideways and I need to place the receiver on property for whatever reason, what receiver is qualified to come in and operate this property. The really great thing about going through and setting up that process in advance is that if you do get a receiver on a unique property, let say for example in American home you don't have this weird thing where you basically recorded a notice of the default for otherwise went through wait foreclosure process and then all of a sudden you're stepping into the property shortly after the foreclosure, you'll have assuming that the property actually goes through a foreclosure, you'll have an operating party there who will be able to explain to you exactly how everything's working.

You'll know what the deferred maintenance issues are, you'll know what all the issues of the property are, and it also gives you a window into what's happening at the property. So you'll know the actual rent and it'll give you a window into what oftentimes the loan you made in underwriting and the property you made it Underwriting is now very different than when you are stepping in with the receiver and it really gives you a good clear understanding of what to expect if you are going to own this property and also will help you understand the valuation of last major topic. Here we are going to talk about some of the special circumstances that you might run into when you're lending to a borrower that owns a property that has multiple tenants on it. A couple of the major issues here that will jump into a little bit more in depth are rent control and how do you manage that? What is a lockbox and when should you use one cash for keys reserve? What happens if there's illicit or illegal use of the property? And then finally go dark addendum for document.

So the first one here is dealing with rent control. And so in particular, this is a very hot button issue for in California. You've got a lot of municipalities, even the state of California at times starts getting a little wonky and they want to start imposing a state of rent control or you may already have a property in a rent controlled area. Problematically is oftentimes it's challenging to understand whether you are in a rent control area. So for example, sometimes you will not find rent control ordinances on title and in fact you'll have to look at a city or county and register to understand whether the property is rent control other than the safety office. Just make sure you have a firm understanding in the underwriting process as to whether the property is in a rent controlled area. The second element is to the degree that it's in a rent controlled area is oftentimes you are working with a borrower whose intent is to either renovate the property and do some sort of construction or otherwise wants to, they're buying the property because they believe it can manage it better and get better credit tenants.

And so you run into the situation in which they have forecasted a very rosy picture about how they're going to get the cashflow situation better when in reality they didn't understand or don't truly grasp the extent of the rent control laws or otherwise are unable to comply from a timeline perspective to get tenants in or out of the property or otherwise hamstrung in their ability to increase the rent in the first place. So just make sure that their proforma makes some sense here given the constraints of rent control.

The next thing we're discussing here is the lock box. And so oftentimes this is referred to as a rental income lock box account. And so you'll see this in a variety of context. It depends on the lender, the amount of times the leverage, but ultimately is one of the best protections a lender can do is negotiate a lockbox account. And what a lockbox account is is that currently your borrower, especially for a refinance transaction, currently your borrower is depositing rent in their own bank account, right? What a lockbox does is it requires all deposits of rent to be deposited into an account. And the bank account here is an account that you as lender control. And so what happens here is that you get true visibility about what's the cash flow in this account. And better yet is if this loan never goes into default, you get control over that account, you get immediate access and if frees out the borrowers access to any of the cash which truly belongs to you at this point.

And so if you're going to negotiate a lock box, there's a lot of factors to weigh in. It'll have be kind of brief here, but there's really three things to think about, which is typically how do I manage the way the lock box works because I know that the rent are going to get deposit into the account, but what right affinity do I have as a lender to these funds while the loan is performing? And so one of the more common arrangements we will see in here is that you as the lender will automatically sweep this account because you'll control the account for is the account that you have signature, you'll automatically sweep the account on a set date. So it apps very similar to, for example, a CA authorization where you kind of come in and the rents are 15,000 and you sweep your $10,000 and you sweep it on a date certain.

So this way that there's no, the borrow is not letting you a check the second option because the borrowers oftentimes will say, look, as long as my loan is performing, you really shouldn't have any rights, any of the funds in that account, I'll pay you timely. If I don't, you have access to the account. So we'll oftentimes want to negotiate that down one step further and simply paycheck may have a hundred percent likely account you as lender will not touch the account until unless November fall. And then the third is that particularly for more specific transactions is that and transactions in which the cash is unstable is that all transactions will require dual party authorization to transact anything from the borrower can't take funds out of the account. The lender can't account you have dual signatures until and unless there's an event of default. If there's an event of default, then the lender has a single authority that, so kind of touching upon it go hand in hand with rent control is oftentimes a borrower's intended use of the loan is to obtain better credit tenants and the way they're going to do it, they're either going to try to improve the property, do some kind of renovations or otherwise they see a market opportunity where they say, look, the tenants here currently are way below market and I believe I can get more above market rent and the way I'm going to affect that client is I'm going to do a tax receive arrangement.

I'm going to walk into the tenants, I'm going to get the property, and on day one I'm going to offer them $5,000 if they get out in 30 days or whatever that looks like. And so oftentimes what we typically see here from a loan documentation perspective is we'll set up some type of reserve account for this purpose. So it is nice because we get a purview of how successful the borrower being as a lender. So we can say, Hey, are they actually able to execute on their plan getting these tenants out? Because oftentimes it's contingent upon getting the low market tenants out. And then the issue here, and in particular for areas of rent control, oftentimes even without areas rent control, there are significant landlord tenant rights is that you want to make sure they're doing this process correctly. So to the degree that they are going to be using some kind of after key system, a condition still releasing funds from these reserves should be the fact that they actually affirm and indemnify you as a lender for any landlord tenant rights. And oftentimes they'll try to get on the phone with their attorneys who are handling the eviction processes to make sure that we have a level of comfort because the last thing you want to do is you end up foreclosing on the property and you immediately walk into landlord tenant issues.

So the next special circumstance we have here is how do you manage illicit or uses of the property? Typically, your blanket loan documents, the generic ones that you have are only going to prohibit from borrowers illicit legal use of the property and not the tenants. And so when you do have tenants at the property, you want to make sure that you're revising that boiler plate loan document language to include also the tenant use of the property in particular. This is relevant for cannabis uses especially because currently there are states where cannabis use of the property is permitted, it's fine, but then obviously federally those uses are prohibited. So in particular, it also depends on your risk analysis if this is something that you're willing to allow at the property or not. If so, then you want to make sure it's very clear in the documents that as long as the borrowers and the tenants are compliant with state law, that unless a federal action has come into play, you're going to allow that use of the property.

Otherwise, if you're going to straight up say, no, no cannabis related businesses, no use of the property that's affiliated with cannabis, then what you can do is you can build in negative covenants into the loan documents that would prohibit both the borrower and the tenants from using the property in such a manner and that would therefore create an event of default under the loan document. So if we did find out that either marijuana is straight up prohibited at the property, you can immediately call that event to default or in the event that you do allow it at the property, but a federal action has come in to stop the activity. That can also be a similar event of default under your loan document. It just depends on your risk and what you're allowing the borrowers tenant to. At the last item here, a go dark addendum to the documents, this is particularly helpful when you have large anchor tenants that are paying the substantial portion of the monthly rent at the property.

And so what you can do here is put an addendum to the loan document that says, pay borrower. If such and such tenant stopped occupying the property, abandoned their lease, anything like that for more than 30 days, stop paying their rent for more than a certain period of time. This is an automatic default under your loan documents. In addition to that, not only is it in an event of default, but you can lay out the terms in the go dark addendum that say, here's what you have to do, borrower, in order to cure this default. Either get that tenant back into place, get them performing, work it out with them, make sure that they're paying their monthly rent and they're operating at the property. Or you can also make sure you can put covenants into the addendum that say, here is the type of tenant you could replace that tenant with. Here's the credit terms, here is the monthly rent that you would want that tenant to be paying. You can really bill that out. And then in addition, it's usually helpful because at the same time you don't want a large tenant at a mall or the complex unoccupied. It usually affects the business at the west of the development of the property. So you want to make sure that that portion of the property is always occupied.

So kind of trying to wrap this up here, some of the key takeaways that we would say here is first is figure out what your policies and procedures are going to be in terms of obtaining SES and estoppels. One of the things that we see more often than not is that this is not thought of until way too late in the process and therefore becomes this huge impediment of closing and everyone's scrambling to kind of figure out is what are you going to do about estimating the estoppels and who are you going to require them of, right? Are you going to require them from every tenant if it's just major tenants, if it's the tenants that comprise at least 10% of the tax flow, creating an actual policy that you can kind distribute to your team. But everyone knows how you will deal with NDAs when you see them.

The second one here is typically you are working with an anchor tenant, know that they're going to be problematic and that they're going to take more time to go to. So address those issues first. Negotiate them first touch base with them because they will slow down the transaction. The third thing is to the degree that you are working with the exceptional use property, make sure that you are thinking about enforcement ahead of time. So make sure you've got a receiver who can manage that sort of sexual use. And the last one here is make sure that you understand that you've got appropriate loan documents in place that have significant protections regarding assignment leases that you have an S protection do. Kind of a double take of your actual documentation. As we've kind of discussed in here, there's these major ramifications that could potentially cause you heartburn down the road after foreclosure, where all of a sudden you have major tenant issues that you weren't expecting.

So lastly here, just a quick plug for our conference. For those of you that have not heard or attended, we at Geraci LLP have a affiliated company called Geraci Media and Geraci Media hosts really great conferences across the country. Our largest conference is the Captivate conference. It is held at the Cosmo in Las Vegas from August 21st through 23rd. There is a code up on the screen, which is Captivate VIP, which will get you $200 off of a ticket. Those prices do go up on July 21st, which is a few days here, so it will be price increases shortly. There's also a link up here about how to find information about the conference and see if it makes sense for you to attend and if it's the right kind of conference. The next thing on here is addressing as we discussed at the beginning of the call, which is if you want a copy of the slides, we'll be sending a survey right after this webinar. Please, it's going to take you less than 30 seconds to complete it. And in that survey we will ask your email address and we'll send you a copy of the slides. The last thing here is if you want to watch this presentation after the fact. So if it's been useful and maybe you have an underwriter or someone else in your office or someone else you want to show us to, we do post all of our webinars online

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