How lenders read a co-tenancy clause

Retail lenders do not stop at the rent roll's total. They ask which shop leases get cheaper, or become cancellable, if the grocer goes dark or if too much of the center is empty. That bargain is a co-tenancy clause. A go-dark clause is the tenant's promise to keep operating, or the landlord's loss of remedies if the tenant may shut the doors and keep paying. The two travel together in an anchor file because a dark grocer is often what wakes the shops' co-tenancy. Capital Market Funds arranges the loan. It does not draft the clause and it does not tell you the clause is enforceable. This note is general information for sponsors and brokers. It is not legal advice, not tax advice, and not a reading of your lease. Have counsel abstract the documents that bind you.

Opening co-tenancy is a condition to the shop tenant's rent starting, or to a penalty if named anchors are not open by a date. Operating co-tenancy runs during the term: if the named anchor closes, or if occupancy of the center falls through a line written in the lease, the shop tenant may pay a substitute rent or may terminate after a notice period. Some leases require the tenant to be current, and some give the landlord a cure window to replace the anchor. None of those mechanics has a universal number. If a memo you received quotes a percent as 'standard,' ask to see the lease that contains it.

What underwriters do with income that can shrink

When a lender believes a rent reduction is live, or nearly live, the income in the loan sizing is often the reduced rent, not the rent the roll shows as billed. Tenants who can terminate are treated as rollover even if the expiration date is years away. That is a haircut on income at risk. It is not a formula this note will write down, because the haircut depends on which leases have the clause, how broad the anchor definition is, and whether a replacement tenant satisfies it. A power center that names the department store, and a neighborhood center that names the grocer, fail different tests. Grocery-anchored centers in Arizona is where that property-type split is drawn. Arizona retail is the wider shopping-center page.

Borrowers should abstract co-tenancy before a refinance, not after a term sheet assumes the trailing rent. The abstract names the triggering tenant, the occupancy line if one is stated, the remedy, the notice, and whether the landlord can cure by signing a replacement. A grocer swap, such as one banner leaving and another taking the box, does not automatically cure a clause that names the old banner. Read the words. The estoppel, covered separately, is how the tenant later confirms the clause has not already been triggered.

What this note will not put in a model

It will not state a sales-per-foot level, a coverage ratio, or a cap rate at which co-tenancy 'usually' bites. It will not rank centers or quote a loan amount. It will not treat a press release about a grocer opening as a waiver of shop leases. If you need the national shadow version, where the grocer was never your tenant, read shadow-anchored financing. If you need the closing documents that confirm the clause is quiet, read estoppels and SNDAs.

The office is 7373 E Doubletree Ranch Rd #255, Scottsdale, AZ 85258. The phone is (480) 495-8072. Capital Market Funds, LLC - CBK-2007014 - Commercial Mortgage Banker and NMLS 1445066. Sending an abstract to this office does not waive a tenant's rights and does not commit a lender.

A co-tenancy cut changes shop rent. Financing a property whose income is mostly one credit tenant's lease, rather than a clause in the other leases, is credit tenant lease financing.