Lease vs Mortgage Superiority

Lenders are seeking to protect their investment by ensuring that, in the event of default, they are superior or, "first-in-line," to have their investment dollars returned and to control the foreclosure action. Depending on the jurisdiction, a foreclosure proceeding can terminate a leasehold interest in property unless the lease is either superior to the mortgage or contains an appropriately worded subordination, nondisturbance and attornment agreement (SNDA). How this is structured (SNDA vs superiority) is established in advance of any foreclosure proceedings and grants control and certainty to either the tenant or the lender.

Without either an SNDA or a superior mortgage a tenant's leasehold interest in the property is subject to the goals and strategies of the lender and their efforts to make the building more appealing for potential buyers. If the tenant is paying above-market rents with an otherwise agreeable lease arrangement the lease may be allowed to survive. If, however, the tenant is paying below-market rent or is in an otherwise tenant-friendly arrangement, it is more likely the lender will terminate the lease document.

Tenant Improvement Dollars

When evaluating a lease document for TI dollars there are numerous components to track and be aware of. The ultimate dollar value receives the most scrutiny, but it is also important to review what costs are eligible for TI reimbursement, what happens to unused amounts and what prerequisites must be cleared before a Tenant is eligible to receive reimbursements from the Landlord.

The Tenant's goal is to derive the maximum benefit with the fewest restrictions to be received as early as possible. The Landlord is seeking to contribute as little as is required, protect their interest in the property and delay making any dispersal for as long as possible.

Landlord's can require lien waivers, COIs, occupancy permits, inspector approval or other control points be completed before reimbursing the Tenant for capital expenditures. If there is a time limit for the reimbursement, 60 days or 180 days from a given benchmark for example, the Tenant must be sure to complete all required steps by the stated deadline or risk losing the TI amount.