Residential or commercial real estate in a lease is real property and a mortgage loan to the owner of leased real estate is secured by that real estate. With the funding of real estate leasing, lenders must consider their real property security options that go beyond the mortgage of the property. The revenue stream from third-party leases is a significant asset that should also be secured.
Tenants and landlords provide lenders their respective interest in real estate leases as security for funding by means of lease assignment or mortgage. Where the borrower is a tenant with a leasehold interest in real property, the borrower’s interest in the lease may be registered against title to the leasehold interest. Where the borrower is a landlord, the landlord’s interest in a lease may be secured by registration against title to the real estate, typically upon registration of the mortgage.
A standalone specific lease assignment may be used where the premises have one or more significant tenants under a long-term lease and the lender takes a fixed lien security interest in those particular leases to secure a mortgage on the borrower’s real estate. Otherwise, a general lease assignment may be undertaken by means of a floating lien to secure all present and future leases where the mortgaged premises are subdivided, without reference to a specific tenant. The rentals and lease in the assignment of a real estate are personal property requiring registration of a financing statement against the landlord and a notice of lease.
| Real Estate Lease Assignments | |
|---|---|
| Specific Lease Assignment | Fixed Lien against Current Specific Leases |
| General Lease Assignment | Floating Lien against All Present and Future Leases |
A method of financing real estate usually structured as nonrecourse debt whereby a landlord obtains financing of rental property secured by assignment of the tenant rentals and the real estate as collateral in the form of a first lien to the lender is a credit tenant lease (CTL). A CTL is usually structured as a triple-net lease and may be created either in sale-leaseback or new purchase transactions.
| Key Forms of Real Estate Security | |
|---|---|
| Leasehold Assignment | Lien against Tenant Leasehold Interest |
| Real Estate Mortgage | Lien against Landlord Title to Real Estate |
| Credit Tenant Lease | Tenant Rentals + Lien against Real Estate |
A notice of lease is an instrument used to secure legal claim to leased real property exclusive of any other potential claim that is executed by all persons who are parties to the lease of which notice is given and recorded in the registry of deeds where the real estate is located. A notice of lease provides evidence of the tenant’s interest in the real estate and publicly notifies other parties of the tenant’s interest in the rental property in the event of foreclosure. Once the lease has been recorded, any other lease or sale of the real estate that does not take into account the existing lease will normally be void. A notice of lease normally includes the lease inception and termination date, any renewal options, the date by which any purchase option must be exercised, any rights of expansion of the tenant, and any use restrictions.