Lender Considerations when GSA is a Tenant

September 1, 2010

When a lender considers foreclosure or exercising its rights to receive an assignment of the rents on a commercial property with traditional tenants, the following checklist for pre-foreclosure due diligence is fairly standard:

  • Check the terms of each of the leases and the assignment of leases and rents to be certain that conditions exist for demanding payment of rent directly to the lender;
  • Check the terms of any subordination, non-disturbance and attornment agreements that may exist with tenants;
  • Require current estoppel certificates from each tenant to check the tenant’s perspective on rent, term, options, landlord default and condition of the property, in accordance with any restrictions in the leases;
  • Check the current rent rolls; and
  • Demand payment of rent directly to the lender or to a lock box via a letter delivered to each tenant in accordance with the notice provisions of each lease.

However, when one or more of the leases is a lease with the federal government through the General Services Administration (GSA), the process is more complicated. A typical GSA lease, which offers the landlord – and by extension the lender before and after a landlord default – a more stable and secure rent stream, comes with additional “costs” and is written on a standard GSA lease form (which incorporates various federal regulations). These “costs” and the GSA lease may include atypical responsibilities for the landlord. After the landlord’s default, the lender must also take into account the special considerations discussed below.

For example, in addition to some of the checklist items noted above, a lender contemplating foreclosure or the exercise of its assignment rights for a building with a GSA tenant should consider at least the following, which are typical in the GSA lease:

  • Are there exclusive rights conferred to the GSA tenant or restrictions on the landlord’s (lender’s) ability to alter the GSA leased premises or the entire building?
  • Is there a current lease status report on a proper GSA form?
  • Are there restrictions on the transfer of the landlord’s interest that might apply to the lender?
  • Does the GSA tenant have special or unusual termination rights? Does anything the landlord has done give rise to an opportunity for GSA to exercise those rights?
  • Does the GSA tenant have special rights to an award in the event of condemnation that extend past the usual tenant leasehold improvements?
  • Has someone confirmed the GSA assignment of claims was properly done and which parties must receive notice under a GSA lease and how that notice is to be given?

Leasing to the GSA, is prevalent in all three of our local jurisdictions and has many advantages, especially in the current economy. The GSA typically is a safe, secure stream of income. However, GSA leases come with their own quid pro quo and a lender contemplating its remedies (or a new GSA lease in a building on which the lender has a loan) should be aware of some of the considerations and consult knowledgeable counsel.

This alert was authored by Dorothea W. Dickerman and E. Kristen Moye. For more information, visit our Greater Washington-Baltimore Region Transactional Real Estate.