An Estoppel Certificate, also referred to as an Estoppel Letter, is a document used in Commercial Real Estate (CRE) to outline the specific terms of a lease agreement and verify representations made by the landlord.
For a CRE investor purchasing a property with existing tenants, obtaining an Estoppel Certificate is a critical part of the due diligence process. This document ensures that the buyer understands the terms of the leases and avoids potential complications.
Why Are Estoppel Certificates Important?
Estoppel Certificates are crucial for protecting investors from potential liabilities involving current tenants. As you move through the process of acquiring a commercial property, the certificate clarifies any uncertainties regarding tenant agreements. It ensures that the buyer is fully informed about the lease terms, reducing the risks associated with tenant relationships.
What Does an Estoppel Certificate Contain?
An Estoppel Certificate typically includes several key details:
- The amount of rent being paid
- The security deposit amount
- The lease duration
- Any special provisions agreed upon by the landlord and tenant
Essentially, the document verifies the terms of the agreement between the landlord and tenant. For a buyer or lender, this information is crucial before finalizing the transaction.
Why Do You Need an Estoppel Certificate?
If you are an investor purchasing a commercial property with tenants, it is essential to verify the rent, payment history, and tenant-landlord relationship. For example, if a landlord claims four tenants are paying $4,700 per month on a five-year lease, how can you be sure that’s accurate? What if the tenants are actually paying $4,300 per month, and the lease isn’t fully signed?
An Estoppel Certificate provides an accurate, verified record of the lease agreement, ensuring you have the correct information. This protects you from future disputes or surprises during the transaction.
Other Uses of an Estoppel Certificate
Besides due diligence, an Estoppel Certificate is also useful when refinancing. If a property owner wishes to refinance or use the property as collateral for a loan, banks or lenders often request estoppel certificates from tenants. These certificates include important financial information such as payment records and credit history. If the documents confirm reliable cash flow, lenders are more likely to approve the refinance.
Thus, an Estoppel Certificate offers confidence to both investors and lenders, ensuring they have accurate financial data about the property.
Legal Importance of Estoppel Certificates
In some cases, unresolved tenant issues might require legal intervention. When this happens, an Estoppel Certificate serves as a legally binding document. If disputes move to court, the certificate proves that the agreed-upon terms between the investor and the tenant are valid. This can be vital during legal proceedings, providing the investor with solid evidence.
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Meet The LeveragedCRE Investment Team
Phill Tomlinson and Eric Butler are seasoned commercial real estate brokers with over 44 years of combined experience. They lead the LeveragedCRE Investment Team at Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, specializing in investment sales and tenant/landlord representation across the Phoenix and Scottsdale submarkets.
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