An Estoppel Certificate, also known as an Estoppel Letter, is a document used in Commercial Real Estate (CRE) to describe the details of a lease agreement or to verify certain representations made by the landlord.
As a CRE investor buying a commercial property with existing tenants, there is a key piece of due diligence to execute before the transaction is completed, that is in the form of an Estoppel Certificate.
Estoppel Certificates are extremely important and is part of the due diligence in purchasing a commercial property. As an investor goes through the process of purchasing a commercial investment property it helps remove liability to the new owner (investor) in certain matters with the existing tenants of the property.
What does it contain?
The details will include the amount of rent, amount of security deposit, length of the lease, and any special provisions that the landlord has allowed the tenant for the buyer or lender to be aware of before completing the proposed transaction. Essentially, the terms of the agreement between the landlord and the tenant.
Why do you need an Estoppel Certificate in CRE? Is it useful?
If you are an investor looking to buy a commercial property with existing tenants, a huge part of the due diligence process is verifying the tenants’ monthly rent, payment history, and the relationship that the current owner or the landlord has with the existing tenants. Let’s say you are looking to buy a property from a landlord that has four (4) tenants and is claiming that these tenants pay $4,700 per month with a lease term of 5 years, how would you know he is telling the truth? What if the tenants are only paying $4,300 a month, and the lease contract is not confirmed, nor signed by both parties?
For these instances, an Estoppel Certificate is useful as it provides an accurate, factual nature of the agreement between the landlord and the tenant. Furthermore, it gives you the protection for such claims as you go in and purchase the property.
Other uses of an Estoppel Certificate in Commercial Real Estate
An Estoppel Certificate can also be used if the owner of a property wants to refinance, or purchase a property and use the current as collateral – in this case, the bank or financing company will ask for an estoppel certificate for each tenant since it includes bank statements, checks, pay stubs, and credit history. If such document proves that the property is likely to have good cash flow, it can help the lender in the decision-making process to approve the refinance requested by the owner or buyer.
In short, an estoppel certificate provides a level of confidence for both the investor and the lender.
In rare cases where there are matters that are unresolved by simply reminding the tenants of their estoppel agreement, and a situation moves to small claims court, an estoppel agreement is a legally binding document to prove you as the investor, have set forth terms that were agreed by the tenants for the court to take into consideration.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
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Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
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