By Erich Schultz, SIOR
Congratulations! Your offer has been accepted on a multi-tenant office building and you are about to embark on a long list of due diligence activities on the way to closing the transaction. The action items that need to be completed for the subject property are extensive:
• Review leases
• Conduct a physical inspection
• Obtain an environmental survey
• Check for Underground Injection Control devices (UIC)
• Obtain a certificate of occupancy
• Check for zoning compliance
• Review Operating Expenses
• Confirm Building and suite sizes
• Review Plans
• Confirm NOI
Next, your commercial real estate broker asks if you would like to have Estoppel Certificates prepared for signature by each tenant.
(Needle scratch, music stops).
Estoppel Certificate? What is an Estoppel Certificate?
The term is not generally used in a normal day to day conversation. So, it is not surprising that some owners and buyers of real estate are unfamiliar with the documents and their purpose.
Periodically, landlords make promises to tenants — maybe to repaint a suite within the next six months or clean the windows at the end of winter or some other promise to perform that may never get documented in an addendum to the lease. This is where estoppel certificates become very useful. An Estoppel Certificate essentially restates the economic terms of the lease, whether or not there has been any prepaid or unpaid rent and if there have been any addendums. It will go on to prompt the tenant to identify any promises or agreements between the landlord and tenant that are outside of the lease (i.e., either verbal or written and not attached to the lease). The significance of an Estoppel Certificate is that it gives the buyer of a property assurance that he or she will not be liable for a promise that was not in the lease. A properly prepared Estoppel Certificate stops tenants from asserting such claims as well.
For buyers of income properties, receiving Estoppel Certificates is an essential part of the due diligence process. In most leases, the tenants are required to sign an Estoppel Certificate if requested to do so. If you think you might need an Estoppel Certificate, you should consult your attorney and/or commercial real estate broker.
Erich Schultz, SIOR is a partner and principal broker with Compass Commercial Real Estate Services in Bend, Oregon.