Lease Expire

Definition of Lease Expiration

In the context of commercial mortgages, lease expiration refers to the formal date on which a tenant's contractual right to occupy a specific space within a commercial property terminates. At this point, the tenant is no longer legally obligated to pay rent, and the landlord (the borrower) must either negotiate a renewal, sign a new tenant, or face a vacancy.

Detailed Description and Importance in Financing

For lenders and investors, lease expirations are a primary factor in assessing the risk profile of a commercial mortgage. Because the underlying property's income is the primary source for debt service payments, the timing and concentration of lease endings are scrutinized during the underwriting process.

Key areas where lease expiration impacts a commercial mortgage include:

• Rollover Risk: This is the risk that a lease expires and the tenant chooses not to renew. If a property has multiple leases expiring around the same time—known as lease maturity concentration—the borrower may experience a sudden drop in cash flow, potentially leading to a default on mortgage payments.
• Weighted Average Lease Term (WALT): Lenders use WALT to measure the remaining life of all leases in a building. A higher WALT indicates more stability, making it easier to secure favorable mortgage terms or lower interest rates.
• Debt Service Coverage Ratio (DSCR): If a significant lease expires, the projected income of the property decreases. Lenders often stress-test the DSCR to ensure that even if certain tenants depart upon expiration, the remaining income can still cover the mortgage payments.
• Tenant Improvement (TI) and Leasing Commissions (LC): When a lease expires, the landlord often incurs significant costs to attract a new tenant, including physical renovations (TI) and broker fees (LC). Lenders may require the borrower to maintain upfront reserves or "lockbox" accounts to ensure funds are available for these transitions.
• Refinancing Hurdles: If a commercial mortgage matures shortly after major leases expire, the borrower may find it difficult to refinance. Lenders are hesitant to issue new loans on buildings with high vacancy or "dark" space resulting from recent expirations.

Ultimately, lease expiration is more than just an end date; it is a critical milestone that dictates the valuation and liquidity of the commercial asset. Borrowers with staggered expiration dates across their rent roll are generally viewed as lower-risk profiles compared to those with single-tenant expirations.