Lease Start

Understanding Lease Start in Commercial Mortgages

In the context of commercial mortgages, the Lease Start (often referred to as the Lease Commencement Date) is the specific calendar date on which a lease agreement becomes legally effective and the tenant is granted the right to take possession of the commercial space. This date marks the beginning of the contractual relationship between the landlord (borrower) and the tenant, and it serves as a primary data point for mortgage underwriters when assessing the stability of a property’s income.

Detailed Description and Impact on Financing

For a commercial lender, the Lease Start is more than just a calendar entry; it is a trigger for cash flow analysis and risk management. Lenders scrutinize lease starts to ensure that the property will generate sufficient Net Operating Income (NOI) to cover the debt service payments. Below are the key areas where the Lease Start impacts a commercial mortgage:

• Revenue Timing: Lenders distinguish between the Lease Commencement Date (when the tenant takes the keys) and the Rent Commencement Date (when the tenant actually begins paying). If there is a gap due to a "rent-free" period or build-out phase, the lender may adjust the loan-to-value or require an interest reserve to cover the shortfall.
• Debt Service Coverage Ratio (DSCR): The DSCR is a critical metric in commercial lending. A lease that has officially "started" allows the lender to include that projected income in their calculations. If a lease start date is too far in the future, the lender may exclude that income from their initial underwriting, potentially reducing the total loan amount.
• Lease Rollover Risk: The Lease Start date determines the eventual expiration date. Lenders analyze the "staggering" of lease starts and ends across a multi-tenant property to ensure that too many leases do not expire at the same time, which would create a high-risk vacancy event during the mortgage term.
• Loan Funding Conditions: Many commercial mortgage commitments include "lease-up" requirements. A lender may refuse to fund the final portion of a loan until a certain number of tenants have reached their Lease Start and have physically occupied their suites.
• Tenant Estoppels: Prior to closing a mortgage, a lender will often require an Estoppel Certificate. This document requires the tenant to verify the official Lease Start date, ensuring the borrower’s financial representations align with the tenant's contractual obligations.

In summary, the Lease Start is the foundation of the property's economic occupancy. For borrowers, ensuring that Lease Starts are clearly defined and documented is essential for securing favorable terms and ensuring a smooth underwriting process during the commercial mortgage application.