Buyer wants tenant estoppels on a strip center I only have under contract

Question

I've been underwriting a 7-unit retail strip, about 11,000 sf, seller wants $2.1M. His marketing sheet shows an 8.2 cap but that's proforma with the two vacant bays filled at asking rent. In-place NOI from the rent roll he sent is more like $147k, so 7.0 at his number. Anchor is a laundromat with 4 years left, two units are month to month, one tenant's lease I haven't seen at all.

My plan was to tie it up around $1.75M with a 45 day due diligence and assign. The problem I can't figure out: any real commercial buyer is going to want tenant estoppel certificates before they commit, and estoppels have to come from the seller asking his tenants. If I'm the one triggering that, the seller learns fast that the guy actually buying isn't me. And if a tenant signs an estoppel that contradicts the rent roll, my whole spread evaporates mid-assignment.

So two things. Mechanically, how does a contract holder get estoppels ordered without blowing up the deal? And does the estoppel risk mean I should be pricing the fee off verified in-place income instead of the rent roll he handed me?

Rena Expert · Accepted Answer

An estoppel certificate is a statement the tenant signs confirming their rent, deposit, lease term, arrears and that no side agreements exist with the landlord. Only the landlord can practically request them, and the mechanism is a clause in your purchase contract: seller shall deliver executed estoppels in the attached form from tenants representing X percent of occupied space within 15 days of buyer's written request. Make the form addressed to "Purchaser and/or its assigns" and the seller learning there's an assignee later stops being a crisis, because the paper already contemplated one.

On timing, don't order them early. Your end buyer's lender will want estoppels dated within roughly 30 to 60 days of closing, and terms vary by lender, so confirm the window in writing before you burn the seller's goodwill with tenants twice.

Your spread question answers itself if you run it. At $147k verified NOI, a buyer pricing an unanchored strip with 4 years of term on the largest tenant is not paying a 7 cap. Call it 8.25 and you're at $1.78M. You're planning to tie it at $1.75M. There's no fee in that deal, and the estoppel isn't what kills it.

The two month-to-month tenants are the bigger hole. Most underwriters give month-to-month income partial credit or none, and a lender sizing debt will haircut it. Strip that out of the $147k and see what's left. Also get the missing lease before anything else, because that's where the surprises live, expense pass-throughs the seller has been absorbing, a below-market renewal option, an exclusive-use clause that limits who you can lease the vacant bays to. Transfer tax and recording cost sit on the buyer's side and differ by state, which further compresses what they'll pay.

samantha_ruiz · Answer

45 days is the part I'd fight about. Every commercial buyer I've talked to wants their own estoppels, their own PCA and a fresh appraisal, and they will not inherit your diligence file on trust. That's 60 to 90 days for them, and if you only bought 45 you're asking them to close on a clock that doesn't exist. I've started asking for 60 with two 15 day extensions tied to extra deposit, which sellers hate less than they hate a blown closing.

Also ask for the last two years of CAM reconciliations, ember. If he's been under-billing recoveries the buyer's expense line is worse than your $147k.

megan_doyle15 · Answer

Had to go read what an estoppel even is. So the tenant signs a paper saying yes I really pay $1,900 and there's no secret deal with the landlord... what stops the two month-to-month guys from just walking the month after closing anyway?

Buyer wants tenant estoppels on a strip center I only have under contract

3 replies