Thread: Assignments of Rents and Leases

This may be a bit of an advanced RE question, and I think I understand the basics of it, but I was just hoping that someone on here could explain it to me...

I've been doing a little research on some of the big players / investors in my area, and one of the things I've noticed that a couple of them are doing is assigning their leases / rents to the banks in exchange for, what appears to be, a loan or line of credit.

For example, they may assign the rents of 4 SFH's (with an average retail price of $80,000, if that makes any difference) for a loan of $250,000.

I've even seen the rents assigned on a single SFH (worth $150,000), in exchange for a loan of $1M!

Is this typical, that an investor can use their rents / leases as collateral for such a large loan? It seems disproportionate to me. But if so, what are the requirements to receive such a loan, in general? Does the bank typically have to have a certain amount of cashflow / percentage of equity in the property?

Can you explain how this typically works?

Thanks in advance.

Kasey,

there's a wide array of reasons, but here are basics:

keep in mind the majority of times a bank assumes the lease it is because the property is in default or the owners are taking steps to avoid a default situation.

1. a lease is in many times the owner's/building's most valuable asset. By assigning it, the cash flow can immediately pay down the debt owed.

2. The bank doesn't want the property, especially if it can't sell. Many owners have tried to sell their buildings before resorting to the "assignment" stage. The bank wants the loan to stay on the books. Once the bank takes over the property, the loan becomes "written off" as a loss and the building becomes a liability. (the affects of a bank taking over a property are extremely and profoundly damaging to a bank's balance sheet)

3. In bankruptcy proceedings, the mortgage is still entact so the bank will take whatever cashflow it can to settle the debt and the court appointed trustee will assign the lease to the creditor.

4. in years past we were able to use a commercial lease as collateral to obtain financing, but it was only collateral and we did not do an assignment.

if there are other ways to get financing by utilizing the values of leases, then I am all eyes/ears....