What is an assignment of leases?

On Behalf of | Apr 17, 2024 | Commercial Real Estate

In the world of commercial real estate, which describes properties used for business purposes (instead of personal purposes, for example), there is a term called “assignment of leases.”

Let’s say you own a building for which you got a loan from a bank, and you rent space in your building to businesses. It could be medical offices, law offices, or other businesses, and they sign leases with you to rent space from you in that building.

Landlord-tenant relationship

You have a direct landlord tenant relationship with the businesses that signed leases with you, and you have a direct relationship with the bank if you owe them money. In this case, then, you are the landlord and your tenants sign a lease and pay you whatever you decide to charge them.

Here’s where it gets interesting.

Let’s say you apply and are approved for a loan from the bank to make improvements to the building you own (the same one you use to rent offices to businesses),  and the bank gives you the money, and you make the updates you need to the building.

Purpose of assignment of leases

The work on the building is finally finished, everything is up to code and running smoothly, and something major happens that leads you to run into financial trouble. Assignment of leases exist for this reason. It is a safety net for the bank.

Banks want to lend money to people and companies that will pay them back. They try very hard to sift through many applications to ensure they do not get stuck with someone who cannot pay.

Banks minimizing risks

However, it happens. They know it happens and there is always a level of risk involved. However, if there is any way to minimize that risk, the bank will want to do it.

Not all loan agreements have an assignment of leases, so it is important to look at your contract carefully. It is also important to mention that banks rarely come after you for payment via this method right away.

Assignment of leases is a safety net, but it is not the preferred way the bank wants to do business. It would be much better if you kept up with payments and ultimately paid them back.

Back-up plan for the bank

Think of assignment of leases as a backup plan the bank has in case you, the business owner who borrowed money from them, cannot make payments and eventually pay off your loan.

Having an assignment of leases also makes it easier to qualify for a loan with the bank because there is less risk. When the bank is evaluating whether to lend someone money, via the process of underwriting, they weigh the amount of risk against the profits they will eventually make from giving the loan. In the world of commercial real estate, where it is difficult to get a loan and usually banks require a considerable number of documents and an established business portfolio, assignment of leases can come in handy for owners of buildings.