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Co-Tenancy Trigger and Lender DSCR on a Mixed-Use Acquisition

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Co-Tenancy Trigger and Lender DSCR on a Mixed-Use Acquisition

Your buyer client is under a PSA to purchase a 28,000-square-foot mixed-use building for $6.2 million. The ground floor contains a 10,000-square-foot anchor space that has been vacant for four months and a 3,000-square-foot café tenant with eight years remaining. The café lease has a co-tenancy clause: if the anchor is not operating, base rent drops to 60% of the $34 per square foot face rate, and the tenant may terminate after six months. The 15,000 square feet of office space is leased at market. In-place NOI is $410,000, which already reflects the anchor vacancy but assumes full café rent. The lender will provide 65% LTV at 7.25% interest, 25-year amortization, and requires a minimum 1.30x DSCR. Due diligence expires in 10 days. The seller refuses any rent credit but will consider a price reduction or escrow. Your client asks whether to proceed, re-trade, or terminate.

1. Quantify the co-tenancy exposure and test the acquisition against the lender’s DSCR requirement. What conclusion follows?

Read the worked answer
  • Café base rent: 3,000 sf × $34 = $102,000 per year.
  • Triggered rent at 60%: $61,200; annual loss = $40,800.
  • Stressed NOI if the tenant does not terminate: $410,000 − $40,800 = $369,200.
  • Loan amount at 65% LTV: $6,200,000 × 0.65 = $4,030,000.
  • Annual debt service at 7.25%, 25-year amortization is approximately $349,600 (mortgage constant about 0.08675).
  • DSCR on in-place NOI: $410,000 ÷ $349,600 = 1.17x, already below 1.30x.
  • DSCR on stressed NOI: $369,200 ÷ $349,600 = 1.06x.
  • NOI needed to hit 1.30x: $349,600 × 1.30 = $454,480. The property is short by about $44,480 even before the co-tenancy trigger and by about $85,280 after it.

The conclusion is that the deal does not work on the current terms. The lender is likely to underwrite the co-tenancy clause, not just current collections. If the café terminates after six months, the buyer also faces downtime and re-leasing costs on 3,000 sf. A simple assurance that the tenant is paying today is not enough.

2. What re-trade or structuring options would you propose, and how large should the protection be?

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The cleanest fix is a lease amendment waiving the co-tenancy clause, but the café has leverage and may demand a rent reduction. If the clause stays, the buyer needs both a price adjustment and a liquidity reserve.

  • Price support for 1.30x on in-place NOI: maximum loan = $410,000 ÷ 1.30 ÷ 0.08675 ≈ $3.64 million. At 65% LTV, maximum price ≈ $5.60 million, a reduction of about $600,000.
  • Price support on stressed NOI: maximum loan = $369,200 ÷ 1.30 ÷ 0.08675 ≈ $3.27 million; maximum price ≈ $5.03 million.
  • Rent-loss escrow: 18 months of the $40,800 differential is $61,200. Re-leasing 3,000 sf with six months downtime, $15/sf TI, and a leasing commission adds roughly $110,000, so a $200,000 to $250,000 escrow is a floor, not a full cure.

A workable structure would combine a price reduction to roughly $5.6 million, a $250,000 co-tenancy escrow, and a seller guaranty to fund anchor lease-up or buy out the café clause. If the seller will not cure the clause, the buyer should underwrite the property as a multi-tenant retail re-lease, not as a stabilized mixed-use asset.

3. The seller offers a $250,000 price credit and a 12-month anchor rent reserve. Do you proceed?

Read the worked answer

Run the numbers rather than reacting to the concession.

  • Adjusted price: $6,200,000 − $250,000 = $5,950,000.
  • Loan at 65%: $3,867,500. Annual debt service ≈ $335,500.
  • In-place DSCR: $410,000 ÷ $335,500 = 1.22x, still below 1.30x.
  • Stressed DSCR: $369,200 ÷ $335,500 = 1.10x.
  • Price needed for 1.30x on in-place NOI is about $5.60 million; on stressed NOI it is about $5.03 million.

A 12-month reserve helps cash flow but does not cure a permanent rent reduction or satisfy a lender that tests the lease clause. The buyer should reject the offer as insufficient unless the seller adds a lease amendment eliminating co-tenancy, increases the credit to at least $600,000, or funds a larger escrow with a guaranty. Otherwise, terminate within due diligence and recover the earnest money.