Opting lease guarantee in commercial real estate: A Detailed Checklist – INVESTO 101.12

Lease guarantee in commercial real estate is an effective method to ensure consistent rental income in case of property vacancies. Offered by the developers, it varies from project to project and is subject to predefined conditions and limitations. If you are on the lookout for commercial projects offering lease guarantee, read on as Investo gives an overview!

Lease guarantee in commercial real estate differs from conventional lease agreements signed between landlords and tenants. Rather than being a standard tenancy arrangement, a lease guarantee functions as an additional feature to provide financial stability for commercial property owners. Nevertheless, the specifics of lease guarantee agreements can differ among developers. This brings in the need to have a thorough understanding of what entails a lease guarantee.

What is lease guarantee in commercial real estate?

In simple terms, if an investor buys a commercial property with a lease guarantee, the developer assures a monthly rental income calculated per sq ft. The developer himself, or in a tie-up with a brand, leases the space and provides the owner with a fixed payment per month. The investor, hence, is renting the commercial property to a developer for a predetermined duration. This method serves the purpose of attracting investors and alleviating apprehensions related to potential fluctuations in rental earnings. The lease guarantee generally applies within a specified timeframe, which might encompass several months to multiple years, based on the terms set in the arrangement.

For instance, projects such as Cyberthum and City Center 150 by Bhutani Group have the option of commercial offices and retail spaces with a nine-year lease guarantee. The lease guarantee varies from Rs 150-200 per sq ft, basis the location and amenities.

What factors affect lease guarantee?

Lease guarantees often vary as per the type of commercial property. Location, footfall and demand are major factors in setting the terms of the lease guarantee. Usually, the payout in retail spaces is higher than in commercial office spaces due to high demand among businesses and franchise owners.

Things to know before opting for a lease guarantee in commercial Real Estate

Opting for a lease guarantee is an important decision that requires a few careful considerations. Here is a checklist for opting lease guarantee in commercial real estate:

• Ensure that the lessee has a strong financial record. Discuss with the developer and review their credit history, income, assets, and liabilities
• Thoroughly read and understand the terms and conditions of the lease guarantee. Pay attention to details such as the scope of the guarantee (for example, rent, damages, etc.), the duration of the guarantee, and any limitations or exclusions
• Determine the maximum amount payable to you as the amount of the lease is determined per sq ft of the area. Make sure the agreement also covers potential damages or unpaid rent
• Check the application process for the lease guarantee. Some developers may require certain documentation or information before approving the guarantee
• Understand the costs associated with the lease guarantee. There might be upfront fees or ongoing premiums that you need should budget for
• Check whether there are exit clauses or conditions, under which the lease guarantee can be terminated before the lease term expires
• Consult with legal experts to understand the legal implications of the lease guarantee for all parties involved, including the property owner, developer, and lessee
  

  How to mitigate risk factor in commercial lease guarantee?

  If you have opted for a lease guarantee in commercial real estate, here are a few steps to mitigate the risk factor:

  • Familiarise yourself with the lease guarantee concept, and its terms and conditions. It varies in different types of projects
  • Communicate openly with the developer and all involved parties about the lease guarantee arrangement and its terms
  • Stay informed about the tenant’s business performance and financial health during the lease term.
  • Set aside some funds to cover potential lease defaults
  • Lay out all the terms and conditions if the circumstances change, such as selling the property or transferring the lease
  • Consult with financial experts to assess the potential impact of the guarantee on your overall financial situation
  • Keep up-to-date with changes in market conditions and regulations that could affect your lease guarantee

  Remember, a lease guarantee can provide a level of financial security, but it is essential to carefully assess your specific situation and thoroughly review all aspects of the arrangement before making a decision. It is advisable to consult with legal and financial professionals to ensure that your interests are protected.

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