Can a commercial lender require tenant tax returns as a condition of financing a commercial real estate deal if that tenant is not a party to the transaction beyond an existing lease agreement?
A lender can ask for almost anything if they feel the file warrants it. The request for a tenants tax return is odd, but not unreasonable, depending on the situation. The lender wants to make sure you get paid, so they will get paid. It sounds like this will be a pain, but they are also looking out for YOU.
The purpose is to determine the tenant credit quality of the lease. Not providing the return will result in less favorable rates.
As for requiring the tenant to provide the return, that is a function of the lease terms. Neither you nor the bank can compel the tenant if the lease does not require the tenant to do so. Most retail percentage leases do require a sales report for the basis of calculating % lease payments.
The tenant is an existing tenant in the building and the lease they signed with the Sellers is pre-existing and calls for a straight rent payment. The rent does not change if they make more or less money. I have reviewed the lease agreement and it does not compel the tenant to provide financials to the owners. The bank is saying that the financials are necessary because the tenant occupies 65% of the building and the appraiser has identified that there is a functional obsolescence to the floor plan of the building (department store size square footage in a downtown location). The building used to be a large variety store up until 1960 when these types of stores were relocated to Malls. I recognize that should the existing tenant move I would have to spend $$ to remodel the interior spaces to maximize rental opportunities. I don't disagree with the appraiser that it would be difficult to very-difficult to replace this tenant if they leave without remodeling the space. The main reason I want the building is because I own the building next door (45,000 square feet) and it is fully occupied and this building has not been kept up and leased up correctly. However, in the end, the tenant in question has refused to provide the seller with financials and therefore he has told me he can't provide them to me.
Sorry to hear about your troubles.
An thought, can you offer the tenant a form of compensation, discount on rent for the inconvenience/utilities, tickets to a show. Essentially, your next steps are predicated on how badly you want to get this loan.
Although not technical ideals, ideals nonetheless.
Good luck and keep us posted
One more thought, you might ask your tenant to execute an estoppel letter which would reaffirm the lease terms. Generally, there is a clause in the lease that states that the tenant is not in bankruptcy nor in any adverse financial condition. Your lender might buy off on that as a compromise.
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