We often get requests to provide terms for a CMBS conduit loan secured by office and industrial properties in which a branch or agency of a state or the federal government is one of the tenants. Having a government agency as a tenant is highly desirable because there is no risk of the government defaulting on rent payments.
But government leases can be tricky. When we start looking at a deal with a government lease, the first question is “how long is the lease?” and the second question is “does it have a cancellation clause?” Often the answer is “it’s a five-year lease with no cancellation clause” or “it’s a 10-year lease with no cancellation clause.”
But the truth is often different. Buried in many government leases is a “non-appropriation clause” that allows the government agency to terminate the lease if the “appropriating” body does not appropriate (fund) the agency for the lease payments. The lease termination notice for non-appropriation is usually very short, typically 30 days. While termination for non-appropriation is rare, a government lease with an appropriation clause and a termination notice of 30 days is underwritten as a month-to-month tenant. Typically, month-to-month tenants are considered “vacant,” so a government tenant with an appropriation clause is often underwritten as vacant.
Sometimes workarounds to government leases with appropriation clauses exist. If you have a deal with a government tenant, contact Mike Sneden at email@example.com, Dennis Suh at firstname.lastname@example.org, or Gary Unkel at email@example.com for advice on how to get the deal done.