02 Jul Estoppel Certificates Explained
Commercial real estate investment requires the careful review of an asset’s financial performance. Revenues and expenses must be clearly understood for an investor to make an informed decision. Documents obtained from the seller commonly include prior years’ financial statements, setups and proforma income statements, rent rolls, and estoppel certificates.
What is an Estoppel Certificate?
In a purchase transaction, a commercial real estate investor requests documentation from the seller that exhibits income and expenses from the current year and prior years. The historic information from prior years demonstrates stabilized income and expenses. The current information is used by the investor to understand the asset’s performance relative to the market. Current rental income is critical to the investor’s purchase price decision for the asset, and therefore verifying the rent paid by each tenant is an important step in the due diligence process. An estoppel certificate is a document signed by a tenant that confirms to the buyer the rent paid and other important details of the tenant’s lease agreement with the landlord.
Estoppel certificates commonly request from the tenant information about rental amount, lease terms and provisions, details about payment of utilities, oral agreements and promises made by the landlord, and protected tenancy status. A tenant must sign an estoppel certificate when the written lease contains a lease provision requiring it.
It is customary in a commercial real estate sales transaction that the purchase contract sets forth the details by which the investor and his agent verifies the financial performance of the asset and the provisions in each lease, by his own due diligence work while in escrow.