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Give Tenants ‘Mortgage’ to Reduce Cash Outlay to Buy Out Rent Regulated Leases

By Adam Leitman Bailey, P.C.

Now that the financial crisis has hit, some owners are experiencing cash flow problems and their lenders have stopped or seriously tightened lending. At the same time, owners want to continue to increase their property values through buying out existing rent-regulated leases. To help our clients deal with this crisis, we came up with an unconventional solution that operates much like a traditional mortgage agreement. It has led to a few deals that wouldn’t otherwise have happened. In this solution, buyout money is disbursed in three steps to the tenant agreeing to give up the rent-regulated lease: (1) a bulk payment upon signing a stipulation of settlement; (2) monthly payments thereafter over a set time period, for example, five years; and (3) a balloon payment at the end of the specified term. All but the payment on signing are secured by a mortgage on the building with a “due on sale” clause, at a reasonable rate of interest. While at first blush, this makes the tenant an investor in the building, it can be attractive to both the owner and the tenant. The owner doesn’t have to come up with as much money up front during times of tight lending and the tenant has a dependable secured income stream, which could be particularly useful for funding the tenant’s new quarters.

Adam Leitman Bailey owns a 17-attorney real estate law firm, Adam Leitman Bailey, P.C. It is one of four law firms with landlord-tenant practices in New York State to earn an AV®

Martindale-Hubbell rating and the only law firm in the state WITH A LANDLORD_TENANT PRACTICE to have both an AV rating and a

lawyer with a Super Lawyer ranking. He and his law partner Dov Treiman recently collaborated to produce the first 21st-century form leases for Blumberg-Excelsior.



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