Revisiting Credit Support in Early Sale Transactions

The current popularity of real estate as an investment class has fostered a favorable environment for the sale of shopping centers, among other properties. With demand seeming to outstrip supply and competition fierce among institutional purchasers, many shopping centers are now sold before the retail spaces therein are fully leased and income producing. Because institutional purchasers typically require a minimum level of return on their investment dollar, they typically will not accept full responsibility for the completion of project leasing. Accordingly, in such early sale transactions, sellers frequently retain some measure of post-closing leasing risk.

An early sale transaction can be structured in a number of ways to ascribe post-closing leasing risk to the seller. One such transaction structure is the earn-out sale, in which the seller is paid a capitalized amount for the leases that are income producing at the time of sale, with future portions of the purchase price to be paid over time, as leases become income producing. In earn-out sales, the seller retains the exclusive right to lease vacant portions of the project for an agreed period of time. Then, as tenants commence payment of rental for space that was not income producing at closing, the purchaser pays a capitalized amount based on the rent payable under such tenants' leases.