Underwriting GSA Leases
I'm taking a look at a deal where +/- 20% of the tenancy are government agencies. These leases were all 10+ years in initial term, however they all allow for the tenant to terminate at any time after the halfway point of their lease (which has been reached). On the surface, this seems effectively like a MTM lease for underwriting purposes, but I'm not familiar with how lenders or buyers usually treat this and wanted to see if anyone here as any insight they can provide.
Happy to provide any additional info that would be useful. Thanks in advance.
Without any info on the other 80% of the tenant base, here's what i would dig into:
A lot would depend on how those tenant's credit profile and lease expirations look. Do any of them have a co-tenancy clause w/ a specific agency?
What kind of weighted average lease term do other tenants have? How much roll would you potentially have in one-year if all of the GSA tenants left plus those tenants already set to expire. If they did, could you live with the total potential roll in that year?
Is there any notification period required prior to the GSA terminating their lease? Like 12 months notice prior to cancellation?
Thanks for the response. To add some more details: * This is a +/- 200k SF office building, generally diversified rent roll with variety of your normal Class-A tenants (law, finance, engineering, etc.) * The Government tenants are paying rents that are below market for their space * The GSA may terminate their leases w/o any termination payment after the halfway point of their lease
We are looking at financing the building and don't have a ton of experience with how most participants treat GSA leases. We've got some structure in mind we can put in place, but really just trying to get smarter as to how often the GSA exercises these termination rights and leave their space, and whether full credit is usually given to the income stream from a underwriting perspective.
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