Meaning
Asset protections are established to ensure that a lender can access and remove collateral from a leased property if a borrower defaults on their loan. Landlord lease reserves are amounts deducted from the borrowing base to cover potential unpaid rent or to satisfy the landlord’s statutory lien on the assets held at that location. Allocation of these funds accounts for the cost of maintaining the property while the lender organizes a liquidation or removal of the inventory.
Rental Obligation
Failure to pay rent can lead to a lockout that prevents the recovery of the very assets that secure the credit facility. The landlord lease reserves typically represent two or three months of rent for each third-party warehouse or production site. This ensures that the lender has the capital available to keep the doors open and the utilities running during a period of transition.
Property Access
Legal agreements known as landlord waivers or subordinations are often sought alongside the creation of these reserves. Even with a waiver in place, the landlord lease reserves provide a secondary layer of protection against local laws that might grant the property owner priority over the inventory. This measure is particularly important in jurisdictions where a landlord’s claim for unpaid rent can be settled through the sale of the tenant’s property.
Possession Security
Keeping these funds aside reduces the risk that the collateral will be held hostage during a legal dispute. The landlord lease reserves are a standard component of asset-based lending in the manufacturing and retail sectors. They guarantee the physical path to the assets remains open.
