To assess the impact of a subordination clause, you first need to understand the general lease priority rules.
Lenders may insist on subordination clauses while prospective tenants are strongly opposed to them.
In light of these rules, lenders often require subordination clauses as a condition of a new loan secured by the property, while tenants may be reluctant to lease mortgaged property without the protection of a nondisturbance agreement.
in today's struggling real estate market, it's important for you to understand the impact of subordination clauses on both tenants and lenders.
A subordination clause
in favor of a lender would influence the land-lease rate upward, as would low value improvements nearing the end of their economic life, because a tenant would have less incentive to avoid default and a landlord would have less of a value buffer over the land value itself.
In the past, landlords were in such a dominant position that most tenants (other than the strongest of anchor tenants) were forced to accept the standard subordination clause, and until recently most tenants did not think much about the possibility of a mortgage foreclosure on the shopping center.
These days, however, tenants must consider the risk of entering into a lease without providing for something more than the standard subordination clause without modification.
Depending upon the bargaining strength of the tenant, the standard subordination clause can be modified in several ways to be more palatable to the tenant.