The landlord may have reviewed the regulatory frameworks, both publicly and privately (through CC&Rs), that may impinge upon a MME tenancy. You have vetted the risks and weighed them against the rewards of installing a MME in your project. You may even have studied the insurance coverage aspects of a proposed tenancy. Are you ready to draft the lease and deliver it to the MME tenant prospect? Not a bit; not until you’ve run the tenancy by the attorney who reviewed your loan documents, if you’re leveraged, and then, with the advice of counsel, discussed it with your lender.
If you think that your lender is not concerned about a MME occupant in a portion of its collateral, you’re not thinking clearly. Lenders are anxious about everything in these times that will impact negatively on their balance sheets. Here are a few threats to their balance sheets that are implicated by failure of a MME occupant to comply with every essential law and regulation (and recall, banks have a lot of compliance obligations so the notion of compliance is much on their corporate minds) or just resistance in the community to MME occupancies:
1. Forfeiture of the collateral: Federal and state law permit seizure of assets of the criminal defendant that either (a) have facilitated a criminal enterprise, or (b) have derived from the criminal enterprise. Understand, please, that the assets seizure precedes the government’s determination whether there is sufficient cause to move the court for forfeiture. The seizure – and deprivation of use of the property and its revenue – can go on for months, even years, before the government determines if it will proceed with its forfeiture petition. When my client’s fenced-off motel (which she believed she had secured some months before its seizure) was being used without her knowledge as a shooting gallery, it took years to have it restored to her possession, and the gauntlet required intervention with the Justice Department officials in Washington, D.C. to get the property turned loose. Forfeiture leads to the (i) diminution of the value of the collateral in the period pending the property’s return to the owner, (ii) loss of revenue (rent stream) to the owner, which leads to (iii) default in the payment of the mortgage note’s balance. Realization on the collateral is a nightmare for the lender, because the forfeiture stymies the effective takeover of the assets, which remain under the control of the U.S. Marshall’s Service or the equivalent state law enforcement authorities, an involuntary and uncooperative “receiver” of the real estate. While a MME that is operating within the bounds of the law is unlikely to undergo any such crisis, with the customers coming and going in the common areas, there is no absolute clarity as to what occurs in the neighborhood of the leased premises.
2. Uninsured or underinsured damage or destruction to the collateral: Even a lender with a certificate establishing its status as a named insured isn’t sufficient to give a lender comfort that its coverage is in the amount of the loan. There is some probability that the lender will have to come out of pocket to pay the costs of restoration in the amount of the deductible and the amount that is not the result of a covered casualty, which may incorporate mold or indoor air quality claims for personal injury. There is additional possibility that pesticides or herbicides could damage portions of the property or contaminate soil or groundwater adjacent to the leased premises.
3. Suits by MME clients against the owner for violation of Title III of the Americans With Disabilities Act because the client’s debilitating condition is not accommodated by the physical facilities of the MME-occupied building or project. Such a suit could result in an injunction that will require the owner (and in all likelihood, the lender wanting to protect its collateral) substantial sums to be expended for reconstruction of the insufficient facilities.
4. Personal injury suits by persons harmed by clients of the MME who are under the influence of Cannabis products at the time the injuries are inflicted. Unless adequate insurance proceeds exist, this could be a disaster for the financial viability of the owner’s assets, hence the owner’s capacity to pay the mortgage note.
Other lender likely anxieties include the loss of occupancy due to a tenant exodus of a building or project as the result of installing a MME within the collateral, the diminution in the property’s income if lower rents generated by the balance of the collateral ensue following a MME occupancy and possible claims by neighboring owners sounding in nuisance, that may result in termination of the MME tenancy and afford possible grounds for other tenants of the building or project to terminate their leases on the basis of quiet enjoyment covenant breaches.
The prudent landlord considering a MME tenancy will scrutinize its loan agreement and the deed of trust for provisions that require prior approval of “non-standard” type leases by the lender. Also, be mindful that sometimes loan documents will require the consistent use of a “form lease” for tenants leasing certain quantities of square footage. Since there is need to make a number of changes to those forms that are in the current marketplace, the failure to run the modified form by the lender for approval almost insures a claim of breach of the loan documents, should anything go awry with the MME’s occupancy.
When the landlord makes the presentation of the potential lease to the MME, more information rather than less will increase the likelihood of a fair hearing with the lender, which may be prone to knee-jerk reaction to the proposal. Particularly of interest, I would think, to the lender is prior operating experience of the MME’s director, and expertise in the medical supervisor in practice areas relevant to pain relief and comfort care. These are the folks who have the most to lose, reputationally, in the event of the MME’s failure. And these are just the persons whom the landlord wants to guaranty the performance of the lease’s non-monetary obligations, and not just the payment of rent.