- What is an estoppel certificate?
- Why does it matter more than the rent roll?
- What should an estoppel request cover?
- Why does the timing collide with an exchange?
- What does the purchase contract need to say?
- What if a tenant will not sign?
- What about single tenant properties?
- How does this apply to fractional interests?
- What to do first
Every commercial property comes with a rent roll: a summary of tenants, rents, terms and deposits. Buyers read it, lenders underwrite from it, and appraisers use it.
It is prepared by the seller. It reflects what the seller believes, or what the seller would like you to believe. The document that tests it is the tenant estoppel certificate, and on a property with several tenants it is the most useful piece of diligence available.
What is an estoppel certificate?
A statement signed by a tenant confirming the key facts of their tenancy: the lease and amendments, the rent, the term, renewal options, security deposit, any prepaid rent, whether the landlord has performed its obligations, and whether the tenant has any claims or offsets.
Once signed, the tenant is generally prevented from later asserting facts inconsistent with it. That is where the name comes from.
Why does it matter more than the rent roll?
Because the two frequently differ.
Common discrepancies include a side letter granting free rent that never reached the rent roll, an option to terminate the seller forgot to mention, a deposit that was partly applied years ago, an unwritten agreement about parking or signage, or a tenant who believes the landlord owes them repairs.
None of these are necessarily dishonest. Buildings change hands, managers change, and records drift. But each one can change the value of what you are buying.
What should an estoppel request cover?
- ›Confirmation of the lease and every amendment
- ›Current base rent and next escalation date
- ›Lease commencement and expiry dates
- ›Renewal, expansion and termination options
- ›Security deposit and any prepaid rent
- ›Outstanding landlord obligations, including tenant improvement allowances
- ›Any claims, offsets or defaults the tenant asserts
- ›Confirmation that no rent concessions exist other than those stated
Why does the timing collide with an exchange?
Because estoppels depend on tenants, and tenants respond at their own pace.
A national retailer may route the request through a corporate real estate department with a queue of several weeks. A small local tenant may simply not reply. On a property with fifteen tenants, collecting signed certificates can take a month.
Inside a 180 day exchange window that is manageable if started early. Started after identification, it can push against closing.
What does the purchase contract need to say?
Most commercial contracts require the seller to use reasonable efforts to obtain estoppels, and set a threshold that must be met before the buyer is obliged to close. Typical formulations require certificates from all major tenants and a percentage of the remaining leased area.
Negotiate that threshold deliberately. A contract that requires no estoppels leaves you relying entirely on the seller's representations, which survive closing only to the extent the contract says they do, and only for as long as the seller is worth suing.
What if a tenant will not sign?
Some contracts allow the seller to provide a landlord estoppel instead, in which the seller makes the same statements. It is better than nothing, and considerably weaker than a tenant's own confirmation.
A tenant who refuses to sign, or who returns a certificate with significant qualifications, is telling you something. Read the qualifications carefully rather than treating the return as a box ticked.
What about single tenant properties?
They matter more, not less. With one tenant, that certificate is confirmation of the entire income stream. Verify the lease, the guarantor, the remaining term, the options, and any landlord obligations.
How does this apply to fractional interests?
In a Delaware Statutory Trust, the sponsor carries out this work before the offering. Your diligence shifts to reviewing what they did: the lease abstracts, the tenant credit, the remaining terms and any disclosed issues. Asking whether estoppels were obtained, and what they said, is a fair question to put to a sponsor.
What to do first
Ask for the rent roll and the leases on day one of diligence, and ask the seller to begin the estoppel process immediately rather than at the end. When certificates arrive, compare each against the rent roll line by line. The differences are the point, and they are usually where the negotiation is.
Nothing here is tax, legal or investment advice. Lease and contract matters should be reviewed by your attorney.
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This article is educational and not tax, legal, or investment advice. 1031 exchanges are complex — consult your own CPA and attorney. DST and fund offerings are securities available to accredited investors only; all examples are illustrative.