Within a triple-net lease there will be an explicit or implicit right for the tenant to terminate prior to the end of the initial term due to a partial or total condemnation of the premises as a result of a governmental entity exercising its right of eminent domain. In every case where eminent domain is exercised, the condemning authority must pay fair compensation to the owner of the property to offset the value of the property taken. However, the calculation of this amount is often subject to protracted legal maneuvers. From the perspective of a CTL lender, the uncertainty surrounding the timeliness and adequacy of payment from the condemning authority introduces excessive real estate risk into what is supposed to be a credit based transaction.
Therefore, in order to mitigate the lender’s concerns, condemnation insurance is required.
The insurance policy is written for the entire term of the loan and is for the benefit of the lender only. Essentially it states that, should the lease on the mortgaged property be terminated by the tenant as a result of condemnation, the lender will be paid the entire unamortized balance of the loan within 15 days of a claim being submitted. In return, the insurer takes over the lender's position as first mortgagee and all rights of recovery associated with it. The lender is made whole without the time and expense of foreclosing or litigating over the condemnation award.
The premium for the policy is paid up-front and the policy is non-cancelable once the premium has been paid. Terms of up to 30 years are available. Pricing varies based on the condemnation wording in the lease and the perceived ease with which the tenant may exercise the termination right.
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