What purchase agreements require tenant lease execution before closing?

In build-to-suit (BTS) and income-generating industrial property transactions, certain types of purchase agreements (PAs) are structured to make tenant lease execution a mandatory condition for deal closure. This ensures that the buyer acquires a secure, income-producing asset and that the seller delivers a stabilized, lease-backed property.

Below are the main types of purchase agreements where tenant lease execution is a prerequisite:

1. Forward Sale Agreements (Pre-Leased Assets)

• Definition: The buyer agrees to purchase the property after the tenant lease execution and building completion.
  
• Lease Execution Condition:
  
  • The lease must be signed with a minimum lock-in period and a rent schedule.
    
  • Often requires delivery of the rent commencement letter before closing.
    
• Why It’s Used:
  
  • Allows the buyer to value the asset based on future rental income (capitalization method).
    
  • Ensures a stable revenue stream at closing.

2. Sale with Lease Contingency Clauses

• Definition: A standard sale agreement that includes a “closing condition” requiring a fully executed lease.
  
• Terms Include:
  
  • The lease must be registered or enforceable.
    
  • Rental terms must match the agreed rent roll or pro forma.
    
  • The tenant should not be in default before closing.
    
• Purpose:
  
  • Protects the buyer from acquiring a vacant or unleased asset.
    
  • Especially common in institutional purchases of BTS assets.

3. Triple Net (NNN) Investment Purchase Contracts

• Definition: Buyer agrees to purchase an income property only if it’s leased on a triple net basis (tenant covers taxes, insurance, maintenance).
  
• Lease Execution Clause:
  
  • Requires the tenant to sign and commence a lease with a specific term, credit rating, and escalation.
    
• Why Used:
  
  • NNN investors focus purely on cash flow certainty and risk transfer.

4. Turnkey Build-to-Suit Sale Agreements

• Definition: Developer constructs a BTS asset and sells it to an investor after lease execution and completion.
  
• Lease Condition:
  
  • Buyer mandates that the tenant must execute the lease before construction completion, with a minimum rent commencement date.
    
  • May also require delivery of a tenant estoppel certificate confirming lease terms.
    
• Impact:
  
  • Aligns funding with tenancy, improving bankability and valuation at closing.

5. Assignment of Lease at Closing (Income Transfer Agreements)

• Structure:
  
  • Buyer agrees to take over the existing lease through assignment at the sale closing.
    
  • Requires:
    
    • The lease is to be fully executed and in effect.
      
    • No material breach by either party
      
• Purpose:
  
  • Common in core asset acquisitions and REIT transactions.