Guaranteeing a Lease with an International Tenant
Our clients periodically ask us to review tenant credit on foreign entities. Whether the company is from Canada, France, Japan, or anywhere in between, a landlord must weight several additional considerations when evaluating a foreign guarantor. Recourse on these entities is more challenging, complicated by jurisdictional layers and increased recovery costs. Below is a summary list of issues TRA has cultivated for clients leasing to non-U.S. entities.
Organizational Structure
What is the entity’s role that is guaranteeing the lease?
Know where the entity sits in the broader corporate structure. Understand the entity’s role in the company, and how it is funded. Strong entities to consider are operating entities and other critical affiliates, such as finance entities. It is beneficial when the U.S. tenant entity consolidates into the foreign guarantor as it provides greater visibility into the source of funding for U.S. operations.
What entities does the company use to do business in the U.S.?
It is important to understand each U.S. entity’s role within the broader company. The tenant is likely to be a U.S. based entity. If the entity is a single purpose entity (SPE), then the strength of the guarantee is much more important. If the U.S. entity is an operating entity, then the tenant entity carries more significance in the broader company.
Significance of U.S. Operations
What portion of the company’s gross revenue is generated in the U.S.?
The strength and significance of a company’s U.S. operations is key to understanding a foreign guarantor and its risk profile. If a company derives a material portion of its global revenue in the U.S., the guarantee is likely to be stronger than if the U.S. comprises an insignificant portion of global revenue.
Securing the Lease
There are limited options for securing a lease with a foreign guarantor. Even if the credit is strong on the foreign entity, recourse can be both timely and costly. Often times the best protection is to hold a letter of credit (preferably from a U.S. bank) with strong credit. This effectively transfers the risk from the guarantor entity to the bank. If the company does not have a U.S. banking relationship, a foreign bank may be a suitable alternative if it has a strong credit rating.
While foreign guarantors can complicate the leasing process, they do not need to derail it. Securing a lease is largely a matter of understanding the company’s structure and the strength of its U.S. operations. Then, if necessary, identify and transfer the risk to a bank through a letter of credit.
