A.8.6.2 Background

A. Prior to the issuance of Mortgagee Letter H 2011-14, HUD’s policy on SNDAs was based on a concern over lack of flexibility in the event of a mortgage default, since an SNDA gives a commercial tenant the right to remain in its space under the existing lease terms and conditions after a loan default and foreclosure. If there were a Borrower approved SNDA, HUD would be bound to continue the commercial lease even after assignment of the insured loan. Because of HUD’s prohibition on SNDAs, Borrowers were negotiating into commercial leases the required lease termination language, were leasing to commercial tenants that would not insist on an SNDA or were deciding not to apply for financing under the FHA insurance programs.

B. In many cases, the tenant incurs costs to design and build out their unique tenant improvements, which costs must be amortized over the lease term. Nor does the tenant want to lose the good will and customer base associated with continuing to operate on the premises. Indeed, MAP lenders report that most national retail chains require an SNDA and will not execute a long-term lease without the non-disturbance assurance.