What Is a Collateral Assignment?
When a borrower takes out a loan, they must provide the bank with a guarantee of repayment. In real estate, this is typically done by pledging the physical land as collateral via a mortgage. However, sometimes a business needs a loan but does not own the building they operate in. In these cases, they use a collateral assignment.
A collateral assignment transfers the rights and benefits of a contract or policy to the lender. The borrower still owns the business and uses the contract, but if they default on the loan, the lender has the immediate legal right to step into the borrower's shoes and take over the asset.
Collateral Assignment of Leases and Rents (CALR)
In commercial real estate, the most critical use of this concept is the Collateral Assignment of Leases and Rents. When a developer gets a multi-million-dollar loan to build a shopping mall, the bank will record a mortgage on the land. But the bank also requires a CALR.
The CALR legally assigns all the rental income generated by the mall's tenants to the bank. As long as the developer pays their mortgage every month, they are allowed to collect and keep the rent. But the moment the developer defaults, the CALR gives the bank the immediate legal right to contact the tenants directly and order them to send their monthly rent checks straight to the bank, bypassing the developer entirely.
Collateral Assignment of Life Insurance
Another common use in commercial real estate deals involves life insurance. If a small business owner takes out a massive Small Business Administration (SBA) loan to buy a commercial warehouse, the lender knows the business will likely collapse if the owner dies. The lender will require the owner to buy a massive life insurance policy and execute a collateral assignment. If the owner dies, the death benefit goes directly to the lender to pay off the warehouse loan, rather than going to the owner's family.
Related Terms
- Collateral — The underlying concept of securing a loan
- Mortgage — Often filed simultaneously with a Collateral Assignment of Leases
- Commercial Lease — The contract whose income is assigned to the bank
Barnes Walker Commercial Financing
Barnes Walker's attorneys assist commercial landlords and developers in negotiating commercial loan packages, ensuring that Collateral Assignment of Leases and Rents (CALR) documents do not improperly restrict the landlord's daily operational control of the property. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC