What a buyer, or better yet a seller-financed buyer gets with this type of clause is some confidence. More specifically, confidence that a buyer or an investor will have relying on a specific income ceiling if leasing a property.
As an example:
Let's say that your mortgage payments are 2000 dollars a month and your depending upon the mortgage payments to be tied to 75% the net operating income of a business.
As long as the net operating income of the business at least remains at $2,666.67, you'll see that 75% of the net operating income is two thousand dollars and will satisfy the mortgage payment requirement since 2000 dollars is 75% of the net.
If your the lessee, if the net operating income falls to 2000 dollars, then you would only have to pay the landlord 1500 dollars with a performance clause governing the percentage of the net operating income to the amount of rent your required to pay.
The downside to a performance contract is that the lender or landlord might not get paid anything if there isn't any income from the property or business for the corresponding month. This is more of a protective clause for the buyer or investor.
Always get responsible, competent, experienced legal advice !
Any thoughts from our lenders ?
Next : The Option Clause
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