What does 'subordination' mean in leasing?

Subordination in leasing refers to the process of prioritizing one loan over another in the event of foreclosure. This concept is particularly important in the realm of commercial real estate, where multiple financial interests may exist. In a leasing context, subordination typically involves the relationship between a lease and a mortgage. When a lease is subordinated to a mortgage, it means that in the case of a foreclosure, the rights of the lender (holding the mortgage) will take precedence over the rights of the tenant (the leaseholder). This is significant because it assures lenders that their interests are protected, and it can also impact the tenant's security and rights should the property change ownership.

Understanding the concept of subordination is crucial for lease analysts as it affects negotiations, the terms of the lease, and the overall investment strategy for property owners and investors.