For almost 30 years, I have represented borrowers and lenders in commercial real estate transactions. For the duration of this time it has become apparent that numerous Purchasers do not have a clear understanding of what is needed to document a commercial genuine estate loan. Unless the fundamentals are understood, the likelihood of good results in closing a commercial real estate transaction is considerably reduced.
Throughout the procedure of negotiating the sale contract, all parties should preserve their eye on what the Buyer’s lender will reasonably demand as a situation to financing the purchase. This might not be what the parties want to concentrate on, but if this aspect of the transaction is ignored, the deal may not close at all.
Sellers and their agents generally express the attitude that the Buyer’s financing is the Buyer’s issue, not theirs. Perhaps, but facilitating Buyer’s financing must certainly be of interest to Sellers. How quite a few sale transactions will close if the Purchaser cannot get financing?
This is not to suggest that Sellers need to intrude upon the partnership among the Buyer and its lender, or turn out to be actively involved in getting Buyer’s financing. Grand Dunman does imply, however, that the Seller should really recognize what information concerning the home the Buyer will need to have to produce to its lender to acquire financing, and that Seller need to be prepared to fully cooperate with the Purchaser in all affordable respects to generate that facts.
Basic Lending Criteria
Lenders actively involved in generating loans secured by industrial genuine estate commonly have the same or comparable documentation needs. Unless these requirements can be satisfied, the loan will not be funded. If the loan is not funded, the sale transaction will not likely close.
For Lenders, the object, generally, is to establish two fundamental lending criteria:
1. The capability of the borrower to repay the loan and
2. The capacity of the lender to recover the full quantity of the loan, like outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the occasion the borrower fails to repay the loan.
In nearly every single loan of each kind, these two lending criteria kind the basis of the lender’s willingness to make the loan. Practically all documentation in the loan closing approach points to satisfying these two criteria. There are other legal specifications and regulations requiring lender compliance, but these two basic lending criteria represent, for the lender, what the loan closing course of action seeks to establish. They are also a principal focus of bank regulators, such as the FDIC, in verifying that the lender is following safe and sound lending practices.
Couple of lenders engaged in commercial true estate lending are interested in producing loans without the need of collateral adequate to assure repayment of the whole loan, which includes outstanding principal, accrued and unpaid interest, and all affordable charges of collection, even where the borrower’s independent capacity to repay is substantial. As we have seen time and once again, adjustments in economic conditions, no matter whether occurring from ordinary financial cycles, alterations in technology, all-natural disasters, divorce, death, and even terrorist attack or war, can transform the “capability” of a borrower to pay. Prudent lending practices call for sufficient safety for any loan of substance.
Documenting The Loan
There is no magic to documenting a commercial real estate loan. There are concerns to resolve and documents to draft, but all can be managed effectively and properly if all parties to the transaction recognize the genuine needs of the lender and program the transaction and the contract needs with a view toward satisfying those requirements inside the framework of the sale transaction.
When the credit selection to situation a loan commitment focuses mostly on the ability of the borrower to repay the loan the loan closing course of action focuses primarily on verification and documentation of the second stated criteria: confirmation that the collateral is sufficient to assure repayment of the loan, which includes all principal, accrued and unpaid interest, late fees, attorneys fees and other charges of collection, in the occasion the borrower fails to voluntarily repay the loan.
With this in mind, most industrial true estate lenders method commercial real estate closings by viewing themselves as prospective “back-up buyers”. They are constantly testing their collateral position against the possibility that the Purchaser/Borrower will default, with the lender being forced to foreclose and turn into the owner of the home. Their documentation requirements are made to place the lender, after foreclosure, in as superior a position as they would call for at closing if they had been a sophisticated direct buyer of the house with the expectation that the lender might require to sell the house to a future sophisticated buyer to recover repayment of their loan.
Top 10 Lender Deliveries
In documenting a commercial actual estate loan, the parties should recognize that virtually all industrial true estate lenders will need, among other items, delivery of the following “home documents”:
1. Operating Statements for the past 3 years reflecting revenue and expenditures of operations, like expense and timing of scheduled capital improvements
2. Certified copies of all Leases
3. A Certified Rent Roll as of the date of the Obtain Contract, and again as of a date within two or 3 days prior to closing
4. Estoppel Certificates signed by every single tenant (or, typically, tenants representing 90% of the leased GLA in the project) dated inside 15 days prior to closing
5. Subordination, Non-Disturbance and Attornment (“SNDA”) Agreements signed by each tenant
six. An ALTA lender’s title insurance coverage policy with expected endorsements, including, among other people, an ALTA three.1 Zoning Endorsement (modified to include things like parking), ALTA Endorsement No. four (Contiguity Endorsement insuring the mortgaged home constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged house has access to public streets and approaches for vehicular and pedestrian visitors)
7. Copies of all documents of record which are to stay as encumbrances following closing, like all easements, restrictions, party wall agreements and other related products
8. A present Plat of Survey ready in accordance with 2011 Minimum Regular Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer
9. A satisfactory Environmental Web-site Assessment Report (Phase I Audit) and, if acceptable below the situations, a Phase 2 Audit, to demonstrate the home is not burdened with any recognized environmental defect and
10. A Web-site Improvements Inspection Report to evaluate the structural integrity of improvements.
To be positive, there will be other specifications and deliveries the Purchaser will be anticipated to satisfy as a condition to getting funding of the purchase revenue loan, but the products listed above are virtually universal. If the parties do not draft the purchase contract to accommodate timely delivery of these items to lender, the chances of closing the transaction are significantly decreased.