For nearly 30 years, I have represented borrowers and lenders in industrial actual estate transactions. For the duration of this time it has become apparent that a lot of Buyers do not have a clear understanding of what is expected to document a commercial actual estate loan. Unless the basics are understood, the likelihood of achievement in closing a commercial actual estate transaction is tremendously reduced.
All through the process of negotiating the sale contract, all parties need to retain their eye on what the Buyer’s lender will reasonably demand as a situation to financing the buy. This could not be what the parties want to concentrate on, but if this aspect of the transaction is ignored, the deal may possibly not close at all.
Sellers and their agents usually express the attitude that the Buyer’s financing is the Buyer’s issue, not theirs. Perhaps, but facilitating Buyer’s financing should really undoubtedly be of interest to Sellers. How several sale transactions will close if the Buyer can’t get financing?
This is not to suggest that Sellers should really intrude upon the connection amongst the Purchaser and its lender, or turn into actively involved in acquiring Buyer’s financing. It does mean, even so, that the Seller must realize what data concerning the house the Purchaser will will need to create to its lender to acquire financing, and that Seller must be ready to fully cooperate with the Purchaser in all affordable respects to make that data.
Basic Lending Criteria
Lenders actively involved in making loans secured by industrial actual estate usually have the same or related documentation needs. Unless these needs 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, normally, is to establish two basic lending criteria:
1. The potential of the borrower to repay the loan and
two. The potential of the lender to recover the full amount of the loan, like outstanding principal, accrued and unpaid interest, and all affordable expenses of collection, in the occasion the borrower fails to repay the loan.
In nearly every single loan of every single variety, these two lending criteria form the basis of the lender’s willingness to make the loan. Practically all documentation in the loan closing procedure points to satisfying these two criteria. There are other legal needs and regulations requiring lender compliance, but these two simple lending criteria represent, for the lender, what the loan closing approach seeks to establish. They are also a principal concentrate of bank regulators, such as the FDIC, in verifying that the lender is following safe and sound lending practices.
Handful of lenders engaged in industrial true estate lending are interested in making loans devoid of collateral enough to assure repayment of the entire loan, which includes outstanding principal, accrued and unpaid interest, and all affordable costs of collection, even exactly where the borrower’s independent potential to repay is substantial. As we have observed time and once more, alterations in economic situations, irrespective of whether occurring from ordinary financial cycles, modifications in technologies, natural disasters, divorce, death, and even terrorist attack or war, can change the “ability” of a borrower to pay. Prudent lending practices demand sufficient security for any loan of substance.
Documenting The Loan
There is no magic to documenting a industrial real estate loan. There are challenges to resolve and documents to draft, but all can be managed effectively and proficiently if all parties to the transaction recognize the reputable requirements of the lender and plan the transaction and the contract specifications with a view toward satisfying these needs inside the framework of the sale transaction.
When the credit selection to challenge a loan commitment focuses mainly on the ability of the borrower to repay the loan the loan closing approach focuses mainly on verification and documentation of the second stated criteria: confirmation that the collateral is enough to assure repayment of the loan, such as all principal, accrued and unpaid interest, late costs, attorneys costs and other costs of collection, in the occasion the borrower fails to voluntarily repay the loan.
With this in thoughts, most commercial actual estate lenders method industrial real estate closings by viewing themselves as potential “back-up purchasers”. They are generally testing their collateral position against the possibility that the Purchaser/Borrower will default, with the lender getting forced to foreclose and turn into the owner of the house. Their documentation specifications are created to location the lender, soon after foreclosure, in as fantastic a position as they would need at closing if they have been a sophisticated direct purchaser of the home with the expectation that the lender could need to sell the property to a future sophisticated purchaser to recover repayment of their loan.
Top 10 Lender Deliveries
In documenting a industrial real estate loan, the parties need to recognize that virtually all industrial true estate lenders will require, amongst other points, delivery of the following “house documents”:
1. Operating Statements for the past three years reflecting income and expenditures of operations, like price and timing of scheduled capital improvements
2. Certified copies of all Leases
3. yoursite.com as of the date of the Obtain Contract, and once again as of a date within 2 or 3 days prior to closing
four. Estoppel Certificates signed by every tenant (or, normally, 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 every tenant
6. An ALTA lender’s title insurance policy with essential endorsements, such as, among other people, an ALTA 3.1 Zoning Endorsement (modified to include things like parking), ALTA Endorsement No. 4 (Contiguity Endorsement insuring the mortgaged house constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged home 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, which includes all easements, restrictions, party wall agreements and other related products
eight. A current Plat of Survey ready in accordance with 2011 Minimum Normal Detail for ALTA/ACSM Land Title Surveys, certified to the lender, Buyer and the title insurer
9. A satisfactory Environmental Site Assessment Report (Phase I Audit) and, if suitable under the circumstances, a Phase 2 Audit, to demonstrate the property is not burdened with any recognized environmental defect and
ten. A Web-site Improvements Inspection Report to evaluate the structural integrity of improvements.
To be confident, there will be other requirements and deliveries the Buyer will be expected to satisfy as a situation to obtaining funding of the obtain income loan, but the items listed above are practically universal. If the parties do not draft the obtain contract to accommodate timely delivery of these items to lender, the possibilities of closing the transaction are drastically decreased.