For practically 30 years, I have represented borrowers and lenders in commercial real estate transactions. Throughout this time it has become apparent that lots of Buyers do not have a clear understanding of what is required to document a industrial real estate loan. Unless the basics are understood, the likelihood of success in closing a commercial genuine estate transaction is drastically reduced.
All through the method of negotiating the sale contract, all parties should maintain their eye on what the Buyer’s lender will reasonably call for as a situation to financing the purchase. This could not be what the parties want to focus on, but if this aspect of the transaction is ignored, the deal could not close at all.
Sellers and their agents often express the attitude that the Buyer’s financing is the Buyer’s issue, not theirs. Perhaps, but facilitating Buyer’s financing need to surely be of interest to Sellers. How numerous sale transactions will close if the Purchaser can not get financing?
This is not to suggest that Sellers need to intrude upon the connection among the Buyer and its lender, or come to be actively involved in getting Buyer’s financing. It does mean, nonetheless, that the Seller need to have an understanding of what information concerning the home the Buyer will need to create to its lender to acquire financing, and that Seller should be prepared to completely cooperate with the Purchaser in all reasonable respects to produce that facts.
Standard Lending Criteria
Lenders actively involved in creating loans secured by commercial true estate generally have the very same or equivalent documentation specifications. Unless choosing a reliable realtor can be satisfied, the loan will not be funded. If the loan is not funded, the sale transaction will not most likely close.
For Lenders, the object, generally, is to establish two basic lending criteria:
1. The capacity of the borrower to repay the loan and
2. The capability of the lender to recover the full quantity of the loan, which includes outstanding principal, accrued and unpaid interest, and all reasonable expenses of collection, in the occasion the borrower fails to repay the loan.
In practically every loan of each variety, these two lending criteria type the basis of the lender’s willingness to make the loan. Practically all documentation in the loan closing process points to satisfying these two criteria. There are other legal requirements and regulations requiring lender compliance, but these two fundamental lending criteria represent, for the lender, what the loan closing procedure seeks to establish. They are also a principal focus of bank regulators, such as the FDIC, in verifying that the lender is following secure and sound lending practices.
Few lenders engaged in commercial real estate lending are interested in creating loans with no collateral adequate to assure repayment of the whole loan, which includes outstanding principal, accrued and unpaid interest, and all reasonable charges of collection, even where the borrower’s independent potential to repay is substantial. As we have seen time and once more, alterations in financial conditions, whether or not occurring from ordinary financial cycles, modifications in technologies, all-natural disasters, divorce, death, and even terrorist attack or war, can alter the “capability” of a borrower to spend. Prudent lending practices require sufficient safety for any loan of substance.
Documenting The Loan
There is no magic to documenting a commercial genuine estate loan. There are difficulties to resolve and documents to draft, but all can be managed efficiently and proficiently if all parties to the transaction recognize the reputable wants of the lender and plan the transaction and the contract requirements with a view toward satisfying those requirements within the framework of the sale transaction.
When the credit selection to concern a loan commitment focuses primarily on the potential of the borrower to repay the loan the loan closing method focuses mostly on verification and documentation of the second stated criteria: confirmation that the collateral is enough to assure repayment of the loan, including all principal, accrued and unpaid interest, late fees, attorneys costs and other charges of collection, in the event the borrower fails to voluntarily repay the loan.
With this in thoughts, most industrial actual estate lenders method industrial true estate closings by viewing themselves as potential “back-up buyers”. They are often testing their collateral position against the possibility that the Buyer/Borrower will default, with the lender getting forced to foreclose and grow to be the owner of the house. Their documentation requirements are designed to spot the lender, immediately after foreclosure, in as great a position as they would need at closing if they had been a sophisticated direct buyer of the property with the expectation that the lender may possibly need to sell the house to a future sophisticated buyer to recover repayment of their loan.
Major 10 Lender Deliveries
In documenting a industrial real estate loan, the parties need to recognize that virtually all commercial actual estate lenders will call for, among other factors, delivery of the following “property documents”:
1. Operating Statements for the previous 3 years reflecting earnings and expenses of operations, including cost and timing of scheduled capital improvements
2. Certified copies of all Leases
3. A Certified Rent Roll as of the date of the Acquire Contract, and again as of a date within two or 3 days prior to closing
4. Estoppel Certificates signed by each tenant (or, ordinarily, tenants representing 90% of the leased GLA in the project) dated within 15 days prior to closing
five. Subordination, Non-Disturbance and Attornment (“SNDA”) Agreements signed by every tenant
six. An ALTA lender’s title insurance coverage policy with expected endorsements, which includes, amongst other people, an ALTA 3.1 Zoning Endorsement (modified to include parking), ALTA Endorsement No. four (Contiguity Endorsement insuring the mortgaged property constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged property has access to public streets and ways for vehicular and pedestrian website traffic)
7. Copies of all documents of record which are to remain as encumbrances following closing, such as all easements, restrictions, party wall agreements and other comparable products
8. A present Plat of Survey prepared in accordance with 2011 Minimum Common 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 situations, a Phase two 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 needs and deliveries the Purchaser will be expected to satisfy as a situation to obtaining funding of the buy funds loan, but the items listed above are virtually universal. If the parties do not draft the buy contract to accommodate timely delivery of these things to lender, the possibilities of closing the transaction are tremendously lowered.
