By Philip M. Hastings,Esquire
For novice and seasoned real estate
owners, investors and developers alike, the commercial loan closing process can
be time-consuming, frustrating, and expensive. Here are a few things that can make
closings easier (and perhaps save the borrower some money, too).
Pay
Attention to the Loan Commitment.
The lender’s loan commitment is not a mere formality. In addition to identifying the key terms of
the loan (amount, interest rate, repayment terms), it contains requirements binding
on the borrower and sets forth specific conditions that must be satisfied
before the lender will advance the loan proceeds. Some of these conditions can impose
substantial burdens on the borrower – What is the lender requiring for
additional collateral or guarantees? Will
the lender require an opinion of the borrower’s counsel with respect to the
loan transaction, the status of permits and approvals, or zoning
compliance? Will the lender need
estoppel certificates from tenants? Will
the lender want a survey of the property?
What endorsements to its title policy will the lender require?
An inaccurate loan commitment is likely to cause delays and
confusion at the closing and can inadvertently commit the borrower to unfavorable
terms which may be difficult to negotiate later. Because the loan commitment provides a road
map for the closing, even mundane details – the wrong name of the borrower or
property address, for example – can get a closing off-track from the very
beginning. Having a lawyer review the
loan commitment on behalf of the borrower and help negotiate its terms before
it is signed will go a long way to minimizing problems and reducing costs.
Address Real Estate
Issues Early. Obviously, the real estate is the
center-piece of a commercial real estate loan.
Regardless of loan-to-value, no lender will close until it is assured
that the borrower’s title is sound. If
the borrower does not have a title policy covering the property, then it should
make sure that it will be able to obtain one at closing. Well before closing, the borrower should
position itself to have the title transferred to the borrowing entity (if
different). Find out whether the lender will want the survey exception deleted
and whether this will require a new survey.
Make sure old mortgages have been discharged and all leases will be
subordinate to the new financing.
Satisfy all outstanding tax liens.
Take care of any boundary or access issues. If you have worked with a real estate
attorney before, then check with the lender to see if that attorney can provide
the title commitment instead of lender’s counsel. This will give the borrower better control
over how title issues are being handled and avoid duplicative efforts.
Relatedly, the borrower should make sure that all leases are
current, security deposits are properly accounted for and that all landlord
obligations have been fulfilled. The
borrower should take care to ensure that the conditions of any land use permit
(e.g., site plan review) have been satisfied (especially with newly-constructed
projects) and that the property complies with zoning and land use regulations.
Organizational
Housekeeping. Not paying attention to the legal
requirements for corporations or limited liability companies are a sure way to
mess up a closing and add costs to the transaction. The borrowing entity and all entity
guarantors should be duly formed, in good standing and registered to do
business in the jurisdictions in which they operate. Corporate and LLC record books, shareholder
agreements, bylaws, and LLC operating agreements should be up-to-date. Internet-based form documents should be
avoided; they are notoriously inadequate and lender’s counsel will probably
insist on revisions. For corporate
borrowers and guarantors, directors and officers should be named, and managers
should be named, if necessary, for LLC borrowers and guarantors. Trade name registrations
should not lapse. In the long run, it’s
cheaper to pay a lawyer to take care of these issues on an ongoing basis than
it is to deal with them on an expedited basis at closing.
Closings don’t just happen.
Paying attention to certain details, with the help of capable real
estate professionals, will reduce aggravation and save time and money.
Philip M. Hastings
is the President and a Shareholder and Director of Cleveland, Waters and Bass, P.A. (www.cwbpa.com), a full-service
law firm based in Concord, New Hampshire, with offices in New London, New
Hampshire, and Haverhill, Massachusetts.
Mr. Hastings practice focuses on real estate development, transactions
and finance. He is also a principal of Granite State Title Services, LLC
(www.granitestatetitle.com). He can be
contacted at 603.224.7761 or by email at hastingsp@cwbpa.com.