For nearly 30 years, I have represented borrowers in commercial real estate transactions. During this time, it became clear that many buyers do not have a clear understanding of what is needed for a commercial real estate loan document. Unless the basics are understood, the chances of success in closing a commercial real estate transaction is greatly reduced.
Throughout the process of negotiating the purchase agreement, all parties should keep an eye on what the lender buyer may reasonably require as a condition for financing the purchase. This may not be what the parties want to reach, but if this aspect of the transaction is ignored, the deal may not close at all.
Sellers and their agents often Express the view that the buyer finance the buyer is the problem, not theirs. Perhaps, but to facilitate the financing of the buyer should certainly important for sellers. How many sales will close if the buyer can not get financing?
This is not to suggest that vendors should infringe on the relationship between the buyer and his lender, or are actively involved in getting financing from the buyer. But it does mean that the seller should understand what information the property of the buyer will have to produce its lender to obtain financing with respect to, and that the seller should be prepared to fully cooperate with Buyer in all respects reasonable to produce that information.
Basic Lending Criteria
Lenders are actively involved in making loans secured by commercial real estate typically have the same or similar documentation requirements. Unless these requirements can be met, the loan was not funded. If the loan is not funded, the transaction is not likely to close.
For Lenders, the object, always, is to establish two basic lending criteria:
1. The ability of the borrower to repay the loan, and
2. The ability of the lender the full amount of the loan, including outstanding principal, accrued and unpaid interest to recover all reasonable costs of collection, in case the borrower does not repay the loan.
In almost every loan of any type, these two criteria, loans are the basis of the willingness of the lender to make the loan. Almost all the documentation in the loan closing points to meet these two criteria. There are other laws and regulations requiring compliance lender, but these two fundamental criteria are loans, the lender, which borrow tracht fixed. They are also a primary focus of regulators like the FDIC, checking that the lender is safe and sound lending practices following.
Few lenders involved in commercial real estate lending are interested in providing loans without collateral sufficient to repay the entire loan, including outstanding principal, accrued and unpaid interest to insure all reasonable costs of collection, even independent if the borrower repay significant. As we have seen time and again, changes in economic conditions, both from the normal economic cycles, changes in technology, natural disasters, divorce, death, and even terrorist attacks or war, change the "possibility" of a borrower to pay . Prudent lending practices require sufficient security for a loan from the dust.
Documenting the loan
There is no magic to document a commercial real estate loan. There are problems and documents to draw, but everyone can efficiently and effectively if all parties to the transaction, the legitimate needs of the lender and the plan of operation and the requirements of the contract in view of the direction of that needs in the context of accreditation managed the transaction.
While the credit decision to grant a loan commitment focuses on the ability of the borrower to repay the loan, the loan closing focuses on monitoring and documentation of the second criteria: confirmation that the collateral is sufficient to repayment of the loan guarantee, including all principal, accrued and unpaid interest, late fees, attorneys fees and other costs of collection, in case the borrower fails to voluntarily repay the loan.
With this in mind, most commercial real estate lenders approach to commercial real estate closings by viewing themselves as potential back-up purchasers. They are always testing their collateral positions against the possibility that the buyer / borrower will default, the lender is forced to foreclose and the owner of the property. Their documentation requirements designed to protect the creditor position, after blocking in as good as they would require that closing when a sophisticated direct purchaser of the property with the expectation that the lender may need the property to sell a future advanced buyer to repay their loan recovery.
Top 10 Lender Supplies
In documenting a commercial real estate loan, the parties must recognize that virtually all commercial real estate lenders will require, among other things, the next episode of "Property Documents":
1. Operating Statements for the last 3 years due to income and expenses of operations, including costs and timing of planned capital improvements;
2. Certified copies of all leases;
3. Certified Rent Roll as of the date of purchase, and again on another date within 2 or 3 days prior to closing;
4. Estoppel certificates signed by the tenant (or, generally, tenants represent 90% of the GLA leased in the project) within the 15 days prior to closing;
5. Subordination, Non Disturbance and Attornment ("SNDA") agreements signed by each tenant;
6. An ALTA lender title insurance policy with the necessary approvals, including, inter alia, an ALTA Zoning Endorsement 3.1 (adjusted to parking below), Alta Note No. 4 (Note contiguity insuring the mortgaged property is a single parcel without holes or Gores), and an Access note (ensure that the mortgaged property to access public streets and roads for vehicles and pedestrians);
7. Copies of all documents of record as expenses remain after the closing, including all easements, restrictions, party wall agreements and other similar items;
8. An update on Plat prepared in accordance with the 2005 Minimum Standard Detail for Alta / ACSM Land Title Surveys certified to the lender, seller and the title insurer, including the points 1 to 4, 6, 7 (a) 7 (b) (1), 8 to 11 (a) and 14 from the Surveyor's "optional survey Responsibilities and Specifications" called "Table A";
9. A satisfactory environmental site assessment (Phase I Audit) and, where appropriate under the circumstances, a Phase 2 audit show that the property is not charged with a recognized environmental defect, and
10. A site inspection report improvements to the structural integrity of improvements to be evaluated.
To be sure, there will be other demands and supplies of copper are expected to meet as a condition of obtaining financing for the purchase money loan, but the above mentioned items are almost universal. If the parties do not draft the purchase agreement with the timely delivery of these items provide lender, the chances of completing the transaction are greatly reduced.
Planning for closing costs
Closing commercial real estate transactions can be expensive. Besides drawing up the contract with the documentary requirements of the lender buyer, the buyer and his advisors should consider suitable and adequate plan for the high cost of bringing a commercial real estate transaction from contract to closing.
If competent counsel and competent Buyer lender counsel working together, each understanding of what needs to be done to get the transaction closed, the costs of closure are minimized, but it will undoubtedly still substantial. It is not unusual for closing costs for a commercial real estate transaction with more typical subjects close run thousands of dollars. Buyers must understand and are willing to accept as a cost of doing business.
Informed buyers understand the costs involved in documenting and closing a commercial real estate transaction and fold them into the total cost of the transaction, just as they do, such as the cost of the agreed purchase price, real estate brokerage commissions, Loan brokerage fees, loan commitment fees and the like.
Closing costs are significant transaction costs and must be factored into the business decision of the buyer to determine whether to proceed with a commercial real estate transaction. They are inescapable expenditure added to the cost of the buyer of acquiring commercial real estate. They should be taken into account in the "actual purchase price" to be paid by the buyer to acquire a particular project and the expected return on investment to calculate precisely the determining factor.
Some closing costs may be shifted to the vendor by custom or actual contract negotiations, but many will inevitably fall to the Buyer. This can easily total tens of thousands of dollars into a still medium commercial real estate transaction in the tot $ 1,000,000 $ 5,000,000 price range.
Costs are often overlooked, but always present, including the required title insurance lender notes, an ALTA survey, environmental audit (s), a site improvement inspection report and, somewhat surprisingly, buyers' fees of the lawyer.
For reasons that escape me, inexperienced buyers of commercial real estate, and even some experienced buyers, almost always underestimate the attorneys fees required in a particular transaction. This is not because they are unpredictable, because the combined charges a buyer must pay his own lawyer and the lawyer representing the lender usually totaling about 1% of the Purchase Price. Perhaps the result of wishful thinking in relation to the usual low fees charged by lawyers attorneys handling residential real estate closing. In reality, the level of sophistication and the amount of specialized work required to fully investigate and document a transaction for a buyer of commercial real estate makes comparisons with residential real estate transactions inappropriate. Sophisticated commercial real estate investors understand this. Less sophisticated commercial real estate buyers need to learn how well the budget these costs.
Conclusion
Completion of negotiations for the sale / purchase of a significant commercial real estate project is an exciting experience, but until the transaction closes, it is only ink on paper. To conclude, the agreement must anticipate the documentation of the buyer will have to make to the lender for the purchase money financing. The buyer should also be aware of the considerable costs that must be made in preparation for closing so the buyer can reasonably plan cash requirements for closing. With a clear understanding of what is needed, and advanced planning for these requirements, the chances of success will be greatly improved closure.
