Loan Applications: Customize Your Request For Funds
As published in the Nashville Chapter of NAIOP newsletter.
Scene I: The real estate purchase agreement has been signed. Time is ticking away toward the expiration of the purchaser's inspection period. The purchaser is eager to nail down financing before the earnest money becomes non-refundable under the purchase agreement. The purchaser approaches its lender or mortgage broker about a loan commitment. The loan commitment will enable the purchaser to line up its remaining equity and to complete the acquisition.
Scene II: Great news – lender sends the purchaser a commitment for a loan for 80% of the purchase price! The lender provides loan documents to the purchaser for review prior to closing, and the purchaser calls a lawyer to review the loan documents.
Scene III: After meeting with the purchaser the lawyer points out to lender some terms and conditions in the loan documents that are unacceptable to the purchaser. Lender must take the requested changes back through credit committee for approval. Will the purchaser be able to close the acquisition on time and with loan terms the purchaser can live with?
CUT! Rewind to Scene I: In today's environment it is critical for the borrower to negotiate major issues prior to the loan commitment stage. After the loan commitment is issued, each change a borrower requests may have to be presented to the lender's credit committee for approval. This is time-consuming, and the lender may deny the borrower's requests. Experienced counsel should be able to anticipate issues and help a borrower client obtain a more borrower-friendly loan commitment.
Some of the issues counsel may advise raising early with the lender include exceptions to the prepayment premium, certain permitted transfers, subordinate financing, use of insurance and condemnation proceeds, ability to deal with leases, the method of calculating interest and limitations on non-recourse "carveouts" in non-recourse loans. The list will vary depending on whether the loan is from a bank, an insurance company or some form of securitized loan.
Standard loan commitment letters are becoming more stringent in today's marketplace. The chart below demonstrates the tightening of credit standards, with the trend beginning in 2005.
(Federal Reserve Board, October 2007 Senior Loan Officer Opinion Survey)
A dramatic uptrend beginning in June 2007 is apparent from the foregoing chart. Around this time some lenders began to opt not to close loans despite the fact that commitments had been issued. Some of these decisions may have been based on "boilerplate" provisions in loan commitments such as the "Material Adverse Change" clause. Some lenders relied on this provision to claim that general market conditions had caused a deterioration in the financial prospects of their borrowers.
This article does not contain an exhaustive list of recommendations that experienced counsel might make during the loan application process. The main point is that in a tighter credit market and in our Middle Tennessee and regional Southeast area where attractive commercial real estate opportunities do still abound, purchasers and property owners looking to obtain financing should retain legal counsel and negotiate with lenders at the outset to save time, headaches and money during the loan closing process.