Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/536709
July | August | 2015 Commercial Investment Real Estate L EG AL BRIE F S Ingram Publishing/Thinkstock w Negotiation Tips Here are seven loan commitment issues that borrowers should take into consideration during negotiations from a nonbinding to a binding agreement. Fees. While this seems blatantly obvious, fee issues of en arise af er the loan commit- ment has been executed. Prior to f nalizing the agreement, borrowers should conf rm the timing of and applicability of the fees, whether or not they are refundable, and under what circumstances they are held. Conditions precedent. Commitment let- ters stipulate that certain condi- tions must be satisf ed before the lender will fund the loan. Bor- rowers should conf rm that these conditions precedent, sometimes referred to as "CPs" or "outs," are realistic and reasonable. For example, with improved proper- ties, obtaining a certain percent- age of estoppel certificates or subordination, non-disturbance, and attornment, or SNDA, agree- ments from tenants may be dif- f cult to achieve. Transfer of interests. Lend- ers underwrite their commit- ments partially based upon the f nancial worth of the borrowing entity and, usually, guarantors. Addressing potential changes in those entities is crucially impor- tant, as transfers of interest not specif cally approved may vio- late the loan documents. Lenders are pre- sumably comfortable with the management expertise and style of those in control; there- fore changes to management are dif cult to ef ect, but borrowers should be careful to negotiate permitted transfers that would not violate the lender's primary concern. Non-recourse carve-outs. So-called bad boy carve-outs are the most negotiated pro- visions in loan documents and are usually included in broad terms within the loan commitment. Borrowers should receive advance copies of the carve-outs, if they are not included within the loan commitment, a schedule, or an exhibit. Identifying exactly what the parties intend and expect early in the process can be advantageous to a bor- Loan Commitments Borrowers should negotiate early and often. by Brooks R. Smith Most of these loans begin with a nonbind- ing term sheet or loan application followed by a binding commitment letter. T e com- mitment letter also typically requires the borrower to deposit nonrefundable monies. While loan commitments are negotiated agreements, they are based on the lender's term sheet and almost always draf ed on the lender's form. In other words, loan commit- ments are one-sided in favor of the lender. 18 Commercial mortgage brokers have the most experience negotiating loan commit- ments. However, commercial mortgage brokers typically focus on business terms and material business issues, not on legal issues. Since the negotiating position of the borrower is strongest at this stage, it's a missed opportunity to not involve legal counsel and negotiate relevant legal issues at this time. With an improving economy and persistently low interest rates, commercial real estate lending activity remains robust. It's estimated that approximately $300 billion in commercial mortgage- backed securities loans will mature over the next two years; refi nances also continue to fuel commercial real estate lending. by Brooks R. Smith