Commercial Investment Real Estate

JUL-AUG 2016

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.

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July | August | 2016 Commercial Investment Real Estate w Ambiguous Provisions One popular provider of loan document production so ware includes the following provision in its forms. Subsidiaries and Affi liates of Bor- rower. To the extent the context of any provisions [sic] of this Agree- ment makes it appropriate, including without limitation any representation, warranty, or covenant, the word "Bor- rower" as used in this Agreement shall include all of Borrower's subsid- iaries and affi liates. When the title to real estate is held by a single-asset entity that is owned and con- trolled by an umbrella investment entity, such a provision spells danger. If commercial real estate professionals want to avoid having disputes over whether the "context" of a provision in the loan agreement is relevant, they need to change the language. Beware of Loan Provisions The language in preprinted lending documents could cause you plenty of trouble. When buyers purchase a property with fi nancing or are refi nancing an existing loan, they often see loan documents that are either preprinted or generated by a document assembly program. In either case, making changes to preset terms can be a challenge. by Jerome Grossman e whole purpose of these documents is to allow someone to quickly generate a ser- viceable set of loan documents. Nevertheless, prospective borrowers who want to ensure that the loan documents refl ect their under- standing of the loan terms must adhere to the provisions of these documents. Here are three examples of language that that should be modifi ed and why. Unwarranted Fees Mechanically produced prepayment pro- visions can be worded in a way that are surprising to commercial real estate profes- sionals — and are unfair to the borrower. Typically, in form promissory notes, a pre- payment provision appears like this one. Prepayment Fee: Upon prepayment of this Note, the Lender is entitled to the following prepayment fee: The Promissory Note (the "Note") may be prepaid in whole or in part at any time upon payment of a premium (the "Prepayment Fee") … If Borrower prepays this Note in whole or in part. Borrower shall pay a prepayment penalty of ____ percent of the original principal balance of this Note. e note permits the borrower to make a partial prepayment, but the prepayment fee is a percentage of the original principal balance of the note, instead of the amount actually prepaid. To show what damage this may cause, imagine the borrower has a single loan secured by multiple rental houses, and the borrower sells one of the houses. When the borrower approaches the bank to apply the proceeds to a partial prepayment of the loan, would the borrower expect the bank to charge them a prepayment fee based on the entire amount of the loan? No. But technically, the remaining balance of the loan is still outstanding, earning interest at the contracted-for rate. FINAN CIN G FO CUS Hemera Technologies/Thinkstock

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