10 Things Every Buyer Needs - To Close A Commercial Real Estate Loan

For nearly 30 years, I have represented borrowers5. Subordination, Non-Disturbance and Attornment
and lenders in commercial real estate transactions.("SNDA") Agreements signed by each tenant;
During this time it has become apparent that many6. An ALTA lender's title insurance policy with
Buyers do not have a clear understanding of what isrequired endorsements, including, among others, an
required to document a commercial real estate loan.ALTA 3.1 Zoning Endorsement (modified to include
Unless the basics are understood, the likelihood ofparking), ALTA Endorsement No. 4 (Contiguity
success in closing a commercial real estateEndorsement insuring the mortgaged property
transaction is greatly reduced.constitutes a single parcel with no gaps or gores),
Throughout the process of negotiating the saleand an Access Endorsement (insuring that the
contract, all parties must keep their eye on what themortgaged property has access to public streets and
Buyer's lender will reasonably require as a condition toways for vehicular and pedestrian traffic);
financing the purchase. This may not be what the7. Copies of all documents of record which are to
parties want to focus on, but if this aspect of theremain as encumbrances following closing, including all
transaction is ignored, the deal may not close at all.easements, restrictions, party wall agreements and
Sellers and their agents often express the attitudeother similar items;
that the Buyer's financing is the Buyer's problem, not8. A current Plat of Survey prepared in accordance
theirs. Perhaps, but facilitating Buyer's financing shouldwith 2005 Minimum Standard Detail for ALTA/ACSM
certainly be of interest to Sellers. How many saleLand Title Surveys, certified to the lender, Buyer and
transactions will close if the Buyer cannot getthe title insurer, including items 1 through 4, 6, 7(a),
financing?7(b)(1), 8 through 11(a) and 14 from the Surveyor's
This is not to suggest that Sellers should intrude upon"Optional Survey Responsibilities and Specifications"
the relationship between the Buyer and its lender, orreferred to as "Table A";
become actively involved in obtaining Buyer's9. A satisfactory Environmental Site Evaluation Report
financing. It does mean, however, that the Seller(Phase I Audit) and, if appropriate under the
should understand what information concerning thecircumstances, a Phase 2 Audit, to demonstrate the
property the Buyer will need to produce to its lenderproperty is not burdened with any recognized
to obtain financing, and that Seller should be preparedenvironmental defect; and
to fully cooperate with the Buyer in all reasonable10. A Site Improvements Inspection Report to
respects to produce that information.evaluate the structural integrity of improvements.
Basic Lending CriteriaTo be sure, there will be other requirements and
Lenders actively involved in making loans secured bydeliveries the Buyer will be expected to satisfy as a
commercial real estate typically have the same orcondition to obtaining funding of the purchase money
similar documentation requirements. Unless theseloan, but the items listed above are virtually universal.
requirements can be satisfied, the loan will not beIf the parties do not draft the purchase contract to
funded. If the loan is not funded, the sale transactionaccommodate timely delivery of these items to
will not likely close.lender, the chances of closing the transaction are
For Lenders, the object, always, is to establish twogreatly reduced.
basic lending criteria:Planning for Closing Costs
1. The ability of the borrower to repay the loan ; andThe closing process for commercial real estate
2. The ability of the lender to recover the full amounttransactions can be expensive. In addition to drafting
of the loan, including outstanding principal, accrued andthe Purchase Contract to accommodate the
unpaid interest, and all reasonable costs of collection,documentary requirements of the Buyer's lender, the
in the event the borrower fails to repay the loan.Buyer and his advisors need to consider and
In nearly every loan of every type, these twoadequately plan for the high cost of bringing a
lending criteria form the basis of the lender'scommercial real estate transaction from contract to
willingness to make the loan. Virtually allclosing.
documentation in the loan closing process points toIf competent Buyer's counsel and competent lender's
satisfying these two criteria. There are other legalcounsel work together, each understanding what is
requirements and regulations requiring lenderrequired to be done to get the transaction closed,
compliance, but these two basic lending criteriathe cost of closing can be kept to a minimum, though
represent, for the lender, what the loan closingit will undoubtedly remain substantial. It is not unusual
process seeks to establish. They are also a primaryfor closing costs for a commercial real estate
focus of bank regulators, such as the FDIC, intransaction with even typical closing issues to run
verifying that the lender is following safe and soundthousands of dollars. Buyers must understand this and
lending practices.be prepared to accept it as a cost of doing business.
Few lenders engaged in commercial real estateSophisticated Buyers understand the costs involved in
lending are interested in making loans withoutdocumenting and closing a commercial real estate
collateral sufficient to assure repayment of the entiretransaction and factor them into the overall cost of
loan, including outstanding principal, accrued and unpaidthe transaction, just as they do costs such as the
interest, and all reasonable costs of collection, evenagreed upon purchase price, real estate brokerage
where the borrower's independent ability to repay iscommissions, loan brokerage fees, loan commitment
substantial. As we have seen time and again, changesfees and the like.
in economic conditions, whether occurring fromClosing costs can constitute significant transaction
ordinary economic cycles, changes in technology,expenses and must be factored into the Buyer's
natural disasters, divorce, death, and even terroristbusiness decision-making process in determining
attack or war, can change the "ability" of a borrowerwhether to proceed with a commercial real estate
to pay. Prudent lending practices require adequatetransaction. They are inescapable expenditures that
security for any loan of substance.add to Buyer's cost of acquiring commercial real
Documenting The Loanestate. They must be taken into account to
There is no magic to documenting a commercial realdetermine the "true purchase price" to be paid by the
estate loan. There are issues to resolve andBuyer to acquire any given project and to accurately
documents to draft, but all can be managedcalculate the anticipated yield on investment.
efficiently and effectively if all parties to theSome closing costs may be shifted to the Seller
transaction recognize the legitimate needs of thethrough custom or effective contract negotiation, but
lender and plan the transaction and the contractmany will unavoidably fall on the Buyer. These can
requirements with a view toward satisfying thoseeasily total tens of thousands of dollars in an even
needs within the framework of the sale transaction.moderately sized commercial real estate transaction
While the credit decision to issue a loan commitmentin the $1,000,000 to $5,000,000 price range.
focuses primarily on the ability of the borrower toCosts often overlooked, but ever present, include
repay the loan; the loan closing process focusestitle insurance with required lender endorsements, an
primarily on verification and documentation of theALTA Survey, environmental audit(s), a Site
second stated criteria: confirmation that the collateralImprovements Inspection Report and, somewhat
is sufficient to assure repayment of the loan, includingsurprisingly, Buyers attorney's fees.
all principal, accrued and unpaid interest, late fees,For reasons that escape me, inexperienced Buyers of
attorneys fees and other costs of collection, in thecommercial real estate, and even some experienced
event the borrower fails to voluntarily repay the loan.Buyers, nearly always underestimate attorneys fees
With this in mind, most commercial real estate lendersrequired in any given transaction. This is not because
approach commercial real estate closings by viewingthey are unpredictable, since the combined fees a
themselves as potential "back-up buyers". They areBuyer must pay to its own attorney and to the
always testing their collateral position against theLender's attorney typically aggregate around 1% of
possibility that the Buyer/Borrower will default, withthe Purchase Price . Perhaps it stems from wishful
the lender being forced to foreclose and become thethinking associated with the customarily low
owner of the property. Their documentationattorneys fees charged by attorneys handling
requirements are designed to place the lender, afterresidential real estate closings. In reality, the level of
foreclosure, in as good a position as they wouldsophistication and the amount of specialized work
require at closing if they were a sophisticated directrequired to fully investigate and document a
buyer of the property; with the expectation that thetransaction for a Buyer of commercial real estate
lender may need to sell the property to a futuremakes comparisons with residential real estate
sophisticated buyer to recover repayment of theirtransactions inappropriate. Sophisticated commercial
loan.real estate investors understand this. Less
Top 10 Lender Deliveriessophisticated commercial real estate buyers must
In documenting a commercial real estate loan, thelearn how to properly budget this cost.
parties must recognize that virtually all commercialConclusion
real estate lenders will require, among other things,Concluding negotiations for the sale/purchase of a
delivery of the following "property documents":substantial commercial real estate project is a thrilling
1. Operating Statements for the past 3 yearsexperience but, until the transaction closes, it is only
reflecting income and expenses of operations,ink on paper. To get to closing, the contract must
including cost and timing of scheduled capitalanticipate the documentation the Buyer will be
improvements;required to deliver to its lender to obtain purchase
2. Certified copies of all Leases;money financing. The Buyer must also be aware of
3. A Certified Rent Roll as of the date of thethe substantial costs to be incurred in preparing for
Purchase Contract, and again as of a date within 2 orclosing so that Buyer may reasonably plan its cash
3 days prior to closing;requirements for closing. With a clear understanding
4. Estoppel Certificates signed by each tenant (or,of what is required, and advanced planning to satisfy
typically, tenants representing 90% of the leasedthose requirements, the likelihood of successfully
GLA in the project) dated within 15 days prior toclosing will be greatly enhanced.
closing;