TRA NSACTIONAL UPDAT E
FEAR OF COMMITMENT: UNDERSTANDING THE COMMERCIAL
LOAN COMMITMENT LETTER
By Seth J. Bell
Whether
you
are
financing the acquisition
of a new investment
property or refinancing
your current mortgage
loan, the first document that a lender will
ask you to sign once your loan application
is approved is a loan commitment letter.
The commitment letter essentially sets
forth the basic terms of the loan as well as
any conditions and/or requirements which
must be satisfied by the borrower in order
for the lender to fund the loan.
For obvious reasons, the best time to
negotiate the terms of a loan is prior to
the execution of a commitment letter.
Unfortunately, borrowers often do
not involve their attorney until after a
commitment letter is signed, at which
point it is usually too late to negotiate
certain terms which are already locked
in to the commitment letter. Once the
commitment letter is signed, lenders
and their counsel are less willing to
negotiate the terms of the final loan
documents if they were not included in
the commitment letter. While loan terms
contained in the average commitment
letter may appear to be fair and relatively
straightforward, there are many issues
that are often overlooked by borrowers.
For this reason, it is highly recommended
that the commitment should be reviewed
by an attorney with experience in
commercial real estate finance, prior to
its being signed.
Some of the more commonly overlooked
points that could be negotiated are as
follows:
Prepayment: Most commercial mortgage
loans will contain some sort of prepayment
premium or penalty in the event that the
loan is prepaid prior to maturity. The
terms of the prepayment are usually
difficult to negotiate as banks tend to
have strict prepayment policies from
which they will not deviate. However, a
borrower should always insist that any
such prepayment penalty shall not apply
to the prepayment from the application
of insurance proceeds in the event of a
casualty or condemnation.
Due on Sale: Virtually all commercial
mortgage loans will contain a due on sale
clause—that the borrower’s sale of the
collateral property without the consent
of the lender is deemed a default and the
loan becomes due and payable. While
this term is generally not negotiable
when the loan is secured by a single
property, in the case of a loan that is
collateralized by multiple properties it
is common for borrowers to negotiate
release prices for each collateral property
in the event they wish to sell one or more
of the properties during the term of the
loan without triggering the due on sale
clause. Additionally, borrowers may want
to negotiate an assumption provision
which would grant the purchaser of the
collateral property the ability to assume
the mortgage loan upon the payment
of an assumption fee (generally 1%
of the loan amount) and provided the
new purchaser meets the underwriting
requirements of the lender.
Permitted Transfers: The provisions
concerning the transfer of interests
in the borrower are usually a highly
negotiated term. This lender’s primary
concern is the control of the borrowing
entity. One of the many factors involved
with the lender’s issuance of a loan is
the relationship and comfort with the
principals of the borrowing entity. A
lender generally wants to ensure that
those principals will maintain control of
the borrowing entity throughout the term
of the loan. While this is understandable,
the principals should generally be free
to take on another equity partner and/
or make a transfer of their membership
interest in the borrowing entity for estate
planning purposes provided that they
maintain control of borrower.
Closing Costs: While the borrower
generally does not have much leverage
in the negotiation of the lender’s fees, it
is always a good idea to have all of the
fees detailed in the commitment letter if
only to avoid surprises at closing. Also,
it is prudent to carve out which fees are
refundable in the event that the loan does
not close through no fault of borrower.
Additionally, while you may not be able
to avoid payment of the closing fees and
costs, you may be able to persuade the
lender to allow you to pay certain costs
and fees from the proceeds of the loan at
closing rather than up front.
While the terms of the loan will
ultimately be set forth in greater detail
in the loan documents, a borrower
can save time, legal fees and stress if it
negotiates as many terms as possible in
the commitment letter.
Seth J. Bell is an associate in BBWG’s
Transactional Department, and handles all
types of commercial transactions, including
sophisticated commercial loans for borrowers
as well as lenders. Seth can be reached at
[email protected].
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