BBWG June 2014 Newsletter June 2014 | Page 3

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]. 3