Commercial Investment Real Estate July/August 2016 | Seite 16

FINANCING
FOCUS
Beware
of Loan
Provisions
The language in preprinted
lending documents could cause
you plenty of trouble.
w
by Jerome Grossman
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.
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
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July | August | 2016
“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.
Th 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.
Ambiguous Provisions
One popular provider of loan document
production soft 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.
Commercial Investment Real Estate
Th 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.