In today’s competitive environment, having information and knowledge can mean having a tremendous advantage over the competition, the difference in closing a transaction quickly, or even closing it at all.
Mitchell Fogel
If the idea is to be as prepared, thus making the closing as good an experience as possible for the broker and the buyer, then one sure way is to know what to expect from the lender and its counsel.
Here are the top 10.5 things a lender’s counsel thinks about regarding a commercial real estate transaction.
1. Whose on first, What’s on second, and I Dunno’s on third. It may seem obvious, but the loan will NOT fund - and the deal will NOT close - without establishing in detail and delivering to lender and its counsel critical, current and complete information about the borrower, the seller and, when applicable, the guarantor(s). That means all of the names of the parties and, where entities are involved, the formation and governing documents of the applicable entities.
As simple as this seems, it is often one of the biggest areas of breakdown in getting the loan ready to close as the parties (usually the buyer, but often the guarantors) may form a new entity; may assign the contract to a previously unknown or unformed entity; may change the owners, principals or managers of a critical entity; or may modify the governing documents of a vital entity. To avoid delays in closing, always make sure that the most current information and documents - and all amendments or modifications - are timely delivered to lender and its counsel.
2. Life begins at contract-ception. In every deal I have been a part of as counsel for buyer, seller or lender, there has been a written contract executed by the necessary parties to the deal. Lender’s counsel must have a complete and legible copy of the contract (including any and all exhibits, amendments and other related documentation) and will use the contract in preparing the lender’s closing checklist. This document that provides what materials, conditions and data must be delivered, satisfied and/or prepared prior to closing. Also, any changes to the contract after it is delivered to the lender’s counsel must also be received by such counsel or the closing can be delayed.
3. Show me the money. If the contract calls for a deposit, or a number of deposits, then make sure each has been delivered to the applicable escrow agent and evidence of each deposit made is given to lender and its counsel.
4. Now, show me the survey. In most commercial real estate transactions, unless the subject property is a condominium unit, it is in the best interests of the buyer to have a current survey of the subject property prepared, and it should show and label all applicable title matters. With the survey, buyer and lender can make an informed decision about the property, its condition and matters that affect title to it. Lender’s counsel will need to have sufficient time to review the survey and related matters that affect the subject property. Plus, the survey must be certified correctly (usually to the lender, the title insurance company, the buyer, and the closing agent).
5. He said, she said. Effective communication among the essential parties is critical having a smooth closing. Therefore, the lender’s counsel must receive, early in the process, the names and contact information of all parties and their representatives (i.e., lawyers) in the transaction. Often, the broker can be a tremendous asset in this area.
6. What’s mine is mine, and what’s yours is mine. In a commercial real estate deal and the loan that funds it, the buyer’s “status of title” is what is most important to the lender and its counsel. The lender decides to make its loan - and determines what the loan terms will be - based upon a number of factors, one of the most significant being the priority of its lien on the subject property.
While searching a status of title has become easier over the years, depending on several factors, it still may take some time. Reviewing title matters can be quite complex, requiring the lender’s counsel to read and analyze many documents. It is not uncommon to include the services of a surveyor or other professional in determining the applicability of some title documents. Title review can be challenging and take quite a bit of time, so do not delay in having a title search performed and, where applicable, a title insurance commitment issued and delivered to the lender’s counsel. The lender’s counsel will not advise its client to close a loan unless it is certain that the lien will be in the position the lender requires.
7. Show me where the dead bodies are buried. Except for a commercial condominium, it is almost the rule that some form of environmental questionnaire, analysis, study or report will be required by the lender. If you think buyers don’t like surprises, then you’ll not be surprised to learn that lenders dislike them even more.
You should know that there are very few exceptions to the lender’s requirement that this pre-closing condition meet the lender’s and its counsel’s satisfaction. Quite simply, the lender will not fund the loan without it. Plus, while an environmental questionnaire is relatively quick to prepare, an environmental study (i.e., a Phase 1 report) frequently is not. And, if any further analysis is required, that WILL take time. Therefore the best advice is - when the contract is fully executed, and if the lender requires an environmental analysis - don’t delay. Order it today!
8. How’d they do that? Ah, the appraisal. One of life’s great mysteries. Somehow, some way, the property is given a value by those all-knowing, all-powerful prognosticators of worth: the appraisers. This may be one of the toughest jobs in the commercial real estate industry. It takes experience and study, and it is critical to the loan process.
That means that the appraiser (like the surveyor) must meet the lender’s qualifications, and the bank will (or will not) make its loan based upon the value the approved appraiser gives to the subject property. The lender’s counsel will have this item as a high priority on its closing checklist, as the loan itself will not be done without the appraisal meeting the lender’s criteria.
9. The kitchen sink. Each commercial real estate transaction is unique, and there are times when there are other important facts, terms or conditions that are critical to disclose to the lender and its counsel very early in the process. The list is endless - virtually a kitchen sink of scenarios.
For example, franchises and gas stations have very specific agreements that affect the use of the subject property and, therefore, are subject to the lender’s review and approval. Other commercial properties may have tenants of all different sizes and leases of varied terms. There may be cross-access easements, deed or other use restrictions, property owner associations, zoning or code violation matters.
All of these are important to the lender’s counsel and must be addressed in the initial pre-closing phases of the transaction. A delay in getting the lender’s counsel information on any of these items may result in a delay of the closing, or perhaps no closing at all, thus frustrating the buyer’s and the broker’s objectives and creating unwanted consequences.
10. I’ve got you covered. If you have lived in Florida for 5 minutes, you know that property insurance is a very hot topic now and likely will be for some time to come. It is one of the essential ingredients in “baking the closing cake.” It is extremely unlikely that the buyer’s lender will close without the buyer obtaining insurance coverage acceptable to the lender, so have the buyer determine what are the lender’s insurance requirements as soon as possible, then diligently pursue satisfying them.
Insurance will most certainly be a pre-closing item on the lender’s counsel’s closing checklist, so get evidence of such insurance coverage - paid for in advance by the buyer - to the lender’s counsel. As we have all seen, the insurance market changes like the weather, so do not wait until the last minute.
10.5. Show me the money (again). While all of the pre-closing conditions are getting satisfied, keep your eye on the one of the last, but certainly not least important, ones: the buyer’s closing funds requirement. Generally, the buyer shall be required to come to the closing with funds sufficient to close the transaction, and such funds are usually in the form of a bank or cashier’s check, an attorney’s trust account check, or sent by wire transfer.
It is not uncommon for borrowers to lose track of this requirement, then have to scramble to come up with sufficient closing funds, thereby causing myriad of issues on the eve of the big day!
Mitchell Fogel is a partner in the Boca Raton-based law firm Belson, Fogel & Pekale LLP (www.bfplaw.net). His practice areas include commercial and residential real estate transactions, real property development, acquisitions, leasing and financing, title insurance and related matters.
See Also
Source: Florida Real Estate Journal
