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Make the Most out of Your Next Commercial Mortgage Loan

Peter T. Currin

Is there a commercial mortgage loan in your future?  Whether you are buying a new investment property, acquiring an owner-occupied commercial property, or just refinancing an existing loan, the following tips could help you secure more favorable terms and ensure a smooth and timely closing:  

Begin talking with potential lenders about your loan request well in advance of the date you will need to close.  Anticipate that the lender will need a month or more to underwrite and approve the loan and another month to collect documentation and prepare the loan documents.  For larger or complex loans, especially construction loans, these timeframes may be even longer.  A lender is more likely to approve your loan if it has a reasonable period of time to analyze your request.   

Commercial mortgage loans are not as homogenous as residential loans.  There are many variables in a commercial loan transaction. Be sure that your loan officer is experienced with the type of loan you are requesting and understands your loan request.  Providing your lender with a written outline that describes your project, together with a proposed budget, will help your lender understand your lending needs.  Take the time to find a lender who can offer a loan structure and terms that are best suited to your particular needs.  

Unlike a residential mortgage lender, a commercial mortgage lender will not automatically provide you with a good faith estimate of closing costs.  Request an estimate of your closing costs early on to evaluate the financial costs of the loan; however, be aware that such estimates will only give you a range for your costs and typically are not absolute.  

Borrowers typically engage an attorney to represent them in commercial mortgage loan transactions.  The borrower’s counsel generally issues an opinion letter regarding the borrower’s entity and other matters, and reviews loan documents on behalf of the borrower.  If you engage an attorney, be sure the attorney has experience in commercial mortgage transactions.  An experienced attorney can help you understand, evaluate, and negotiate the loan documents.  Also, bring your attorney into the transaction as early as possible, particularly if the lender will be issuing a commitment letter.  Borrowers frequently make the mistake of getting their attorney involved after the commitment letter has been signed, which limits their attorney’s ability to help you negotiate the loan terms.

Commercial lenders usually engage an attorney to represent them in connection with the loan.  The fee charged by the lender’s attorney will be passed on to you as a closing cost and will generally vary according to the size and complexity of the loan and the extent to which you and your counsel negotiate the loan documents.  Although the lender’s attorney’s fee might not be established until shortly before the closing, the lender’s attorney may be willing to set a range for the fee to help you budget your closing costs. 

Some lenders have the ability to prepare commercial loan documents internally using standardized loan documentation, particularly for small, relatively simple transactions.  This can lower your closing costs by limiting or eliminating the role of the lender’s attorney. However, using standardized loan forms also makes it more difficult to negotiate changes to the loan documents.  Ask your loan officer how the lender intends to document your loan.  If the lender will be using standardized loan documents, ask for a copy of the documents early on so you and your counsel can review them.

Considerable attention in any commercial mortgage loan must be paid to “due diligence” items, which must be received by the lender before the loan can close.  Certain items, such as an appraisal, survey, and environmental audit, are prepared by third parties. Other items are provided by the borrower or the borrower’s counsel, such as title insurance,  evidence of property and liability insurance, entity formation documents (articles of incorporation, bylaws, or similar documents), certificates of good standing for the borrower and any corporate guarantor, and, if applicable, purchase contract, rent rolls, and leases for existing tenants.  If your loan is a construction loan, the amount of due diligence items could easily double, since the lender will need to be furnished documentation confirming that construction is ready to proceed and has been permitted by all appropriate governmental departments.

Make sure your lender or its attorney provides you with a clear list of the due diligence items required for closing.  This list should also reflect which party is responsible for furnishing each particular item. Review this list frequently to ensure that the due diligence items are being assembled in a timely fashion.  Proof of insurance and copies of entity formation documents – especially amendments to bylaws, partnership agreements, and the like – are frequent trouble spots. Try not to leave these items until the last minute.

Request a copy of the lender’s survey standards early in your discussion with the lender.  If your lender requires an “ALTA” survey, be aware that it will cost significantly more, and take longer to prepare, than a standard survey.  Make sure that the lawyer or title company preparing the title insurance commitment is in communication with your surveyor, since the survey must reflect all matters shown on the title commitment.  If the surveyor has the title commitment at the outset, the surveyor can avoid having to make costly revisions to reflect additional title matters.

Begin thinking about the closing logistics well before the closing date.  Who will sign the documents on behalf of the borrower and any corporate guarantors?  Are those individuals and any individual guarantors available to sign or will documents have to be mailed away for signature?  Get this information to the lender early so that the loan documents are prepared with the correct signature blocks and the closing process can be smooth and orderly.

Following these suggestions should improve your next commercial borrowing experience.
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