For more than 30 years, I've represented lenders and borrowers in commercial real property transactions. Through this period, it has become clear that the majority of buyers do not have a good understanding of what documentation is needed to support the commercial real estate loan. If the fundamentals are not understood and understood, the chances of completing the commercial real estate deal is significantly diminished.

In the course of making the deal, everyone must keep an focus on what the lender of the buyer would reasonably expect as a condition for financing the purchase. This might not be the thing parties are trying to concentrate on however if this element of the transaction is left unnoticed and the deal is not even close.

Sellers and their representatives often declare that financing of buyers is the responsibility of the Buyer not theirs. However, facilitating Buyer's financing is certainly an interest for Sellers. How many sales transactions will conclude if the Buyer is unable to find financing?

This does not mean that Sellers should interfere with relationships between buyer and the lender, or be actively involved in obtaining the Buyer's financing. It is, however that the Seller must know what details regarding the property that the Buyer has to provide its lender to get financing, and that the Seller must be prepared to cooperate fully with the Buyer in all regards to supplying the required information.

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Basic Lending Criteria

The lenders who are actively involved in the making of loan secured with commercial real estate usually will have similar or identical requirements for documentation. If the requirements cannot be fulfilled, the loan may not be able to be funded. If the loan isn't paid, the sale is unlikely to close.

For lenders, the goal always is to set two fundamental lending requirements:

1. The borrower's ability to pay back the loan and

2. The lender's capacity to recover the entire value of the loan including principal outstanding as well as accrued and unpaid interest as well as all reasonable costs of collection in the event that the borrower fails to pay the loan.

In the majority of loans of every kind these two criteria are the foundation of the lender's desire to grant the loan. Nearly every document used during the process of closing a loan will satisfy these two requirements. There are additional laws and regulations that demand compliance by lenders, however these two fundamental lending requirements are for the lender what the closing process will establish. They are also the primary goal of bank regulators, including the FDIC to ensure that the lender is adhering to prudent and safe lending procedures.

A few lenders involved in commercial real mortgages are willing to make loans with no collateral that can ensure the full repayment of the loan, which includes outstanding principal due, unpaid interest and accrued as well as all reasonable costs of collection, regardless of whether the borrower's ability to pay back the loan is significant. As we've seen many times, changes in economic conditions, be it caused by normal economic cycles, shifts technological advancements, natural catastrophes divorce, death and even terrorist attacks or war, may alter an individual's "ability" of a borrower to repay. A prudent lending practice requires an adequate amount of security for loans of any significant amount.

Documenting The Loan

There is no magic formula for documenting a commercial real property loan. There are issues to address and documents to write however, all of it can be efficiently and effectively managed when all parties involved in the deal recognize the legitimate requirements of the lender and design the deal and contractual requirements to meeting these needs within the context of the sale.

The credit decision to grant an obligation to lend is mostly on the capacity of the borrower in repaying the loan, the closing process is primarily focused on verification and documentation the second criteria stated which is confirmation of the security adequate to guarantee the loan's repayment, including the entire principal, accrued, and unpaid interest, late charges or attorneys' fees, as well as other collection costs, in the event that the borrower is unable to pay back the loan.

In this regard In this regard, the majority of commercial real estate lending institutions take commercial real estate closings in the manner of "back-up buyers". They constantly test their collateral positions against any possibility of buyer/borrower will default, which could result in the lender having to foreclose, and then become the property's owner. The documentation requirements are designed to put the lender, in the event of foreclosure, in the same in a position that they would need to be in as a direct purchaser of the property, with the possibility that the lender will have be able to offer the home to a advanced buyer to pay back the amount to their debt.

Top 10 Lender Deliveries

When documenting the terms of a commercial real estate mortgage the parties need to recognize that almost all commercial real mortgage lenders will have to require the submission one or more of these "property documents":

1. Operating Statements for the last three years that reflect the operating income and expenses including the cost and time of capital improvements scheduled;

2. A certified copy of each Leases;

3. A certified Rent Roll at when the Purchase Contract and on a date that is two or three days before closing

4. Estoppel Certificates that are signed by every tenant (or usually tenants who make up 90 percent of the lease GLA within the project) with a date of 15 days of closing;

5. Subordination, Non-Disturbance, and Attornment ("SNDA") agreements signed by each tenant

6. The ALTA Title Insurance policy for lenders that has required endorsements, such as among them the ALTA 3.1 Zoning Endorsement (modified to include parking), ALTA Endorsement No. 4 (Contiguity Endorsement ensuring that the mortgaged property is a single parcel without Gores or gaps) as well as the Access Endorsement (insuring that the property being mortgaged is accessible to public roads as well as ways to allow pedestrian and vehicular traffic);

7. Copies of all the documents of record, which will remain encumbrances in the event of closing, which includes all easements or limitations, party wall agreements and similar items;

8. A up-to-date Plat of Survey prepared in conformity with the the 2011 minimum standard detail for ALTA/ACSM Title Surveys that have been certified to the buyer, lender and the title insurance company;

9. A positive Environmental Site Assessment Report (Phase I Audit) and, if necessary given the circumstances the need for a Phase 2 Audit, in order to show that the property isn't affected by any environmental defect.

10. An Site Improvements Inspection Report to examine the structural strength of the improvements.

There will be additional conditions and obligations that the buyer will have to fulfill prior for obtaining financing of the loan for purchase however, the requirements mentioned above are almost all-inclusive. If the parties fail to prepare the purchase contract to permit prompt delivery of these items to the lender, the odds of closing the deal are significantly decreased.

Planning for Closing Costs

A closing procedure for real estate deals in commercial transactions could be costly. Along with drafting the Purchase Contract to accommodate the documentation requirements of the lender to whom the buyer is borrowing and the Buyer's advisors must be aware of and properly plan for the cost of taking an commercial real estate deal through the closing phase.

If Buyer's counsel who is competent and an experienced lender's attorney collaborate, and each knows what needs for the deal completed and the closing costs is reduced to a minimum but it will be massive. It's not uncommon to see closing costs associated with commercial real estate transactions and even the most common closing issues to exceed thousands of dollars. Buyers need to be aware of this and be ready to accept it as a part of operating a business.

Highly educated buyers understand the expenses that are involved in documenting and concluding the commercial real estate deal and include them in the total costs of the transaction like other expenses like the agreed-upon purchase price as well as brokerage commissions for real estate and loan brokerage fees. charges for loan commitment and similar.

Costs for closing can be substantial costs for a transaction and should be considered as part of the Buyer's decision-making process when deciding whether or not to go with an investment in commercial real estate. These are essential expenses that increase the expenses of purchasing commercial real property. They should be taken into consideration when determining an "true purchase price" to be paid by the buyer for the purchase of a specific project, and also to determine the expected yield of an the investment.

Some closing costs could be transferred to the Seller by custom or efficient contract negotiations, however many will ultimately be the responsibility of the buyer. They could easily amount to hundreds of thousands of dollars for a moderately sized commercial real property transaction within the $1,000,000-$5,000,000 price range.

Costs that are often ignored, but always present, are title insurance, which requires lender endorsements and the ALTA Survey, environmental audit(s) as well as an Site Improvements Inspection Report and the most surprising, Buyer's attorney's costs.

For reasons I cannot understand I am not sure why, novice buyers of commercial real estate and some even more experienced Buyers, almost always underestimate the cost of attorneys for any particular transaction. It's not because they're unpredictable as the costs a buyer has to pay its own attorney and the attorney of the lender typically amount to 1 percent of the purchase Cost. Maybe it is due to an illusion of typical low fees for attorneys that attorneys charge for residential closings of real estate. In real life, the degree of sophistication, as well as the amount of work required to thoroughly analyze and document a deal for a buyer or Seller of Commercial Real Estate, renders comparisons to traditional residential property transactions unwise. Professionally trained Commercial real estate buyers are aware of this. More novice commercial real estate buyers need to be able to budget the cost of this purchase.

Conclusion

The conclusion of negotiations regarding the purchase or sale of a large commercial real estate development is an exciting experience, but until the deal is concluded it's only writing on paper. To close the deal the contract needs to anticipate the documents the buyer will have to submit to its lender in order to get the financing for purchase. The buyer must also understand the huge expenses involved in the process of closing, in order to be able to prepare its cash needs to close. If you have a good idea of what is required and the advanced planning required to meet those needs the probability of closing successfully will be substantially increased.