Close Faster and Avoid Unpleasant Surprises
Resolve business and legal issues before signing loan commitments
moSt conventional commercial
lenders use loan-commitment forms
to list major business points and pro-
visions that will be included in loan
documents. These commitment forms,
therefore, serve as a template for the
drafter of the loan documents. In reality,
a commitment letter is not a proxy for
loan documents, and it cannot possibly
cover all issues.
One of the most common areas of tension between lenders and borrowers is
the extent of the lender’s control over
the collateral. Lenders want to maintain
the value of the collateral and will seek
to retain consent rights over major decisions that can impact the underlying
real estate. Borrowers are likely to resist
what they may consider to be microman-agement by the lender. The loan commitment letter should strike a balance
between these concerns and provide a
clear path for both parties.
For example, some commitment letters
have blanket lender-consent requirements for all new leases, amendments
or terminations. Lenders consider leases
critical for creating income stream for the
property and they likely want to monitor
and oversee new leasing activity, which
won’t be welcome by borrowers who try
to limit a lender’s involvement.
In an attempt to soften that requirement, borrowers and lenders should
consider a standard approach of incorporating carve-outs for minor leases.
For example, the consent requirement
would not pertain to tenants who occupied less than a certain rentable square
footage of the building. This percentage
should be negotiated and included in
the commitment letter.
Lenders also may seek to include
cross-default provisions between the
loan and a major tenant’s lease. For
example, a lender in a small shopping
center certainly would want to be able
to take action if the major anchor tenant defaults on its lease. Such a default
— in the eyes of the lender — could create an immediate cash-flow problem
for the borrower and possibly impact
payments of debt service.
Borrowers have a number of compromised positions in this regard that
should be considered in the loan commitment. A borrower may suggest
that the loan is not to be considered
in default as long as the debt service
is current, and the borrower finds a replacement tenant within a certain number of days. Alternatively, a borrower
may allow a default, but limit the rem-edies for that class of default only.
A second, but less-negotiated
area of lender control involves major
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Marc Fitapelli, Esq. is the founder and
managing partner of Fitapelli Law, a New
York City-based corporate and real estate
law firm. Fitapelli’s practice focuses on
commercial real estate, and he represents
owners, tenants and lenders nationwide.
Reach Fitapelli at (646) 201-9208 or at