Since nearly thirty years, I have represented bothlenders and borrowers in commercial realty transactions. It has been clear thatmany Buyers don't have a good understanding of the requirements for acommercial real-estate loan. The chancesof closing a commercial real property transaction successfully are greatlydiminished if you don't understand the basics.
All parties should keep in mind what the Buyer's lenderwould reasonably require to finance the purchase while negotiating the salecontract. Althoughthis may not be the main focus of the parties, it is important to remember thatthe Buyer's lender will reasonably require the purchase in order for the dealto close.
Sellers and their agents often believe that the Buyer'sfinancing problem is theirs. Sellers should be interested in facilitating Buyerfinancing. What number of salestransactions can be closed if the Buyer is unable to obtain financing?
This does not mean that Sellers can interfere with theBuyer's relationship with its lender or be involved in the Buyer's financing. This does not mean thatSellers should know what information the Buyer needs to provide to its lenderin order to obtain financing. It just means that Sellers should be able to workwith the Buyer to get that information.
Basic Lending Criteria
Lenders who are involved in commercial real estate loansoften have similar documentation requirements. These requirements must bemet before the loan can be funded. Theloan must be funded before the sale can proceed.
Lenders have two primary lending criteria.
1. The borrower's ability to repay the loan.
2. Lender's ability to collect the entire amount of the loanincluding accrued and unpaid interests and any reasonable collection costs inthe event that the borrower defaults on repayment.
These two criteria are the foundation of any loan. Nearly all documentationused in closing a loan must meet these criteria. While there are many regulations and legal requirements thatlenders must comply with, these basic lending criteria are what the loanclosing process aims to establish for the lender. These criteria are the primary focus of regulators such asthe FDIC who ensure that lenders follow safe and sound lending practices.
Commercial real estate lenders are unlikely to lendwithout collateral that will guarantee repayment of the entire loan amount,including accrued and unpaid interests, as well as all costs of collection.This is even if the borrower has a substantial independent ability to repay theloan. We have seenthat changes in economic conditions can alter the ability of borrowers torepay. This could be due to changes in economic cycles, technological changes,natural disasters or divorce. A sufficientamount of security is required for any loan of substance. Prudent lendingpractices are necessary.
Documentation of the Loan
Documenting a commercial realty loan is not easy. There are many issues toresolve and documents that must be drafted, but they can all be managedefficiently and effectively if everyone involved in the transaction recognizesthe legitimate needs and plans the transaction and the requirements to satisfythose needs within the context of the sale transaction.
The credit decision to issue a loan commitment is basedprimarily upon the borrower's ability to repay the loan. However, the closingprocess of a loan focuses on documentation and verification of the secondcriteria. This includes confirmation that collateral is sufficient to guaranteerepayment of the loan.
