The reasons property developers and owners borrow money are as varied as the types of loans and lenders available: acquisition; rehabilitation; and re-financing are common. A veritable buffet of lenders is available to those in need of funding, including: all sizes of conventional banks; pension funds; insurance companies; hard-money lenders and private individuals, just to name a few. Loan rates, terms and structures vary greatly depending on the nature of the project as well as a borrower's financial picture and can become creative and complex, very quickly. By the time a borrower is presented with a loan application or commitment letter, they've often spent a good deal of time and energy working with brokers, shopping various lenders, analyzing and negotiating loan terms, and are ready to get their project rolling forward. Invariably, numerous other issues and ticking timelines demand attention. One memorable client and I used to joke that the entire process is like herding cats! It is at this point, where limited time and an ever expanding task list tempts one to 'just sign and move on', where it behooves one to slow down and proceed cautiously. Before putting pen to paper on loan applications, loan commitments and loan documents, and then closing and pulling down funds, there is more to think about. To ensure a smooth project, its essential for borrowers to have an attorney they can rely on to help ensure their interests are properly represented and protected in the loan documents, while paying attention to the loan closing timeline and its relation to other timelines.
Borrowers should have their attorney review the loan application and loan commitment before executing.
Most lenders require borrowers to provide a legal opinion certifying the enforceability of the loan documents but experienced borrowers understand they need counsel for more than the borrower’s opinion letter. Wise borrowers involve their attorney early in the process and have them review the loan application and commitment before executing them. Sometimes, lenders provide an abbreviated loan commitment and a dense loan application containing material terms and providing for substantial fees up front, when the application is executed. Therefore, early and as often as necessary, borrowers should have a detailed discussion with their attorney concerning their project and plans for the funds, their overall timing requirements, and any burning questions or issues they have about the loan process. Only then is it possible for the borrower’s attorney to effectively review the loan application and subsequent loan commitment with an eye toward confirming that the loan reflects the deal the borrower expects. When representing borrowers my initial approach is to follow the money. The application and/or the commitment addresses the fees, costs and expenses that the borrower will pay to the lender, such as application fees. While its important for a borrower to understand when these fees are due, its essential that the triggers for non-refundability of the fees make sense. Fees shouldn’t become non-refundable before studies such as environmental analysis and appraisals are approved and other approvals and conditions to closing the loan are buttoned up. Loan applications and commitments are often vague or inconsistent concerning refundability of fees but if the loan doesn't close because the lender is dissatisfied with the results of post application due diligence or due to issues beyond the borrower's control, the borrower should receive a refund of advance fees. Clients are very grateful when I'm able to remedy such refundability issues before they sign the application or loan commitment and it makes me feel great to add value early on.
Borrowers can best serve their own interests, and avoid delays, by involving their attorney in the conversation around the loan transaction as early as possible.
One of the primary tasks a borrower's attorney performs is reviewing loan documents and providing a borrower's opinion letter that is satisfactory to the lender and lender's counsel. Often, with commercial projects or even a straight forward re-finance, there are business entity structuring or restructuring tasks that must be completed. That is another example of how borrowers can best serve their own interests, and avoid delays, by involving their attorney in the conversation around the loan transaction as early as possible. Sometimes reviewing the loan documents for a borrower is a straight forward exercise confirming the documents match the business terms in the loan commitment, are compliant with Colorado law and don't contain any unwarranted or overly burdensome terms. However, since the actual loan documents are almost always prepared by the lender's counsel, I never assume that will be the case and want to get my eyes on the draft documents as early as possible. Invariably, the documents need help; sometimes its a little and sometimes, a lot. The amount of work required at this point is usually directly related to the complexity of the loan transaction and the sophistication of the lender and their attorney. I never cease to be surprised at this phase; even in the smoothest of transactions, often, lender's counsel is busy and working on several transactions at once and the draft loan documents contain incorrect or inapplicable terms and provisions. While rare, sometimes large and sophisticated national or global lenders, with out of state counsel, are unaware of Colorado's public trustee systems and require input and help with the deed of trust and other documents referring to the security documents. To my frustration (and horror), I've seen banks insist on using loan documents clearly designed for residential transactions and then balk at necessary changes to them. In the end, my point here is that while I always hope for loan document review and finalization to proceed smoothly, invariably there are issues, and sometimes they are numerous!
With the borrower's loan opinion, at a minimum, most lenders require opinions confirming enforceability of their loan documents, proper organization of any borrower entities and due authority of borrower signatories. Lenders usually provide a form of opinion they'd prefer borrower's counsel to execute. When representing lenders, from time to time I've seen borrower's counsel execute the suggested form opinion after merely confirming the accuracy of the listed loan documents and making a few minor changes. Again, I realize practitioners become very busy but in such instances I always feel badly for those borrowers! As is the case with legal negotiations over other standardized transaction documents, loan opinion letters usually warrant some borrower side revisions that come as no surprise when properly requested. In loan opinion letters drafted by lender's counsel, those include assumptions, qualifications and exclusions. Its on the borrower's counsel to draft such changes to the opinion letter and its true that borrower's counsel is the one most exposed by signing legal opinions without requesting, and where necessary, insisting on the appropriate changes, but, from the client's perspective, one has to wonder what else the attorney missed if they didn't appropriately limit the borrower's legal opinion!
When borrowing funds it behooves borrowers to adhere to the maxim, Caveat Emptor!
To conclude, while all parties in a loan transaction are eager to close and on a certain level, so long as payments are timely met there may be no problems, when borrowing funds it behooves borrowers to adhere to the maxim: Caveat Emptor! Whether a borrower is a seasoned and sophisticated real estate developer or an eager entrepreneur learning the ropes as they go with a smaller project, borrowers trying to pull a project together are pulled in several directions at once and even the most able cat herder can benefit from an attorney who understands their overall goals and who is well versed in helping facilitate loan transactions. Luckily, fee structures at Summit 6, based on statements of work, allow me to engage in preliminary conversations with clients as early and as often as they desire, off of the clock, so that both of us can get a handle on the overall picture, what needs to happen and how to get there most effectively. When representing borrowers my goals are: to be sure they are covered legally to the greatest extent possible, to shoulder the burden of nuanced legal issues in the loan documents to the extent my client is comfortable with that, and always keeping the transaction moving steadily toward a timely closing. Giddy Up, Cat Herders!