Using real estate as collateral when borrowing money can be an agonizing and confusing experience. The lender, terms, process, law, qualifications and requirements change periodically.
It doesn’t matter what the money is needed for; as soon as you determine you need money, the process commences with one or more lenders.
Discussions and applications lead to negotiations, which lead to written documentation of the understanding. The next step is usually to submit the loan to the lender’s loan committee for approval and completion of the loan terms, reduced to writing in a Loan Commitment Letter (LCL). Generally, an LCL will set forth the loan’s terms, provisions and conditions.
LCLs vary from lender to lender but commonly include the loan amount, interest rate, payments, term or maturity date, lender fees, cost reimbursement and a general description of other terms, conditions and requirements of the loan.
As frequently occurs with legal documents, the devil is in the details. To avoid problems, there are several issues you should address early in the process and include in the LCL. These include:
* Borrowing entity
* Uses of the money
* Personal guarantors (if appropriate)
* Terms of the guaranty
* Prepayment right or penalty or dollar amount
* Percentage of principal payoff amount
* Escrows for taxes, insurance, repairs and maintenance, etc.
* Draw schedules, if money is not advanced in one lump sum at the closing but disbursed at intervals and occurrence of certain events
* Insurance for property, hazard, and life
* Financial data required for final loan approval and in the future
* Restrictions on transfer of title or any interest in the property, including sales and junior financing
Further inquiry should be made if the loan is styled “nonrecourse with carve outs.” Borrowers are liable for carve outs. Recently, a client was told that his loan was nonrecourse except for carve outs. When he examined the loan documents, there were 34 carve outs or things that he was liable for, even though he was told it was nonrecourse.
Many lenders are reluctant to change their standard LCL but may be willing to give the borrower a separate letter containing additional agreements. Since most agreements state that the only thing that counts is what is in writing, not anything stated orally, the former is the prudent course of action for a borrower.
Prior to signing the LCL and paying any fees, the borrower should request and review a blank set of closing documents from the lender. An inquiry of the lender about terms, conditions and provisions that results in the answer that the standard lender’s documents will be used is not informative or helpful to the borrower.
On the other hand, there is an administrative and time cost to the lender to furnish this documentation prior to receiving any fees or a signed loan commitment letter, as the loan could be shopped to other lenders.
The bottom line is that, because the LCL is the foundation or base on which the loan closing documents are drawn, it is critical to closing the loan that you avoid mistakes and surprises. You are advised not to routinely sign the LCL you are presented and then call your lawyer and ask, ‘Tell me what have I gotten myself into?’
Bruce P. Cohen is a partner with Gambrell & Stolz LLP. His practice areas include real estate, commercial and residential, finance, foreclosures, title insurance and leases. Reach him at (404) 221-3401 or [email protected].
