Tampa Bay Business & Wealth Magazine – January 2022
Tips for a Successful Commercial Loan Closing
By: Paul Rush
In the wake of the COVID-19 pandemic, teamwork and efficiency are paramount when it comes to closing a commercial loan transaction. For newly established and veteran commercial lenders, real estate owners, investors, and developers alike, the commercial loan closing process can be daunting, time-consuming, and expensive. Commercial loan closings do not just happen overnight; all of the parties involved and their respective advisors help pave the way for a successful closing experience. Here are a few tips to keep in mind when closing a commercial loan:
Prepare a Closing Checklist of Requirements
Developing a transaction plan and detailed checklist should be the first step in any loan closing process. Your closing checklist must guide all parties involved as to the necessary steps and requirements in order to fund the loan. Specific requirements for commercial contracts and loan collateral requirements can differ vastly in terms of what may be required from a lender, so having an overall picture of what each party is responsible for is crucial. Lastly, it is important to note that once an item on a closing checklist is provided, this does not necessarily mean that it is acceptable to the lender, lender’s counsel, or other approving party. As such, your checklist should be informative and updated on a regular basis to show what items require further action or discussion. A thorough checklist is just one tool that can assist all parties with achieving target closing dates.
Importance of the Loan Commitment and Initial Terms
A lender’s loan commitment is not a mere formality. In addition to identifying the key terms of the commercial loan (loan amount, interest rate, collateral requirements, repayment terms, etc.), the loan commitment contains requirements and sets forth specific conditions that must be satisfied before the lender will advance any loan proceeds. Some of these conditions can impose substantial burdens or may conflict with the overall nature of business operations. Because a loan commitment provides a road map for the closing, even mundane details – the wrong property address, incorrect borrower or guarantor names, for example – can easily get a closing off-track from the very beginning.
Be Prepared for Potential Third Party Delays
It is important to recognize that any closing deadline important to the parties involved in a commercial loan transaction may seem meaningless to un-related third parties whose participation is vital. These third parties can include government agencies, surveyors, environmental experts, appraisers, or other professional vendors, entities, and individuals that are not a representative of a lender, buyer, or seller. Experienced legal counsel can recognize when a delay seems to be occurring and push for a timely response when necessary.
Address Any Real Estate Collateral Issues Early
When real estate is the center-piece of a commercial loan, it is important to gather all information available on the real property as soon as possible. Unlike other personal property commonly pledged as collateral, real property contains many legal nuances that can complicate and delay your closing if you are not adequately prepared. Regardless of loan-to-value, lenders will not close until the lender is assured that title on any real estate collateral is sound. Prior to closing, a borrower should position itself to have the title transferred to its borrowing entity (if different). Most lenders will require any old mortgages be discharged and all leases subordinate to the new financing. Relatedly, the borrower should make sure that all leases are current, security deposits are properly accounted for and that all landlord obligations have been fulfilled. The borrower should take care to ensure that the conditions of any land use permit have been satisfied and that the property complies with all zoning and land use regulations.
Make sure all Corporate and Organizational Documents are Current
Not paying attention to the legal requirements for corporations or limited liability companies is a sure way to derail your closing and add costs to the transaction. Borrowing entities and all entity guarantors should be duly formed, in good standing, and registered to do business in the jurisdictions in which they operate. Corporate and limited liability company record books, bylaws, shareholder agreements, or operating agreements should be up-to-date. Borrowers should be wary of using form template corporate documents, as they are notoriously inadequate and a lender’s counsel will probably insist on revisions. Although the costs and time to polish corporate documents may add up, updating governing documents on an ongoing basis may be more cost-efficient than dealing with updates on an expedited basis at closing.
Although, each commercial loan transaction may differ in many ways, taking into account these tips will show that you’ve done your research and have done everything possible to allow for a smooth commercial loan closing. If you still need help with this process, however, consider engaging experienced legal professionals to guide you toward a positive loan closing process.
Paul F. Rush is a shareholder at Trenam Law and a member of the firm’s Real Estate and Lending Group. He can be reached at prush@trenam.com.
