Successfully Negotiating Commercial Loans

Intelligent borrowing is a critical element of becoming a successful real estate investor.  Whether the investment property is a multifamily development, such as an apartment building, or a commercial office building, having the right loan can make the difference between a project that generates a robust stream of income for its owner and one that risks becoming a liability for the borrower and, potentially, the lender.

What some owners do not realize is that commercial loans and the tens or hundreds of pages of documents that comprise the loan agreements are not take-it-or-leave-it transactions.  Tailoring an agreement to suit the needs of the particular borrower, bank and property will benefit all parties, because it helps to prevent default and conflict, which can destabilize the building, scare off tenants and threaten the profits of both lender and owner.

With that in mind, below are some of the most commonly negotiated categories of loan terms, in my experience, in no particular order:

• Grace period and notice requirements before a default may be declared;
• Borrower warranties and disclosures regarding the condition of the property (these should reflect actual known conditions, rather than simply warranting an absolute absence of defects);
• Borrower warranties regarding the financial condition of borrower (failure to tailor these warranties may result in additional non-recourse liability for the borrower);
• Applicable law, jurisdiction and venue for any disputes;
• Ongoing financial reporting requirements, which can have a tremendous effect on the cost of the loan to the borrower;
• Prepayment penalties and what constitutes "prepayment";
• The initial and renewal terms of the loan, including conditions for extending the maturity date;
• How rents are handled and by whom;
• Due-on-sale provisions, including defining what constitutes a prohibited sale;
• Debt service coverage ratio ("DSCR") requirements;
• What constitutes an event of default;
• Allocation of expenses related to closing and servicing the loan.

This is not an exhaustive list, but is intended to provide examples of areas within the loan documents that may be worthy of special attention.  Of course, once you have identified areas requiring specific attention, you will want to negotiate modifications and draft revisions in such a way that they will satisfy the needs of each side, without causing undue conflict.  A skilled attorney will be invaluable in that process.

- Ryan D. White