Understanding the Commercial Real Estate Lender

Most commercial mortgage lenders usually have the same or similar documentation requirements. Unless these requirements can be satisfied, there will be no loan and obviously there will be no sale. If the borrower wants the process to go smoothly and efficiently, it must be understood that the lender has two very important criteria. In evaluating a commercial mortgage application, the lender will always determine the ability of the borrower to repay the loan and the ability of the lender to recover the full amount of the loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the event the borrower fails to repay the loan.

In virtually every type of loan, these two criteria will decide whether or not the lender will make the loan. Nearly all the documentation in the loan application process is going to satisfying these two criteria. Of course there may be other documentation requested as part of the lender’s legal requirements, but it is these two criteria that are of utmost importance for the lender. This is the major part of the lender’s goal of following safe and sound lending practices.

A demonstrated evidence to satisfy criteria one, the ability to repay may result in a higher loan amount or a lower interest rate, but it will not effect the second criteria, which is the lender being sure there is adequate collateral. Few lenders engaged in commercial real estate lending will make loans without collateral sufficient to assure repayment of the entire loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, even where the borrower’s independent ability to repay is substantial and well documented. This is because the lender never knows when economic conditions can change which can effect the borrower’s business and the ability to pay.

Even though the application process can seem mysterious and overly complicated, if the parties keep in mind these criteria, things will go more smoothly. If there are problems to overcome and documents to draft or provide, they can all can be managed if the parties to the transaction recognize the goals of the lender and plan the transaction and the contract requirements with a view toward satisfying these criteria. Commercial real estate loans are usually for a substantial amount and involve property that cannot be easily sold. [pullquote-left]This is why most commercial real estate lenders approach commercial real estate closings by viewing themselves as potential “back-up buyers”.[/pullquote-left] They are always testing their collateral position against the possibility that the borrower will default, with the lender being forced to foreclose and become the owner of the property.

With this in mind here are the documents usually required by a commercial lender with regard to satisfying the second criteria. They are aimed at evaluating the property. Some of these documents may not apply to every commercialproperty, but this an accurate estimate as to what can be reasonably expected:

  • Operating Statements for the past 3 years reflecting income and expenses of operations, including cost and timing of scheduled capital improvements.
  • Certified copies of all Leases.
  • A Certified Rent Roll as of the date of the Purchase Contract, and again as of a date within 2 or 3 days prior to closing.
  • Estoppel Certificates signed by each tenant, applicable, (or, typically, tenants representing 90% of the leased
  • GLA in the project) dated within 15 days prior to closing
  • Subordination, Non-Disturbance and Attornment (“SNDA”) Agreements signed by each tenant
  • An ALTA lender’s title insurance policy with required endorsements, including, among others, an ALTA 3.1 Zoning
  • Endorsement (modified to include parking) [or if a multi-tenant property, an ALTA 3.0 Zoning Endorsement (modifiedto include parking), ALTA Endorsement No. 4 (Contiguity Endorsement insuring the mortgaged property constitutes a
  • single parcel with no gaps or gores), and ALTA Access Endorsement No. 17 (insuring that the mortgaged property has
  • access to public streets and ways for vehicular and pedestrian traffic);
  • Copies of all documents of record which are to remain as encumbrances following closing, including all easements, restrictions, party-wall agreements and other similar items;
  • A current Survey prepared in accordance with the Minimum Standard Detail Requirements for ALTA/ACSM Land Title
  • Surveys certified to the lender, Buyer and the title insurer, including items 1 through 4, 6(a), 7(a), 7(b)(1), 8 through 10(a), 11(a) and 14 from the Surveyor’s “Optional Survey Responsibilities and Specifications” referred to as “Table A”;
  • A satisfactory Environmental Site Evaluation Report (Phase I Audit) and, if appropriate under the circumstances, a Phase 2 Audit, to demonstrate the property is not burdened with any recognized environmental defect
  • A Property Condition Assessment Report [ASTM Standard 2018] to evaluate the structural integrity of improvements and general physical condition of the property.

Some of this documentation will come from the seller so the seller’s cooperation in the application process is vital. To be sure, there will be other requirements and documents the Buyer will be expected to satisfy as a condition to obtaining funding of the purchase money loan, but the items listed above are virtually universal. It is important that the obligations of the seller to provide these documents be contained in real estate sales contract. If the parties do not draft the purchase contract to accommodate timely delivery of these items to lender, the chances of closing the transaction are greatly reduced.

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