Avoid Real Estate Financing Roadblocks.
Financing delays are often caused due to inexperienced or lack of knowledge of the financing process. Keep your real estate or development deal on track by using an experienced real estate financing attorney who has represented borrowers on large real estate transactions. With a complex real estate project, you have enough to worry about, let us help you get your deal completed.
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Real Estate Financing for Commercial Properties
Term Sheets & Loan commitments
Term sheets and loan commitments are instruments used by a lender in anticipation of the making of a loan to a borrower. Both instruments detail the framework for the proposed commercial loan and will describe the material terms and conditions that are incident to such loan. The main difference between these instruments is the binding effect on which they have on the borrower.
A term sheet is an outline of the material terms and conditions to guide the lender and borrower but does not bind either side to such terms and conditions. As a practical matter, the parties proceed in good faith to adhere to the material terms of the team sheet. A loan commitment is normally more comprehensive than a term sheet and will require that the lender make the loan subject to approval by the lender of certain matters, such as review and approval of leases, title and survey, and zoning, among other considerations.
It is in the best interest for any commercial borrower to consult with a real estate attorney prior to executing a term sheet due to its influence on the loan commitment, which is eventually executed by the borrower and implemented into the loan documents. Given this long-term binding effect, owners who are negotiating a commercial real estate loan should strongly consider consulting with a real estate attorney at the outset of the transaction.
Promissory Notes & Loan Agreements
A promissory note is a financial instrument that evidences the indebtedness of a borrower to the lender under the loan. These notes are often negotiated between the parties and then drafted by a real estate attorney who can explain the details of the contract and answer questions the parties may have. A promissory note typically includes several essential elements including:
• The amount of the loan;
• The term of the loan;
• The frequency of payments;
• The interest rate;
• Information regarding prepayment;
• A list of loan defaults; and
• A description of collateral that is being used to secure the loan.
Alternatively, such provisions can be set forth separately within the loan agreement along with additional terms and incorporated by reference into the promissory note. The loan agreement may be an unsecured loan in which the agreement grants no security against the loan if the borrower defaults. Alternatively, the loan agreement may be secured (such as a mortgage loan) and enable the lender to recover assets as payment for the borrower’s debt, which commonly results in a foreclosure in the event of a borrower default.
Guaranty & Indemnification Agreements
Most sizable commercial real estate loans will require that an individual or entity aside from the borrower guarantee the obligations of the borrower under the loan agreement. A majority of such loans are made by lenders on a non-recourse basis, which means that the lender’s only course of recourse will be limited to the borrower’s interest in the property. Because most real estate holding companies are structured as single purchase entities, the lender will require a separate individual or entity who will guarantee that the obligations under the loan agreement will be honored in the event of a default.
Prior to executing a guarantee agreement, a guarantor should consult with a real estate attorney who can carefully review the scope of each guarantee being made. Guarantees will typically be tied to all assets of a guarantor and can potentially have devastating consequences for the guarantor if the lender enforces them.
Closing Documents & Coordination
In connection with a commercial real estate closing, both the purchaser’s counsel and seller’s counsel must prepare certain legal documents so that the closing may timely occur. Purchaser’s counsel is typically tasked with the drafting of any company resolutions for the purchasing entity, which authorize the entity to enter into the loan agreement and to purchase the property. Purchaser’s counsel should also provide the title company with detailed escrow instructions which described how the title company must handle the purchase funds and other related escrow documents. Seller’s counsel is typically responsible for the drafting of the deed, bill of sale, tenant estoppel certificates, and any required seller affidavits.
Both parties to a real estate transaction will place their documents and funds in trust with an escrow company who will process the transaction in accordance with the parties’ escrow instructions. The title company will produce a settlement statement that will be reviewed and modified by both parties before being accepted as final. Generally, the purchaser will immediately take possession of the property after closing and upon delivery of the deed. Following the closing, all representations, warranties, and obligations in the purchase and sale agreement generally terminate, except those which have been specifically identified to survive closing.
Land Installment Contracts
A land installment contract (also known as a land contract) is an agreement between a seller and buyer in a real estate transaction in which the buyer agrees to pay the seller the purchase price plus interest in installments over a certain term. Following the contracts execution, the buyer is able to take immediate possession of the property while the seller retains legal title under the terms of the land contract are satisfied. Land contracts are an alternative to traditional mortgage financing and can be used as a tool to provide more flexibility in transaction.
In Ohio, land installment contracts are governed by Chapter 5313 of the Ohio Revised Code. To be valid and enforceable, land installment contracts must contain specific criteria including the full names and mailing addresses of the parties, the date the contract was signed, the purchase price, and a legal description of the property. Additionally, any land contract must be recorded within the chain of title to the property so that third parties may be put on notice to the rights and interest claimed by the vendors under the agreement.
Land contracts come with both advantages and disadvantages that should be carefully considered when entering into such a contract. Given the complexities and long-term relationship that is created, any potential buyers or sellers under such terms should discuss the benefits and drawbacks with a real property attorney.