Checklist Swords And Appraisal Torches: How To Close A Commercial Real Estate Loan

There are many tasks that must be completed for a successful commercial real estate loan closing

. So whether you are a solo entrepreneur or the finance chief with a loan coordinator on staff, here are the major items to be juggled by the borrower.

Provide collateral documents and access. The borrower is usually responsible for sending a form lease to the lender which will become an exhibit to the loan and the basis for future lease pre-approval. All existing leases, contracts and other agreements affecting the collateral must be given to the lender for review and approval. Sophisticated borrowers provide secure, on-line access to electronic documents affecting the collateral. Lender counsel and borrower counsel should also be given document access to limit or eliminate paper document delivery.

Manage estoppel and SNDA document flow. The borrower or borrower counsel is usually responsible for completing, distributing, tracking, collecting and returning these documents to the lender prior to closing. The lender typically provides a form document with placeholders to merge tenant lease data. Ask your attorney to review the documents prior to sending to your tenants. Negotiate with your lender to limit the requirement and return less than 100% of the total leases. Lenders will usually insist on getting these documents from your major leases. Get started early because this is usually a long lead time item.

Coordinate third party reports. You or your loan coordinator must closely organize the activities of the third party report providers. The lender will require the following independent reports prior to loan closing:

Environmental Site Assessment (ESA): Your commercial lender will require an environmental survey of the property. Lenders are keenly aware of the potential for financial exposure from a long list of environmental contaminants and use the ESA as a risk mitigation tool.

Physical Site Assessment (PSA): Like the ESA, the PSA is conducted by an independent engineering firm. The PSA provider will conduct a physical examination of the property including mechanical, structural, electrical and plumbing components.

Property Zoning Report (PZR): The zoning report is required by lenders to ensure compliance with all local, state and federal property restrictions. Use a third party zoning report consultant instead of trying to secure a zoning compliance letter from the local government.

Preliminary Title Report (PTR): Review the PTR for exceptions to title insurance which may include recorded liens, a lease memorandum or other clouds on title. Clear as many of the exceptions as possible before closing by providing supporting documentation to the title company. Also look at the requirements from the title company and get those cleared well ahead of closing.

Appraisal: The appraisal firm hired for your loan closing will determine the property value which directly impacts the loan amount. You should review the draft appraisal for accuracy, especially financial data, which impacts the capitalized value. Look for missing income and inflated expenses that impact the net operating income calculation. Nobody knows your property better than you.

Utility Will-Serve: If you are closing on a construction loan the lender will probably require letters from all the major utilities indicating they will provide service to the property upon completion.

Query for representations and warranties. Your loan agreement will contain statements about the borrower, collateral and the borrower sponsor if there is a loan guaranty. These statements take the form of representations, warranties and promises or covenants. Are these statements true or do they require a qualifying statement? Avoid a potential loan default by being thorough in your investigation.

Track the closing checklist. Someone at the borrower should closely follow the checklist items that need to be completed and manage the person responsible for fulfillment.

Prepare for the Closing Day. The borrower will be moving quickly on the days just before closing. Settlement statements must be verified for completeness and accuracy. Wiring instructions to the borrower account for excess loan funds must be provided to the lender or title company a few days before closing. Ensure sufficient funds are available to wire into closing if there is a loan funding shortfall.

The loan closing is just the beginning. Be sure to track and complete the post closing obligations such as rounding up outstanding documents. Make your initial introduction to the loan servicer who may or may not be affiliated with your lender.

There are many pre-closing items that must be completed prior to the loan funding date. You can juggle them yourself or hire a reliable loan closing coordinator but make sure they get done to ensure your loan closes smoothly and on time.

by: Michael Shelton

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