Stan Mullin specializes in the sales and leasing of industrial land and buildings in southern Orange County, California.

His areas of expertise include: entitlement, contract language, construction schedules, development, assessment district and community facility district bond financing and he specializes in corporate real estate matters.

Completing a Loan? The Final Steps

Authors: Stan Mullin, CCIM, SIOR & Don Smith, Sunrise Mortgage & Investment

As the 3rd and last installment to our articles on the subject of obtaining a loan to re-finance or purchase commercial property, this issue will deal with the remaining documents you will likely execute and summarize the process.

As a review, in first article we discussed the merits of using a loan broker or working direct with a lender, how you can reconcile the differences between loan quotes, the costs and documentation involved in financing and determining when the borrower can have confidence that a commitment to fund has been obtained. The second article addressed the letter of commitment, Deed of Trust, Deed of Trust Note and the Assignment of Lessor’s Interest in the Lease(s).

Certificate and Indemnity Agreement – This document, similar to the AIR Property Information Sheet (which we recommend you have completed by any landlord or seller), is an affirmative statement by the borrower to the lender that he or she is unaware of any of the following conditions:

1. If the property’s use is not in compliance with existing laws
2. If the site is contaminated
3. If the tenant’s have improperly handled hazardous materials on site
4. If the property was not built in compliance with building codes.

It goes on to state that the seller/borrower will notify the lender if there are any code violations, site contamination or if liens are placed against the property. As well, the borrower is required to indemnify the lender against losses due to these situations. Signed and notarized by the borrowing entity. A personal guarantor will also execute as an individual.

Tenant Estoppel(s) – Each states that: a) the tenant(s) which occupy the property, are open for business, b) all of the landlord’s incentives to effect each lease has been provided, c) the tenant(s) are not in default of their agreements, d) each lease has not been amended (other than what has been provided to lender), e) no claims have been made against the landlord and f) there are no side agreements between the borrower and his/her tenants. Each tenant must sign these.

Subordination Non-Disturbance Agreement (SNDA) – Depending on the number of tenants, lenders may require the tenant to execute a SNDA. With this document the tenant agrees to subordinate the lease position allowing the lender’s lien to be senior to the lease. In turn the lender agrees to allow the tenant continued use of the leased premises if the lender forecloses as long as the tenant is not in default of the lease. The tenant, lender and borrower must sign these.

Borrower’s Warranty Letter – This form letter is prepared by and addressed to the lender, is from the borrower, and warrants the same issues as in the Certificate and Indemnity Agreement. Signed and by the borrowing entity and personal guarantor will also execute as an individual

Attorney’s Opinion Letter – In many cases for larger ($3,000,000 +) or complex loans the lender will require the borrower’s attorney to provide his legal opinion that among other things; loan documents are not usurious, the borrower is a legal entity, and the person(s) signing on behalf of the borrower is authorized to do so.

Spousal Waiver – Clarifies interest of a non-borrowing spouse and defines the liability of the marital community. In most cases, it relieves the borrower’s spouse from any financial liability associated with the loan. The signature of the non-borrowing spouse is notarized.

Insurance Premium Impound Waiver – Deed of Trust Notes usually will call for an impound account for taxes and insurance. In some cases where the borrowing entity is considered weak or perhaps the request is a very high loan to value, the lender will require this impound account. If in force, a certain portion of each payment will be set aside as a reserve for the payment of insurance premiums, property taxes and other obligations. Through a side letter, the lender will agree to waive the impounds so long as the loan is not in default. Make every attempt to have this provision waived. Signed by the borrowing entity

Closing Statement – Sometimes referred to as an escrow statement or seller’s and buyer’s settlement statement, this document outlines all of the debits and credits of the transaction (sale or refinance) effecting each party. Produced by your escrow officer, we recommend that you have an “estimated” statement provided to you by the broker and lender at the outset of your transaction in order to obtain a rough idea of your costs and proceeds. Make sure to read, understand and approve the final statement before your closing. Signed by the borrowing entity. Issues relating to the prorations of rental income, property tax or insurance premium payments on asset transfers are subject to errors in calculation and should be reviewed for accuracy. With loan originations, a few items to pay particular attention to are:

1. New loan (confirm that you are receiving, after charges the loan you expect),
2. Title policy and escrow fees (insure they are market charges),
3. Loan origination fee (1% of the loan amount is common),
4. Loan brokerage fee (1% of the loan amount is common),
5. Interest on new loan (should pro-rate as of the date the old loan is paid off),
6. Appraisal, environmental and seismic studies (if you have not paid them directly),
7. Payoffs (insure that the existing 1st and 2nd are fully paid off),
8. Distribution (if you expect cash out of the transaction, is it the correct amount?)

Borrower Loan Escrow Instructions – Prepared by the escrow officer, these instructions outline escrow’s obligations pertaining to issuance of the loan documents to the borrow and receipt of funds from the lender. As well they state the lender’s requirements for their title insurance policy, outline any encumbrances against the property and state the legal description of the property and vesting of ownership. Signed by the borrowers. Note – if you are selling a property, many escrow firms waive any responsibility with respect to the Foreign Investments in Real Property Tax (IRC 1445). This means that you should be aware that this section in the tax code, among other items, may require that 10% of the sale proceeds be held back from seller until all federal tax due is paid. 

Statement of Partnership and Partnership Agreements – Escrow will ask you for a copy of your Statement of Partnership (or similar agreement according to the manner in which title is held). Escrow and the title company require these documents to verify a) the partnership is registered with the State (Statement of Partnership) and b) the required signatures for executing loan documents. If you own as a partnership and one of the partners holds his or her interest in a trust, escrow will require a copy of the trust document and will issue for signature a form sometimes called a Certification of Trustees Under Trust, which further verifies the form of the trust and confirms that it is in effect.

In summary:

While our advice is based on our combined experience in representing clients in commercial real estate transactions, you should always consult with your broker, insurance agent, loan broker, tax advisor, attorney or other appropriate consultants when attempting to address these specific items in any proposed financing.

Stan Mullin, SIOR is a Senior Vice President in the Newport Beach office of Grubb & Ellis and specializes in corporate real estate matters. You can learn more about his firm by looking up www.grubb-ellis.com and he can be reached at  stan@mcareceiverships.com.

Don Smith is Senior Vice President of Sunrise Mortgage & Investments in Long Beach, California and a member of the Mortgage Bankers Association. He specializes in providing equity and debt financing for investors, developers and users throughout the U.S. You can learn more about his firm at www.sunrisemortgage.com and he can be reached at dsmith@sunrisemortage.com.