Developers may benefit from hiring a real estate lawyer to manage details.
By David Weisman, JD |
oday’s demand for new product in most real estate sectors
has convinced a number of commercial real estate professionals to try
developing properties either out of the ground or through the renovation of
existing buildings. While development and redevelopment present a host of
challenges, an early obstacle often is obtaining financing. To ensure a smooth
closing, novice developers should engage and rely on real estate attorneys to
guide them through the process. However, depending on their professional
background, inexperienced developers may be unsure of what role a real estate
attorney plays in the closing.
Every real estate developer can be sure that the lender’s
counsel strives to cover every angle for the bank or financial institution, but
not all may be aware that there are corresponding safeguards for developers
The role of the borrower’s counsel in a closing is, quite
simply, to protect the borrower through two main directives. First, the
attorney represents the developer in all phases of property acquisition. This
includes everything from contract negotiation and preparation to due diligence
investigation to title insurance and surveying matters. The borrower’s counsel
can be critical in this facet of the closing as more closings are delayed due
to borrowers’ inability to handle their due diligence matters than are delayed
by document preparation.
The more sophisticated the financing, the more complicated
and detailed the lender’s requirements for closing will be. For example, if the
loan is a permanent long-term securitized or conduit loan, often favored by
investors because of long-term fixed
rates, then the borrower’s counsel should be familiar with the single-purpose
entity regulations, the inflexibility of the loan documents, and other oddities
of this closing type. Improper preparation of even the borrower’s
organizational documents will delay the closing.
Another loan requirement that often is not satisfied by
inexperienced borrowers is the survey. As simple as it sounds to order a
survey, national lending institutions require American Land Title Association
surveys. ALTA surveys make specific reference to title and zoning matters,
locate each feature of the building and the parking, and certify precise
statements dictated by the lender.
The second role of the borrower’s counsel is to help bring
the money to the closing table. This includes reviewing and negotiating the
loan commitment letter and loan documents and satisfying the requirements of
the lender and the lender’s counsel to close the transaction. These steps
require patience and even finesse to balance the lender’s needs and the
The commitment letter is the contract between the borrower
and the lender that dictates how the loan will be structured and closed. Many
times, developers neglect to have their counsel review the commitment letter,
which can hamper negotiation of the loan documents or the closing process.
Key points to consider include release price provisions for
multiple parcel loans; prepayment restrictions and exceptions to those
restrictions; who writes the title insurance for the loan, which can be a huge
cost factor; whether or not the commitment is enforceable, specifically if fees
are refundable if the developer finds a more favorable loan; and closing costs,
time frames, guarantors, and other loan details. All of these issues can affect
the developer’s costs and should be carefully considered at the time the
commitment letter is negotiated and executed.
The Closing Checklist
Once the loan is approved and closing approaches, the
lender’s counsel will issue a closing checklist. It sets out each requirement
necessary to close the loan and provides a list of documents that have to be
executed or provided by third parties to satisfy the lender’s requirements and
fund the transaction.
Typically, developers are interested in the details of
closing the project and assembling the funds to get to the closing table.
Developers do not want to be bothered with details and paperwork and rely on
counsel to satisfy the checklist requirements. These items can range from
simple documents such as the title commitment, a municipality zoning letter, or
a survey to difficult-to-obtain documents such as agreements executed by
architects, contractors, and engineers with respect to services to be rendered
in the construction phase of the loan. Sometimes third parties are unwilling to
execute the documents simply because they do not understand the need for them.
Most documents requested by third parties provide that in the event the project
fails and the bank takes over the property, the professionals will continue to
render the agreed-upon services to allow the bank to finish the project, making
the project more saleable and allowing the bank to recover its money.
The borrower’s counsel must recognize which of the items on
the checklist are vital to the closing transaction regardless of how difficult they are to provide, which items they can request the lender or lender’s counsel to accept post-closing, and which items are nice to have but
are not required and should be waived or eliminated.
Since lenders’ attorneys often are highly skilled lawyers
with years of experience in representing their financial institutions,
developers should consider engaging their own counsel with the specific
experience and skills necessary to represent their interests as borrowers. This
helps to level the playing field, avoid last-minute anxiety, and close the deal with minimal