CMBS loans (loans that will be packaged with similar loans
and securitized as commercial mortgage backed securities) continue to be popular
despite their rigid structure and higher costs. Many commercial real estate
owners like CMBS loans for their nonrecourse nature, absent the commission of certain
‘bad acts’ by the owner/guarantors, and will pay the extra costs to limit their
exposure on the loans.
When considering a CMBS loan there are a few items to address
early on in the process that could have significant impact on the costs for
closing the loan.
Borrower Structure—CMBS
loans rely on the mortgaged asset being held in a bankruptcy remote entity that
meets specific criteria in how the borrower is structured and operated. A lender
wants to protect the asset from being consolidated with the assets of other
related entities that may become bankrupt.
The borrower should provide copies of its organizational documents
earlier on in the process. Time is needed for lender and its counsel to review
and provide comments on the documents and for the borrower and its counsel to
revise as necessary. Sometimes, the ownership structure itself is a problem and
new entities will need to be formed. If this process is delayed until later in
the loan process, then extra fees will be incurred to pay for expedited
processing of the new entities in time for closing.
Independent Managers/Springing
Members—Depending on the size of the CMBS loan, the lender may require an
independent manager be retained whose sole responsibility is to vote on whether
the borrower should file for bankruptcy protection or not. Springing members
are often required when the borrower is a single member LLC. If the sole member
of an LLC were to cease to exist, it would trigger the automatic dissolution of
the borrower entity. Under Delaware law, the LLC can provide in its operating
agreement for a new member to ‘spring’ into place and keep the LLC in
operation. Since retaining an
independent manager requires paying fees to a service provider for someone
qualified to act in this role, a borrower would want to have this requirement
waived whenever possible. If the loan is small enough, the borrower will likely
be successful in obtaining a waiver. Regarding the need for a springing member,
loan size again may dictate who can serve as the springing member. Some lenders
will allow any individual associated with borrower to serve as the springing
member, aka “special member.” Others require that the springing member be
unaffiliated. The borrower would then incur additional fees to retain someone to
act in that capacity; typically from the same service provider who provides the
independent manager.
Governing Law—CMBS
loan documents are typically governed by New York law, which then leads to the requirement
for certain enforceability legal opinions from a New York attorney and also for
the need of an agent located in New York to receive service of process on the
borrower’s behalf. If the loan is small enough, and the borrower raises the
issue with the lender, the governing law might be changed to the state where
the property is located, eliminating the need for an additional legal opinion ($5,000+
saved) and an agent in New York for service of process ($1,000+ saved). At a
minimum, many lenders will waive the need for the agent in New York on smaller
loans.
Legal opinions—CMBS
loans typically require more legal opinions in their financing opinion letters than
local banks might require. The more complex the legal opinions, the more time
required of the borrower’s counsel and therefore the higher the fee. Also, if
the property is in a different state from where the borrower and its counsel
are located, then a legal opinion from counsel in the real property state will
also be required (add a few thousand more to the closing costs). Further,
depending on loan size, ownership structure and the policies of a lender,
additional legal opinions may be required, some of which can be quite expensive.
It’s important that the borrower confirm
early in the loan process exactly what the lender will require. Some of the
opinion letters may require extensive case law research to be conducted plus
the retention of counsel in other states. Sufficient time needs to be provided
for this.
Clearing/Lockbox
Accounts—CMBS loans will also require some level of cash management to
protect the lender’s security interest in the rents collected from
tenants. Selection of the bank to handle
the clearing account (i.e., lockbox) can take some time. Because an agreement will need to be
negotiated among the lender, the clearing bank and borrower, negotiations often
break down when the clearing bank wants changes that a CMBS lender is not able
to give. This results in the borrower scrambling around to find a new bank who
will sign the lockbox agreement. The paperwork needed to set up a bank account
these days is not simple and it can take a couple days before the account is in
place for closing.
Because of the above and other issues, negotiation of a CMBS
requires a proactive approach by the borrower and its attorney. A failure to
establish exactly what will be required or not early in the loan process can
lead to delays in closing later and added costs to the borrower.
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