Detailed Financing Guidance From Experienced Real Estate Attorneys
At Neiman Law, our attorneys understand how important it is to create a strong, detailed financial plan for any development or renovation. They’ve helped companies from Columbus and nationwide reach their goals through strategic financing decisions.
Term Sheets And Loan Commitments
Term sheets and loan commitments are instruments used by a lender in anticipation of making 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 a 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 term 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 the review and approval of leases, title and survey, and zoning, among other considerations.
It is in the best interests of any commercial borrower to consult with a real estate lawyer 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 And 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 those below.
The Amount Of The Loan
Perhaps the most crucial contract provision is the loan amount. The amount listed on these documents is the principal, which is the cost of the loan before compounded interest or other charges. In the past few years, residential interest rates have fallen dramatically and risen again due to the coronavirus pandemic. Depending on the type of loan, commercial real estate loan interest rates range from about 3% to 11%.
The Term Of The Loan
The section of the document dedicated to the loan term states the loan amount, the length of time that the borrower has to pay it back and the interest rate. Interest rates usually compound monthly or yearly. This document section also details the day the borrower can expect to receive their funds.
The loan period varies, depending on whether it’s for a residential or commercial transaction. Residential loan amortization periods are generally 30 years, with some shorter periods also being available. More extended periods give borrowers a more affordable price with the caveat of higher interest. Conversely, shorter periods yield higher monthly payments but less interest. Commercial ones, however, are usually no more than 20 years long. Many are under five years.
The Frequency Of Payments
This section of a loan agreement details terms on how the borrower will repay the lender. This could be accomplished in a one-time lump sum payment or in a series of installments. If the borrower makes payments in installments, the payment schedule could be weekly, monthly or quarterly.
These financial contracts can be challenging to understand. If you are a borrower or lender with questions about the rules of contract interpretation, then our attorneys can provide answers. If an issue of contract interpretation necessitates litigation, they are prepared to create a legal solution to resolve it.
These contracts also include:
- Information regarding prepayment
- A list of loan defaults
- A description of collateral that is being used to secure the loan
Alternatively, such provisions, along with additional terms, can be set forth separately within the loan agreement 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), enabling the lender to recover assets as payment for the borrower’s debt, which commonly results in foreclosure in the event of a borrower default.
Guaranty And 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 nonrecourse basis, which means that the lender’s only form 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 that will guarantee that the obligations under the loan agreement will be honored in the event of a default.
Prior to executing a guaranty 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 And 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. The purchaser’s counsel is typically tasked with drafting any company resolutions for the purchasing entity, which authorize the entity to enter into the loan agreement and purchase the property. The purchaser’s counsel should also provide the title company with detailed escrow instructions that describe how the title company must handle the purchase funds and other related escrow documents. The seller’s counsel is typically responsible for drafting 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 a 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 that 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 the legal title until 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 relationships that are created, any potential buyers or sellers under such terms should discuss the benefits and drawbacks with a real property lawyer.
Talk To An Experienced Attorney Today
At Neiman Law, our lawyers have helped companies throughout the country establish strong financial strategies. They know what’s at stake with these issues and will help accordingly. Call our office today at 614-682-6999 or send an email to schedule a meeting today.