Beware These Three Hurdles to Closing Your Commercial Loan
After a long underwriting and approval process and seemingly endless loan commitment negotiations, you have your loan approved and you are ready to proceed to closing the loan and then to finally relax.
But don’t get too comfortable just yet. There are still things to watch out for to make sure that the loan actually closes.
Problem #1: The Material Terms in the Commitment Letter Differ from the Material Terms in the Loan Documents
Once an initial commitment letter is fully-executed, many courts view that document as a binding contract to make a loan on the terms contained in the commitment letter. However, it is common for lenders and borrowers to change material loan terms after the initial commitment letter is signed but before the loan is closed and funded.
Solution: In those cases, lenders should require borrowers and guarantors to execute an amendment to the original commitment letter to prevent borrowers from attempting to void the transaction before closing.
Problem #2: Waiting Until the Last Minute to Satisfy Loan Closing Requirements
In order to close a commercial loan, borrowers and lenders must coordinate a process that involves many third parties (e.g., title insurance agents, appraisers, environmental consultants, attorneys, etc.). Effective and efficient loan closings require that all parties be proactive and solution-oriented. Lenders do not want the last minute delivery of due diligence items to delay the closing or create unnecessary post-closing items, or result in a sloppy review and analysis.
Solution: Lenders can manage this process effectively by starting with a closing checklist that clearly designates the parties responsible for the various items required to close the loan. To the extent possible, conference calls with all parties (lender, borrower, title agent, and attorneys) should be held regularly to review and update the closing checklist. A good closing checklist will help manage the closing schedule and mitigate against missing or incomplete information and documentation.
Problem #3: One of the Parties to the Loan is Traveling Abroad and is not Available to Execute Loan Documents
The borrower and lender will likely want to close the loan and execute closing documents as soon as loan documents are negotiated and the checklist items have been reviewed and approved by the lender. Just when you thought you were “out of the woods,” you realize that one of the parties to the loan is traveling outside the United States. While this may seem like a minor obstacle to the closing of the loan, executing loan documents abroad can cause long and extensive delays.
When an obligor executes loan documents abroad, most commercial lenders require that party’s signature be notarized by a notarizing officer at the U.S. Embassy or Consulate. Unfortunately, this is easier said than done since most, if not all, U.S. Embassies and Consulates require an appointment in advance to appear before an officer to notarize documents. Sometimes, appointments aren’t available for weeks at a time.
Solution: Lenders are advised to discuss potential closing dates at the early stages of the loan transaction, and to also confirm each loan party’s availability to execute closing documents well in advance of closing.
By planning ahead, lenders and borrowers can dramatically increase the likelihood of their loan closing on time.
Michael Smith is a commercial lending attorney who helps lenders and borrowers get to closing with the best mix of terms and timelines possible. For more information, contact Michael at [email protected] .