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COMMERCIAL FINANCE 701: Negotiating commercial loans — Is there an app for that?

Ben Williams and Molly Jeffcoat Moody

Ben Williams and Molly Jeffcoat Moody

» EDITOR’S NOTE: Commercial Finance 701 is a continuing series on commercial loans written exclusively for the Mississippi Business Journal.  This series is geared to lenders, developers, investors and transactional attorneys.

 

This new digital world has re-wired us for instant gratification. We have no patience.  We want an “app” for everything.  Unfortunately, negotiating a commercial loan doesn’t lend itself to an app any more than constructing an office building.  Just like the contractor pours the foundation before going vertical, there is a desired order to negotiating commercial loans that improves the odds of a successful transaction.  The conscientious borrower will make an effort to …

Know the Lender 

In the heavily regulated banking industry, the phrase “know your customer” is a constant refrain.  Borrowers should follow suit and know their lenders.   Banks come in all shapes and sizes, with varying appetites for types of loans, loan amounts, and geography.  A borrower should start with the commercial lender who makes the type of loan he wants, in the amount he wants, and in his project’s locale.   The borrower should then …

Put the Best Foot Forward

We suggested a few articles ago that nothing impresses a loan officer (and the very important credit officer in the back room) more than a well-written business plan.  For maximum effect, the borrower should send the confidential business plan to the loan officer, allow her a few days to digest it, and then suggest a meeting.  If the loan officer reviews the package and decides her bank can’t make that type of loan, ask the “non-lender” for a referral to a loan officer at another bank with the right appetite.  Once the borrower finds an interested lender, it is time to …

Ask For Terms

At this stage, the parties are discussing possible terms.  A loan officer usually can provide a general outline of a loan – including the parameters of terms – based on the business plan.  It is during this stage the borrower and the lender each feels out the other’s boundaries.  The sophisticated borrower already has a sense of market loan terms and doesn’t waste his or the lender’s time by overreaching.  These preliminary discussions give both the lender and borrower an opportunity to decide if a deal between the parties is feasible.  As the talks progress, the borrower may need to supplement the business plan by delivering additional requested information (which may include materials such as personal financial statements, tax returns, deed, appraisals, cost quotes, survey, inventory lists, aged receivables, pro forma projections, and budgets).  If the borrower is evaluating terms from multiple banks, he should be upfront with each bank. A bank may not mind competing, but doesn’t want to engage the credit committee only to be “shopped” behind its proverbial back.  If the discussion is positive, then the parties can …

Move to the Commitment Letter 

This is where the borrower wanted to start all along.  The commitment letter is a critical document.  Now that the parties have reached an understanding of desired terms, the lender can seek formal approval from the credit committee.  This process requires a comprehensive financial analysis and could take one to three weeks (assuming all the information is timely delivered).  Once approved and the commitment letter issued, the bank has committed to making the loan, subject to the terms and conditions noted in the letter.    This document, once executed, will become the blueprint for the commercial loan documents.   So, it is important to …

Stick With the Plan

Requests to deviate from the executed commitment letter are akin to change orders in a signed construction contract – potentially costly and time-consuming.  What a borrower might consider an inconsequential change could be a major modification for the bank.  The credit department underwrote the loan commitment based on facts provided by the borrower.  Borrowers sometimes decide (after the commitment letter is signed) to bring in other partners – thus changing the ownership. Or, having signed the commitment letter, decide to put ownership in a spouse’s name, a newly formed entity, or a trust.  If “new” parties surface after execution of the commitment letter, then the lender has to revisit the credit committee for consideration.  Additional guaranties and legal opinions may be required.   Changes in plans and specs may trigger the need for a revised appraisal.  While managing this process, …

Don’t Get the Cart Before The Horse  

In the borrower’s defense, it is extremely difficult to plan a real estate development or an expansion while running a business.  Moving parts, personalities, weather, economic swings, construction costs, elusive (and illusive) tenants, procrastinators, permits, title problems, tax issues — the list is endless.  The timeline can be challenging.  Still, it is important to remember the loan commitment has an expiration date.  An extension is not perfunctory.  If the market has changed – for example, two new apartment complexes have broken ground in the target area or the price of oil has fallen significantly – then the bank’s temperature for your project might have changed.  Updated due diligence may be required.  An extension fee may be imposed. Or the bank might not extend the commitment.   But, assuming all the pieces fall together, then hopefully you will …

Have a Drama-Free Closing 

Just like business attorneys, a commercial loan closing should be boring.  If properly handled, the closing might simply involve the release of previously signed documents and the long-awaited flow of funds.  Eleventh-hour negotiations, missing documents, and absentee parties fray nerves and run up the attorney bills.  The better practice is to have a “pre-closing” at which time executed documents are delivered to the closing table.  Then, on the closing date, the parties confirm via email or conference call the release of documents and loan proceeds are disbursed.  Digital high fives.

Bonne chance!

» Ben Williams and Molly Jeffcoat Moody  are attorneys in a commercial law practice at Watkins & Eager PLLC (watkinseager.com).   Ben is recognized by Chambers USA and Best Lawyers in America and was selected as Best Lawyer’s 2014 Commercial Finance Lawyer of the Year in Jackson.   Molly is recognized by Chambers USA in the area of Real Estate Law. 

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4 comments

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