Legal Update
Mar 20, 2020
Key Considerations for Commercial Mortgage Loan Modifications
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Whether you are a lender, loan servicer, borrower or guarantor, there are many aspects to consider - under normal circumstances - when modifying a commercial mortgage loan. As COVID-19 continues to impact the commercial real estate market, an increasing number of mortgage loans likely will require modification, but parties may be forced to approach such loan modifications in a novel way. While not a complete list, set forth below are 5 key loan modification considerations:
- Pre-negotiation agreements. A properly drafted pre-negotiation agreement allows the parties to a commercial loan transaction to freely communicate (including via e-mail) about the loan and its potential modification without having its communications used against it in a later action. If a loan is in default or is about to go into default, the first step for all parties involved should be to enter into a pre-negotiation agreement prior to having any discussions about the loan and its modification. Click here for more insight on pre-negotiation agreements.
- Additional Diligence. If a commercial mortgage loan has been outstanding for some time, and a modification is being sought, for example, to extend the term, additional diligence may be desirable, but may not be practical in today’s world. For example, if a lender is approached with a request to extend a loan and/or change its terms, they often would require an updated appraisal and/or updated third party reports, such as an updated environmental site assessment or property condition report. In today’s world, it may not be practical or even possible to have such reports prepared.
Similarly, lenders frequently will require title and other searches (such as UCC, judgment, bankruptcy and tax lien searches) as well as, with respect to the existing obligors, good standing and other entity-related certificates in connection with a loan modification. If such searches and certificates are deemed absolutely necessary, the parties should consider the timing to obtain the search results and/or such certificates, particularly if secretary of state and/or clerks’ offices are closed or have limited hours. Although certain information often can be obtained on-line, the on-line data may not be current or verifiable.
At the outset of the loan modification process, it is important that the parties discuss what diligence is absolutely required and likely timing for obtaining such diligence. - Loan Modification Documentation and Costs. If a commercial mortgage loan is to be modified, in addition to the specific terms of the loan modification, the parties should discuss, early on in the process, precisely what documents will be required to effectuate the loan modification and what the overall costs will be. Similarly, in addition to a loan modification agreement, what other documents will be required and do such documents have to be, and can they be, recorded? Are opinion letters required? The parties to a loan modification need to be on the same page from the outset of the process so as to avoid any issues which could derail the loan modification process.
- Enhanced Collateral and Reporting. In considering whether to agree to modify commercial mortgage loans, lenders may wish to implement cash management, look for additional collateral/security, enhance existing guaranties, and/or look for additional guarantors. Similarly, lenders may wish to enhance reporting requirements with respect to troubled loans so as to be able to “keep a closer eye” on the situation on the ground. In today’s environment, some borrowers may find some or all of these enhanced requirements difficult to fulfill.
- Local Law and Other Issues. The parties to a commercial loan may have to consult with local counsel to confirm how local law considerations could impact a loan modification, particularly with respect to modifications of construction loans. Additionally, if a loan modification involves a flagged hotel, the involvement of the franchisor may impact a borrower’s ability to modify the loan. The foregoing and other considerations will vary based upon the type of commercial loan involved. If a mortgage loan is, for example, a construction loan, a syndicated loan or a securitized loan, the considerations will differ considerably.
These materials have been prepared by Seyfarth Shaw LLP for informational purposes only and do not constitute legal advice.
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