I was asked this morning how closing costs are typically divided between Buyers and Sellers in an Illinois Commercial/Industrial real estate transaction. This has come up before, so my response is posted below for others who may be interested:

* * * * *

In Illinois commercial/industrial real estate transactions, allocation of "closing costs" is always subject to negotiation, but as a general proposition "the customary practice" for "usual" closing cost items that come to mind is as follows:

SELLER PAYS for:

1. Title Policy with extended coverage (but Buyer pays for most other endorsements)

2. ALTA Survey (although if Seller has a fairly recent Survey and the improvements have not changed, often the Seller will provide what it has and the Buyer will be obligated to pay for updates).

3. UCC searches on any equipment or other personal property included in sale (if applicable)

4. State and County transfer taxes. (by State law)

5. All property use expenses applicable to periods PRIOR to Closing.

6. Seller's title clearance expenses (i.e. pay-off and release of mortgage and other liens)

[BASICALLY, the Seller pays to establish WHAT it owns.]

BUYER PAYS for:

1. All Environmental due diligence (although sometimes contract will provide for reimbursement of Phase 1 audit if undisclosed contamination is found that results in transaction being terminated).

2. Geo-technical studies (i.e. subsurface environmental, compaction, etc.)

3. All title endorsements other than extended coverage, and any lender's title insurance policy.

4. Municipal transfer taxes (unless provided otherwise by ordinance).

5. Special survey requirements (such as topographical contours, etc.)

6. All Property inspection expenses

7. All property use expenses applicable from and after Closing.

8. Buyer's financing expenses (including, without limitation, recording mortgage and assignment of rents, etc. and also cost of recording the Deed)

[BASICALLY, the Buyer pays for all matters related to its due diligence investigation to verify that once it owns the property it can be used in a way that is satisfactory to Buyer.]

SHARED EXPENSES:

1. Closing Escrow (except Buyer pays for lender's escrow)
2. "New York Style" closing fee

If you are concerned about some other specific cost or expense item, do not hesitate to contact me. As mentioned above, while this division is more or less "customary", in any given transaction the actual negotiated allocation may be different.

Kymn

Anyone who thinks Closing a commercial real estate transaction is a clean, easy, stress-free undertaking has never closed a commercial real estate transaction. Expect the unexpected, and be prepared to deal with it.

I may not be particularly good at warm and fuzzy small talk, and I may not charm your sox off with my charisma, but give me a complex commercial real estate transaction to close and I'll get it done.

I've been closing commercial real estate transactions for nearly 30 years. I grew up in the commercial real estate business.

My father was a "land guy". He assembled land, put in infrastructure and sold it for a profit. His mantra: "Buy by the acre, sell by the square foot." From an early age, he drilled into my head the need to "be a deal maker; not a deal breaker." This was always coupled with the admonition: "If the deal doesn't close, no one is happy." His theory was that attorneys sometimes "kill tough deals" simply because they don't want to be blamed if something goes wrong.

Over the years I learned that commercial real estate Closings require much more than mere casual attention. Even a typically complex commercial real estate Closing is a highly intense undertaking requiring disciplined and creative problem solving to adapt to ever changing circumstances. In many cases, only focused and persistent attention to every detail will result in a successful Closing. Commercial real estate Closings are, in a word, "messy".

A key point to understand is that commercial real estate Closings do not "just happen"; they are made to happen. There is a time-proven method for successfully Closing commercial real estate transactions. That method requires adherence to the four KEYS TO CLOSING outlined below:


KEYS TO CLOSING

1. HAVE A PLAN: This sounds obvious, but it is remarkable how many times no specific Plan for closing is developed. It is not a sufficient Plan to merely say: "I like a particular piece of property; I want to own it." That is not a Plan. That may be a goal, but that is not a Plan.

A Plan requires a clear and detailed vision of what, specifically, you want to accomplish, and how you intend to accomplish it. For instance, if the objective is to acquire a large warehouse/light manufacturing facility with the intent to convert it to a mixed use development with first floor retail, a multi-deck parking garage and upper level condominiums or apartments, the transaction Plan must include all the steps necessary to get from where you are today to where you need to be to fulfill your objective. If the intent, instead, is to demolish the building and build a strip shopping center, the Plan will require a different approach. If the intent is to simply continue to use the facility for warehousing and light manufacturing, a Plan is still required, but it may be substantially less complex.

In each case, developing the transaction Plan should begin when the transaction is first conceived and should focus on the requirements for successfully Closing upon conditions that will achieve the Plan objective. The Plan must guide contract negotiations, so that the Purchase Agreement reflects the Plan and the steps necessary for Closing and post-Closing use. If Plan implementation requires particular zoning requirements, or creation of easements, or termination of party wall rights, or confirmation of structural elements of the building, or availability of utilities, or availability of municipal entitlements, or environmental remediation and regulatory clearance, or other identifiable requirements, the Plan and the Purchase Agreement must address those issues and include those requirements as conditions to Closing.

If it is unclear at the time of negotiating and entering into the Purchase Agreement whether all necessary conditions exists, the Plan must include a suitable period to conduct a focused and diligent investigation of all issues material to fulfilling the Plan. Not only must the Plan include a period for investigation, the investigation must actually take place with all due diligence.

NOTE: The term is "Due Diligence"; not "do diligence". The amount of diligence required in conducting the investigation is the amount of diligence required under the circumstances of the transaction to answer in the affirmative all questions that must be answered "yes", and to answer in the negative all questions that must be answered "no". The transaction Plan will help focus attention on what these questions are. [Ask for a copy of my January, 2006 article: Due Diligence: Checklists for Commercial Real Estate Transactions.]

2. ASSESS AND UNDERSTAND THE ISSUES: Closely connected to the importance of having a Plan is the importance understanding all significant issues that may arise in implementing the Plan. Some issues may represent obstacles, while others represent opportunities. One of the greatest causes of transaction failure is a lack of understanding of the issues or how to resolve them in a way that furthers the Plan.

Various risk shifting techniques are available and useful to address and mitigate transaction risks. Among them is the use of title insurance with appropriate use of available commercial endorsements. In addressing potential risk shifting opportunities related to real estate title concerns, an understanding of the difference between a "real property law issue" and a "title insurance risk issue" is critical. Experienced commercial real estate counsel familiar with available commercial endorsements can often overcome what sometimes appear to be insurmountable title obstacles through creative draftsmanship and the assistance of a knowledgeable title underwriter.

Beyond title issues, there are numerous other transaction issues likely to arise as a commercial real estate transaction proceeds to Closing. With commercial real estate, negotiations seldom end with execution of the Purchase Agreement.

New and unexpected issues often arise on the path toward Closing that require creative problem-solving and further negotiation. Sometimes these issues arise as a result of facts learned during the buyer's due diligence investigation. Other times they arise because independent third-parties necessary to the transaction have interests adverse to, or at least different from, the interests of the seller, buyer or buyer's lender. When obstacles arise, tailor-made solutions are often required to accommodate the needs of all concerned parties so the transaction can proceed to Closing. To appropriately tailor a solution, you have to understand the issue and its impact on the legitimate needs of those affected.

3. RECOGNIZE AND OVERCOME THIRD PARTY INERTIA: A major source of frustration, delay and, sometimes, failure of commercial real estate transactions results from what I refer to as "third-party inertia". Recognize that the Closing deadlines important to transaction participants are often meaningless to unrelated third parties whose participation and cooperation is vital to moving the transaction forward. Chief among third-party dawdlers are governmental agencies, but the culprit may be any third party vendor or other third party not controlled by the buyer or seller. For them, the transaction is often "just another file" on their already cluttered desk.

Experienced commercial real estate counsel is often in the best position to recognize inordinate delay by third parties and can often cajole recalcitrant third parties into action with an appropriately timed telephone call. Often, experienced commercial real estate counsel will have developed relationships with necessary vendors and third parties through prior transactions, and can use those established relationships to expedite the transaction at hand. Most importantly, however, experienced commercial real estate counsel is able to recognize when undue delay is occurring and push for a timely a response when appropriate. Third party vendors are human (they claim) and typically respond to timely appeals for action. It is the old cliché in action: "The squeaky wheel gets the oil". Care must be taken, however, to tactfully apply pressure only when necessary and appropriate. Repeated requests or demands for action when inappropriate to the circumstance runs the risk of alienating a necessary party and adding to delay instead of eliminating it. Once again, human nature at work. Experienced commercial real estate counsel will often understand when to apply pressure and when to lay off.

4. PREPARE FOR THE CLOSING FRENZY: Like it or not, controlled chaos leading up to Closing is the norm rather than the exception for commercial real estate transactions. It occurs because of the necessity of relying on independent third parties, the necessity of providing certifications and showings dated in close proximity to Closing, and because new issues often arise at or near Closing as a consequence of facts and information discovered through the continual exercise of due diligence on the path toward Closing.

Whether dealing with third-party lessees, lenders, appraisers, local planning, zoning or taxing authorities, public or quasi-public utilities, project surveyors, environmental consultants, title insurance companies, adjoining property owners, insurance companies, structural engineers, state or local departments of transportation, or other necessary third-party vendors or participants, it will often be the case that you must wait for them to react within their own time-frame to enable the Closing to proceed. The transaction is seldom as important to them as it is to the buyer and seller.

To the casual observer, building-in additional lead-time to allow for stragglers and dawdlers to act may seem to be an appropriate solution. The practical reality, however, is that many tasks must be completed within a narrow window of time just prior to Closing.

As much as one may wish to eliminate the last minute rush in the days just before Closing, in many instances it is just not possible. Many documents and "showings", such as UCC searches, surveys, water department certifications, governmental notices, appraisals, property inspection reports, environmental site assessments, estoppel certificates, rent rolls, certificates of authority, and the like, must be dated near in time to the Closing, often within a few days or weeks of Closing. If prepared and dated too far in advance, they become stale and meaningless and must be redone, resulting in additional time and expense.

The reality is that commercial real estate Closings often involve big dollar amounts and evolving circumstances. Rather than complain and stress-out over the hectic pace of coordinating all Closing requirements and conditions as Closing approaches, you are wise to anticipate the fast paced frenzy leading up to Closing and should be prepared for it. As Closing approaches, commercial real estate counsel, real estate brokers and necessary representatives of the buyer and seller should remain available and ready to respond to changing demands and circumstances. This is not a time to go on vacation or to be on an out of town business trip. It is a time to remain focused and ready for action.

Recognizing that pre-Closing frenzy is the norm rather than an exception for commercial real estate transactions may help ease tension among the parties and their respective counsel and pave the way for a successful Closing.

Like it or not, this is the way it is. Prepare for the frenzy and be available to respond. This is the way it works. Anyone who tells you differently is either lying to you or has had little experience in Closing commercial real estate transactions.
* * *

So there you have it. The four KEYS TO CLOSING a commercial real estate transaction.

1. HAVE A PLAN
2. ASSESS AND UNDERSTAND THE ISSUES
3. RECOGNIZE AND OVERCOME THIRD PARTY INERTIA
4. PREPARE FOR THE CLOSING FRENZY

Apply these Keys to Closing, and your chance of success goes up. Ignore these Keys to Closing, and your transaction may drift into oblivion.


R. Kymn Harp

P.S. For assistance, call me at my office or on my cell phone (847) 951-HARP. We can work the four Keys to Closing together.

I read once that if you took all the real estate lawyers in Illinois and laid them end to end along the equator -- it would be a good idea to leave them there.

That’s what I read.

What do you suppose that means?

I have written before about the need to exercise due diligence when purchasing commercial real estate. The need to investigate, before Closing, every significant aspect of the property you are acquiring. The importance of evaluating each commercial real estate transaction with a mindset that once the Closing occurs, there is no going back. The Seller has your money and is gone. If post-Closing problems arise, Seller’s contract representations and warranties will, at best, mean expensive litigation. CAVEAT EMPTOR! [“Let the buyer beware!”]

Paying extra attention at the beginning of a commercial real estate transaction to “get it right” can save tens of thousands of dollars vs. when the deal goes bad. It’s like the old Fram® oil filter slogan during the 1970’s: “You can pay me now - or pay me later”. In commercial real estate, however, “later” may be too late.

Buying commercial real estate is NOT like buying a home. It is not. It is not. It is NOT.

In Illinois, and many other states, virtually every residential real estate closing requires a lawyer for the buyer and a lawyer for the seller. This is probably smart. It is good consumer protection.

The “problem” this causes, however, is that every lawyer handling residential real estate transactions considers himself or herself a “real estate lawyer”, capable of handling any real estate transaction that may arise.

We learned in law school that there are only two kinds of property: real estate and personal property. Therefore – we intuit – if we are competent to handle a residential real estate closing, we must be competent to handle a commercial real estate closing. They are each “real estate”, right?

ANSWER: Yes, they are each real estate. No, they are not the same.

The legal issues and risks in a commercial real estate transaction are remarkably different from the legal issues and risks in a residential real estate transaction. Most are not even remotely similar. Attorneys concentrating their practice handling residential real estate closings do not face the same issues as attorneys concentrating their practice in commercial real estate.

It is a matter of experience. You either know the issues and risks inherent in commercial real estate transactions - and know how to deal with them - or you don’t.

A key point to remember is that the myriad consumer protection laws that protect residential home buyers have no application to – and provide no protection for – buyers of commercial real estate.

Competent commercial real estate practice requires focused and concentrated investigation of all issues material to the transaction by someone who knows what they are looking for. In short, it requires the exercise of “due diligence".

I admit – the exercise of due diligence is not cheap, but the failure to exercise due diligence can create a financial disaster for the commercial real estate investor. Don’t be “penny wise and pound foolish”.

If you are buying a home, hire an attorney who regularly represents home buyers. If you are buying commercial real estate, hire an attorney who regularly represents commercial real estate buyers.

Years ago I stopped handling residential real estate transactions. As an active commercial real estate attorney, even I hire residential real estate counsel for my own home purchases. I do that because residential real estate practice is fundamentally different from commercial real estate.

Maybe I do “harp” on the need for competent counsel experienced in commercial real estate transactions. I genuinely believe it. I believe it is essential. I believe if you are going to invest in commercial real estate, you must apply your critical thinking skills and be smart.

* * *

POP QUIZ: Here’s is a simple test of YOUR critical thinking skills:

Please read the following Scenarios and answer the questions TRUE or FALSE:

Scenario No. 1: It’s Valentine’s Day. You are in hot pursuit of the love of your life. A few weeks ago, she confided in you that all she ever dreamed of for Valentine’s Day was that her lover would show up at her door, dressed in a white tuxedo with tails and a top hat, and present her with a beautiful bouquet of flowers. You’ve rented the tuxedo, but now you are concerned about how much money you are spending.

TRUE OR FALSE: Since flowers are pretty much all the same, it is OK for you to skip the roses and show up with a bouquet of fresh yellow dandelions.


Scenario No. 2: For several years you eyesight deteriorated to the point where you can barely see your alarm clock. You are now considering corrective eye surgery so you won’t need glasses. Your sister-in-law had corrective eye surgery and has had spectacular results. She recommends her eye surgeon, but mentions the cost is about $5,700 for both eyes and that the surgery is not covered by insurance. A few years ago, you had surgery to correct your hemorrhoids and it cost you only eight hundred bucks.

TRUE OR FALSE: Since surgeons all went to medical school and are all medical doctors, you are being frugal and wise by asking the surgeon who performed your hemorrhoid surgery to perform your corrective eye surgery.


Scenario No. 3: Several years ago, when you first got married, you asked a former classmate who is a lawyer to represent you in the purchase of your townhome. The cost was only $375. A year later, you started a family and decided you needed a Will. The same attorney prepared Wills for you and your wife for a total cost of $700. You started your own business and your attorney friend formed a corporation for you and charged you only $600 plus the cost of the corporate minute book. Years later, when your son was arrested for misdemeanor reckless driving, your attorney friend handled the criminal case and got your son off with supervision for only $1,500.

Your business has been successful and you have built a pretty sizable nest egg, but you are tired of working for every dime and want to try investing in real estate. You have your eye on a strip shopping center. It includes a grocery store, bank, hardware store, dry cleaners (on a month to month tenancy), a couple of fast food restaurants, a gift shop, dental office, bowling alley (with a lease about to expire), and wraps behind a gas station/mini-mart on the corner. The purchase price is $8,000,000, but the net operating income looks pretty good. You figure if you turn the bowling alley into a full service restaurant/banquet facility, and convert the dry cleaners into a 24-hour coin laundry, the net operating income will increase and the shopping center will turn into a spectacular investment. You plan to pull together much of your life savings and put down $2,000,000 to buy this strip shopping center, borrowing the balance of $6,000,000. You remember that your lawyer friend handled the purchase of your home several years ago, so you know he handles real estate.

TRUE OR FALSE: Commercial real estate is the same as residential real estate [Hey, its all dirt, isn’t it (?)], so you are being a shrewd businessman by hiring your lawyer friend who will charge much less than a lawyer who handles shopping center purchases several time a year. [What is this “due diligence” stuff anyway?]




ANSWERS:


If you answered “TRUE” for any of the foregoing Scenarios . . .

PLEASE ~

Do NOT call me.

Do NOT write me.

Do NOT email me.

You are too dense.

I do NOT want to be your lawyer.

Go away. Please!

If, on the other hand, you understand that the answer to each of the foregoing questions is FALSE, I am available to help you in Scenario No. 3.

For Scenario No. 2, you should follow your sister-in-law’s suggestion and contact her eye surgeon, or some other eye surgeon with equal skill.

For Scenario No. 1, you are on your own. [But, if you answered TRUE for Scenario No. 1, you may be FOREVER on you own.]

Investing in commercial real estate can be profitable and rewarding – but it requires good critical thinking skills and competent counsel.

Give me a call. Lets talk about your transaction.

Thank you,

Kymn




P.S. Please excuse me for harping on due diligence. ~ It is my birthright. ~ With the last name “Harp”, I am entitled to “harp” on anything I wish. ”

Are you planning to purchase, finance or develop any of the following types of Commercial or Industrial Real Estate?

o Shopping Center?
o Office Building?
o Restaurant/Banquet property?
o Parking Lot/Parking garage?
o Store?
o Gas Station?
o Manufacturing facility?
o Warehouse?
o Logistics Terminal?
o Medical Building?
o Nursing Home?
o Hotel/Motel?
o Pharmacy?
o Bank facility?
o Special Use facility
o Other?

A KEY element to successfully investing in commercial or industrial real estate is performing an adequate Due Diligence Investigation prior to becoming legally bound to acquire the property. An adequate Due Diligence Investigation will assure awareness of all material facts relevant to the intended use or disposition of the property after closing.

The following checklists will help you conduct a focused and meaningful Due Diligence Investigation.


Basic Due Diligence Concepts

Caveat Emptor: Let the Buyer beware.

Consumer protection laws applicable to home purchases seldom apply to commercial real estate transactions. The rule that a Buyer must examine, judge, and test for himself, applies to the purchase of commercial real estate.

Due Diligence: "Such a measure of prudence, activity, or assiduity, as is proper to be expected from, and ordinarily exercised by, a reasonable and prudent [person] under the particular circumstances; not measured by any absolute standard, but depending upon the relative facts of the special case." Black's Law Dictionary; West Publishing Company.

Contractual representations and warranties are NOT a substitute for Due Diligence.

Breach of representations and warranties = Litigation, time and $$$$$


* * *



WHAT DILIGENCE IS DUE?

The scope, intensity and focus of any Due Diligence Investigation of commercial or industrial real estate depends upon the objectives of the party for whom the investigation is conducted. These objectives may vary depending upon whether the investigation is conducted for the benefit of (i) a Strategic Buyer (or long-term lessee); (ii) a Financial Buyer; (iii) a Developer; or (iv) a Lender.

If you are a Seller, understand that to close the transaction, your Buyer and its Lender must address all issues material to its objective – some of which require information only you, as Owner, can adequately provide.

IN GENERAL:

(i) A "Strategic Buyer" (or long-term lessee) is acquiring the property for its own use and must verify that the property is suitable for that intended use.

(ii) A "Financial Buyer" is acquiring the property for the expected return on investment generated by the property's anticipated revenue stream, and must determine the amount, velocity and durability of the revenue stream. A sophisticated Financial Buyer will likely calculate its yield based upon discounted cash-flows rather than the much less precise capitalization rate ("Cap. Rate"), and will need adequate financial information to do so.

(iii) A "Developer" is seeking to add value by changing the character or use of the property – usually with a short-term to intermediate-term exit strategy to dispose of the property; although a Developer might plan hold the property long term as a Financial Buyer after development or redevelopment. The Developer must focus on whether the planned change in character or use can be accomplished in a cost-effective manner.

(iv) A "Lender" is seeking to establish two basic lending criteria:

(1) "Ability to Repay" - The ability of the property to generate sufficient revenue to repay the loan on a timely basis; and

(2) "Sufficiency of Collateral" - The objective disposal value of the collateral in the event of a loan default, to assure adequate funds to repay the loan, carrying costs and costs of collection in the event forced collection becomes necessary.

The amount of diligent inquiry due to be expended (i.e. "Due Diligence") to investigate any particular commercial or industrial real estate project is the amount of diligence required to answer each of the following questions to the extent relevant to the objectives of the party conducting the investigation:


I. THE PROPERTY:

1. Exactly what PROPERTY does Purchaser believe it is acquiring?
· Land?
· Building?
· Fixtures?
· Other Improvements?
· Other Rights?
· The entire fee title interest including all air rights and subterranean rights?
· All development rights?

2. What is Purchaser's planned use of the Property?

3. Does the physical condition of the Property permit use as planned?
· Commercially adequate access to public streets and ways?
· Sufficient parking?
· Structural condition of improvements?
· Environmental contamination?
o Innocent Purchaser defense vs. exemption from liability
o All Appropriate Inquiry

4. Is there any legal restriction to Purchaser's use of the Property as planned?
· Zoning?
· Private land use controls?
· Americans with Disabilities Act?
· Availability of licenses?
o Liquor license?
o Entertainment license?
o Outdoor dining license?
o Drive through windows permitted?
· Other impediments?

5. How much does Purchaser expect to pay for the property?

6. Is there any condition on or within the Property that is likely to increase Purchaser's effective cost to acquire or use the Property?
· Property owner's assessments?
· Real estate tax in line with value?
· Special Assessment?
· Required user fees for necessary amenities?
a. Drainage?
b. Access?
c. Parking?
d. Other?

7. Any encroachments onto the Property, or from the Property onto other lands?

8. Are there any encumbrances on the Property that will not be cleared at Closing?
· Easements?
· Covenants Running with the Land?
· Liens or other financial servitudes?
· Leases?

9. Leases?
· Security Deposits?
· Options to Extend Term?
· Options to Purchase?
· Rights of First Refusal?
· Rights of First Offer?
· Maintenance Obligations?
· Duty on Landlord to provide utilities?
· Real estate tax or CAM escrows?
· Delinquent rent?
· Pre-Paid rent?
· Tenant mix/use controls?
· Tenant exclusives?
· Tenant parking requirements?
· Automatic subordination of Lease to future mortgages?
· Other material Lease terms?

10. New Construction?
· Availability of construction permits?
· Utilities?
· NPDES (National Pollutant Discharge Elimination System) Permit?
o Phase II effective March 2003 – Permit required if earth is disturbed on one acre or more of land.
o If applicable, Storm Water Pollution Prevention Plan (SWPPP) is required.


II. THE SELLER:

1. Who is the Seller?
· Individual?
· Trust?
· Partnership?
· Corporation?
· Limited Liability Company?
· Other legally existing entity?

2. If other than natural person, does Seller validly exist and is Seller in good standing?

3. Does the Seller own the Property?

4. Does Seller have authority to convey the Property?
· Board of Director Approvals?
· Shareholder or Member approval?
· Other consents?
· If foreign individual or entity, are any special requirements applicable?
o Qualification to do business in jurisdiction of Property?
o Federal Tax Withholding?
o US Patriot Act compliance?

5. Who has authority to bind Seller?

6. Are sale proceeds sufficient to pay off all liens?


III. THE PURCHASER:

1. Who is the Purchaser?

2. Will the "Purchaser" be the "Grantee"? If not, who is the Grantee?

2. What is the Purchaser/Grantee's exact legal name?

3. If Purchaser/Grantee is an entity, has it been validly created and is it in good standing?
· Articles or Incorporation - Articles of Organization
· Certificate of Good Standing

4. Is Purchaser/Grantee authorized to own and operate the Property and, if applicable, finance acquisition of the Property?
· Board of Director Approvals?
· Shareholder or Member approval?
· If foreign individual or entity, are any special requirements applicable?
o Qualification to do business in jurisdiction of the Property?
o US Patriot Act compliance?
o Bank Secrecy Act/Anti-Money Laundering compliance?

5. Who is authorized to bind the Purchaser/Grantee?


IV. PURCHASER FINANCING:

A. BUSINESS TERMS OF THE LOAN: What loan terms have the Purchaser, as Borrower, and its Lender agreed to?

· What is the amount of the loan?

· What is the interest rate?

· What are the repayment terms?

· What is the collateral?
o Commercial real estate only?
o Real estate and personal property together?

· First lien? A junior lien?

· Is it a single advance loan?

· A multiple advance loan?

· A construction loan?

· If it is a multiple advance loan, can the principal be re-borrowed once repaid prior to maturity of the loan; making it, in effect, a revolving line of credit?

· Are there reserve requirements?
o Interest reserves?
o Repair reserves?
o Real estate tax reserves?
o Insurance reserves?
o Environmental remediation reserves?
o Other reserves?

· Are there requirements for Borrower to open business operating accounts with the Lender? If so, is the Borrower obligated to maintain minimum compensating balances?

· Is the Borrower required to pledge business accounts as additional collateral?

· Are there early repayment fees or yield maintenance requirements (each sometimes referred to as “pre-payment penalties”)?

· Are there repayment blackout periods during which Borrower is not permitted to repay the loan?

· Is there a Loan Commitment fee or "good faith deposit" due upon Borrower's acceptance of the Loan Commitment?

· Is there a loan funding fee or loan brokerage fee or other loan fee due Lender or a loan broker at closing?

· What are the Borrower’s expense reimbursement obligations to Lender? When are they due? What is the Borrower's obligation to pay Lender's expenses if the loan does not close?


B. DOCUMENTING THE COMMERCIAL REAL ESTATE LOAN

Does Purchaser have all information necessary to comply with the Lender's loan closing requirements?

Not all loan documentation requirements may be known at the outset of a transaction, although most commercial real estate loan documentation requirements are fairly typical. Some required information can be obtained only from the Seller. Production of that information to Purchaser for delivery to its lender must be required in the purchase contract.

As guidance to what a commercial real estate lender may require, the following sets forth a typical Closing Checklist for a loan secured by commercial real estate.


Commercial Real Estate Loan Closing Checklist

1. Promissory Note

2. Personal Guaranties (which may be full, partial, secured, unsecured, payment guaranties, collection guaranties or a variety of other types of guarantees as may be required by Lender).

3. Loan Agreement (often incorporated into the Promissory Note and/or Mortgage in lieu of being a separate document)

4. Mortgage [sometimes expanded to be a Mortgage, Security Agreement and Fixture Filing]

5. Assignment of Rents and Leases

6. Security Agreement

7. Financing Statement (sometimes referred to as a “UCC-1”, or “Initial Filing”)

8. Evidence of Borrower’s Existence In Good Standing; including

(a) Certified copy of organizational documents of borrowing entity (including Articles of Incorporation, if Borrower is a corporation; Articles of Organization and written Operating Agreement, if Borrower is a limited liability company; Certified copy of trust agreement with all amendments, if Borrower is a land trust or other trust; etc.)

(b) Certificate of Good Standing (if a corporation or LLC) or Certificate of Existence (if a limited partnership) or Certificate of Qualification to Transact Business (if Borrower is an entity doing business in a State other than its State of formation)

9. Evidence of Borrower’s Authority to Borrow; including

(a) a Borrower’s Certificate;

(b) Certified Resolutions

(c) Incumbency Certificate

10. Satisfactory Commitment for Title Insurance (which will typically require, for analysis by the Lender, copies of all documents of record appearing on Schedule B of the title commitment which are to remain after closing), with required commercial title insurance endorsements, often including:

(a) Affirmative Creditors Rights Endorsement (extending coverage over policy exclusion 7 and policy exclusions 3(a) and 3(d) as they relate to creditor's rights matters)

(b) ALTA 3.1 Zoning Endorsement modified to include parking

(c) ALTA Comprehensive Endorsement 1

(d) Location Endorsement (street address)

(e) Access Endorsement (vehicular access to public streets and ways)

(f) Contiguity Endorsement (the insured land comprises a single parcel with no gaps or gores)

(g) PIN Endorsement (insuring that the identified real estate tax permanent index numbers are the only applicable PIN numbers affecting the collateral and that they relate solely to the real property comprising the collateral)

(h) Usury Endorsement (insuring that the loan does not violate any prohibitions against excessive interest charges)

(i) other title insurance endorsements applicable to protect the intended use and value of the collateral, as may be determined upon review of the Commitment for Title Insurance and Survey or arising from the existence of special issues pertaining to the transaction or the Borrower.

11. Current ALTA/ACSM Land Title Survey (3 sets), prepared in accordance with the 2005 Minimum Standard Detail Requirements for ALTA/ACSM Land Title Surveys including items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from "TABLE A: Optional Survey Responsibilities and Specifications" [generally referred to simply as "Table A"].

12. Current Rent Roll

13. Certified copy of all Leases (4 sets – 1 each for Buyer, Buyer's attorney, Title Company and Lender)

14. Lessee Estoppel Certificates

15. Lessee Subordination, Non-Disturbance and Attornment Agreements [sometimes referred to simply as "SNDAs"].

16. UCC, Judgment, Pending Litigation, Bankruptcy and Tax Lien Search Report

17. Appraisal - complying with Title XI of FIRREA (Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended)

18. Environmental Site Assessment Report (sometimes referred to as Environmental Phase I and/or Phase 2 Audit Reports)

19. Environmental Indemnity Agreement (signed by Borrower and guarantors)

20. Site Improvements Inspection Report

21. Evidence of Hazard Insurance naming Lender as the Mortgagee/Lender Loss Payee; and Liability Insurance naming Lender as an “additional insured” (sometimes listed as simply “Acord 27 and Acord 25, respectively)

22. Legal Opinion of Borrower’s Attorney

23. Credit Underwriting documents, such as signed tax returns, property operating statements, etc. as may be specified by Lender

24. Compliance Agreement (sometimes also called an Errors and Omissions Agreement), whereby the Borrower agrees to correct, after closing, errors or omissions in loan documentation.

* * * * * *
It is useful to become familiar with the Lender's loan documentation requirements as early in the transaction as practical. The requirements will likely be set forth with some detail in the lender's Loan Commitment – which is typically much more detailed than most loan commitments issued in residential transactions.

Conducting the Due Diligence Investigation in a commercial real estate transaction can be time consuming and expensive in all events.

If the loan requirements cannot be satisfied, it is better to make that determination during the contractual "due diligence period" – which typically provides for a so-called "free out" – rather than at a later date when the earnest money may be at risk of forfeiture or when other liability for failure to close may attach.

CONCLUSION

Conducting an effective Due Diligence Investigation in a commercial or industrial real estate transaction to discover all material facts and conditions affecting the Property and the transaction is of critical importance.

The existence of these factors and their impact on a Purchaser's ability to use the Property as intended can only be discovered through diligent and focused investigation and attention to detail.

Exercise Due Diligence.

IF YOU NEED HELP, CALL ME!

R. Kymn Harp

This article was written in September 2003. The predicted rise in interest rates is occuring and is expected to continue for the foreseeable future. Interest in Wrap-Around Mortgages has increaed dramatically in the past year. For this reason, I am recirculating this article for those wishing to learn more about this topic.

For the complete article, with all footnotes and citations, please feel free to request a copy via email.

Enjoy!


WHEN "WRAP-AROUND MORTGAGES" RETURN*
*The Time to Plan is NOW

With interest rates near historic lows, commercial real estate is being financed at rates few believed possible only a short time ago. The commercial real estate loan market is extraordinarily competitive. Lenders are scrambling to find borrowers, and are willing to be flexible to attract borrowers with fiscally sound commercial real estate projects. Forward thinking Investors and Developers will use this time wisely to negotiate loan terms enabling them to take advantage of today's low interest rates when interest rates rise.


WHERE ARE WE NOW? (September 2003)

For over two years – especially since September 11, 2001 - we have watched interest rates decline. It has not always been steady. Rates have occasionally inched up 10, 20 or 30 basis points for a few weeks at a time but, generally, the trend has been downward. In mid-June 2003, interest rates were at their lowest levels in over 40 years. Although the economy is showing signs of recovery, analysts predict interest rates to remain historically low until after the 2004 presidential elections.

With this trend of falling interest rates it is easy to see how some investors have become complacent. As interest rates have fallen, commercial real estate values have risen due to investor willingness to accept lower yields. With traditional optimistic blindness, a significant number of investors seem to believe the current low interest rates, or even lower rates, are here to stay. Many are "taking advantage" by financing projects with floating or adjustable rate mortgages tied to the prime rate, LIBOR or other indexed rates.

The combination of lower yield expectations and higher annual cash flows (with ballooning debt coverage ratios as interest rates have dropped) has raised concerns by some, including the FDIC, that commercial real estate values and performance may be distorted in the current economic climate. A concern is that some commercial real estate loans and investments financed with "typical" underwriting ratios may be at risk when interest rates rise

Fortunately, to mitigate this risk, some borrowers and some lenders are opting to lock in fixed rates for longer periods of time. Lenders, to attract borrowers and to protect against the risk of a further decline in interest rates; and Borrowers, to protect against the risk of rising interest rates. Borrowers may pay a slightly higher yield to lock-in a fixed rate over an extended term, but in the current climate of historically low rates and lender competition for borrowers, long term fixed rates remain attractive.

Since interest rate increases are not likely to be any more predictable or steady than their recent decline, and because lenders can hedge their interest rate bets by matching long term loans to annuity contracts, long term Certificates of Deposit or other long term investments, lenders are likely, for the foreseeable future, to be flexible and negotiable on some loan terms – especially if the terms do not directly affect their agreed upon yield or impair their collateral.


PLANNING FOR RISING RATES

With interest rates at near historic lows, and lenders clamoring to make loans secured by quality commercial real estate, NOW is the time to plan for the future. NOW is the time for investors to lock in attractive loan rates for extended periods, if possible, and to make sure they have the flexibility to keep those rates when economic conditions and future needs change.

INVESTORS: Now is the time to negotiate provisions in your commercial real estate mortgage to allow you to leverage current low interest rates to your advantage when interest rates rise. Here's how:



Leveraging Low Interest Rates

In one respect, the value of locking in low interest rates for extended periods when interest rates are likely to rise is obvious. If you knew today that interest rates were rising and that in the foreseeable future interest rates were going to be 7.5%, 8.5%, 9.5% or higher, who wouldn't lock in today's low interest rates if they could? That is not really the issue. That concept is self-evident.

But what if, for example, you lock in a low interest rate today for the next 10, 20 or 30 years - interest rates rise significantly, and then, say 5 or 6 years from now, you wish to sell your investment?

Assuming pre-payment of your loan is allowed , one solution is to simply sell the property. In this case, you would receive your equity and would be free to reinvest at then prevailing returns. Unless you have a "portable mortgage" allowing transfer to a new project, you would promptly loose any future benefit of your long-term low interest rate because the project would be gone and, most likely, the mortgage paid off.

If the mortgage is "assumable", you may gain some advantage by being able to negotiate a higher sale price for the project because the assuming buyer will be able to benefit from your lower rate. An obvious problem with this scenario is that, if the project has appreciated substantially, the amount of the down-payment the buyer may be required to produce to pay the equity between the purchase price and the remaining loan balance may be prohibitive to most buyers, thereby reducing demand for your property and creating downward pressure to lower the price.
Are there other solutions?

Consider the following hypothetical facts:

Today: Investor acquires an office building, strip shopping center, single use building, or other typical investment property (the "Property") for $2,000,000. Investor obtains a loan for $1,500,000 [75% loan to value] with a fixed interest rate of 6.25 % amortized and payable over 20 years, secured by a first Mortgage on the property.

Five years later: Now, project yourself five years into the future: Interest rates on first mortgage loans have risen to 9.5%. Interest rates on loans secured by second position mortgages are, perhaps, 10.5% to 11%. Because of built-in rental increases under existing leases, the Property has appreciated in value to, say, $2,200,000. Perhaps the tax shelter benefits of the Property to the Investor have diminished somewhat because the Investor used segregated cost accounting to accelerate cost recovery in the early years of the investment, so Investor has decided to sell. The sale price is $2,200,000.

Case No.1. Investor could simply sell the property to a willing buyer (the "Buyer") who would be responsible for obtaining its own financing. Under a typical scenario, the Buyer will obtain a mortgage loan for 75% of the value of the property at current market interest rates. Under the hypothetical facts given, the Buyer will invest equity of $550,000 (25% of the purchase price) and will obtain a first mortgage loan in the amount of $1,650,000 (75% of value) at a current interest rate of 9.5% amortized over 20 years, with a 15 year balloon payment . The Buyer's monthly payment would be $15,380.16. The balloon payment due in 15 years would be $732,323.88. The original Investor would "cash-out" at the time of funding this loan and the original first Mortgage loan would be paid off.

Case No. 2. If the Mortgage is "assumable" (or, at least, not "due-on-sale ), the Buyer could, if it chose to do so and the Seller agrees, pay the original Investor an amount equal to the Investor's equity in the Property and "assume" or "take subject to" the Mortgage obligation with its low 6.25% interest rate for the balance of 15 years. If this were to occur exactly 5 years after the original investment, the Mortgage balance would be $1,278,706.63, requiring the Buyer to invest $921,293.37 as its equity to acquire the Property and receive the benefit of the lower interest rate. An investor may be willing to do this, if it has the funds available and is willing to make a 42% cash outlay for an investment property to achieve a below market interest rate. Investor preferences, however, typically favor a lower down payment.

Case No. 3. Assume at the time of obtaining the original Mortgage, the Investor was able to negotiate a Mortgage that did not include a "due on sale" clause and did not prohibit additional debt secured by the Property . In this case, the Investor has two additional choices if the Buyer wishes to leverage the property by financing 75% of the purchase price.

Option 1: The Investor can offer to hold a standard "second mortgage" in the amount of $371,293.37 at an agreed upon rate close to market rates for second mortgage loans (perhaps, 10.5%), amortized over an agreed upon period (say, 20 years with a 15 year balloon) and buyer can assume or take subject to the existing first Mortgage bearing interest at 6.25%. In this case, the Buyer would get the benefit of the lower interest rate on the first Mortgage, while paying a 10.5% market rate of interest on the second mortgage; or

Option 2: the Investor might offer the Buyer a "wrap-around mortgage" for the entire amount being financed ($1,650,000) at a below market interest rate for a first mortgage loan with interest of, say, 9% on the entire amount, amortized over 20 years with a 15 year balloon.

If Option 1 is chosen, the Investor will receive at closing the sum of $550,000 in cash, and will "hold paper" for $371,293.37 secured by a second mortgage, earning 10.5% interest per year, generating a monthly payment of $3,706.92, and a final balloon payment of $172,463.73 in 15 years. The effective yield to the Investor would be 10.5%.

If Option 2 is chosen, the Investor will receive at closing the sum of $550,000 in cash, and will "hold paper" for $1,650,000 bearing interest of 9% (desirable to Buyer because it is .5% less than market, and results in a monthly payment of only $14,845.48, an amount $534.68 per month less than available at the hypothetical current market rate of 9.5%). Of the $1,650,000 held by Investor, only $371,293.37 represents funds actually "loaned" by Investor .

At first glance, it may seem that these funds will earn interest at only 9% instead of 10.5% available under Option 1, but consider further: Through use of a wrap-around mortgage, the Investor would also earn a 2.75% return on funds of the original lender because of the spread between the 6.25% interest rate on the first mortgage loan and the 9% interest rate on the wrap-around mortgage loan. Since the mortgage "wraps around" the original first mortgage loan, the balance of the wrap-around mortgage amount, $1,278,706.63, represents funds actually advanced by (remaining unpaid to) the original first mortgage lender.

As a consequence, the monthly payment received on the wrap-around mortgage would be $14,845.48. After payment of the underlying monthly payment of $10,963.92 due on the existing first mortgage, the net amount retained from the wrap around mortgage payment during the life of the underlying first mortgage is $3,881.56, (in this case, $174.64 per month more than the monthly payment receivable under Option 1, above, with only a second mortgage position. More significantly, at the end of 15 years, when the underlying first mortgage has been fully amortized and paid off, the balloon payment receivable under the wrap-around mortgage proposed in Option 2 would be $715,156.77 ($542,693.04 greater than in Option 1 - and, in fact, nearly double the amount originally loaned, due to accumulated interest from negative amortization), generating an effective overall yield on Investors actual cash investment of $371,293.37 at a rate of 14.32% per annum compounded monthly during the life of the loan.

Under Option 2, both the Investor and the Buyer benefit, and the original lender continues to receive the rate of return originally contracted for under the first mortgage.


Wrap Option Available to Banks Also

In the foregoing examples, we have assumed that it is the Investor/"Seller" who is providing the financing and who will be the "wrap-around Mortgagee". This is not necessarily the case. There is no legal reason a Bank or other lender could not be the wrap-around Mortgagee under similar circumstances provided it is not prohibited by regulatory mandate or internal loan policies from securing loans through use of a "junior mortgage".

In this case, the transaction would be structured by having the Bank be the wrap-around lender. The Bank would advance to the Buyer the additional $371,293.37 needed to pay off the Seller, as a loan secured by a wrap-around mortgage. The Buyer would contribute $550,000 as 25% of the purchase price, the Bank would lend the Buyer an additional $371,293.37, taking back a wrap around mortgage for $1,650,000 (75% of the purchase price). At closing, the Investor/Seller would receive its entire equity of $921,293.37, and the original lender would continue to carry its first mortgage with a principal balance of $1,278,706.63 at 6.25% for the balance of 15 years.

Except for substitution of the Bank in place of the Investor as the wrap-around mortgagee, all other loan attributes remain the same: the Buyer gets the benefit of below market interest [9% instead of 9.5%]; the Seller receives all of its equity to invest or use as Seller determines appropriate; the original lender continues to receive the benefit of its contracted for fixed interest rate over the term of its loan; and the Bank, as wrap-around mortgagee, receives an effective interest yield of 14.32%. Everyone wins.


Potential Legal Advantages and Documentation

In addition to the yield enhancement benefits enjoyed by the wrap-around lender, another advantage of a wrap-around mortgage as compared with a simple "second mortgage" is that the collateral priority of a wrap-around mortgage may, over time, migrate to a collateral priority on par with the first mortgage.

For the most part, a wrap-round mortgage should mirror the provisions of the senior mortgage around which it "wraps", with a pass through to the mortgagor of virtually all mortgagor covenants. An essential element of a wrap-around mortgage, however, is that it must require the borrower to make all payments to the wrap-around mortgagee, who will, in turn, be obligated to pay the senior mortgagee. The wrap-around mortgage, and related documentation, must not permit the mortgagor to pay the first mortgagee directly. It is this arrangement which, legally, may enhance the wrap-around mortgagee's collateral position.

Although not entirely clear from reported case law, at least one respected commentator has suggested that this migration of lien priority is a natural consequence of applicable subrogation law. Judicial interpretation of this proposition in the context of wrap-around mortgages, however, has been scant, and in most jurisdictions non-existent.

While this legal position appears sound in circumstances where the indebtedness secured by a superior lien is paid in full , its application to partial payments under a wrap-around mortgage with pro rata subrogation remains largely untested.

Still, building a case for preservation of this outcome is desirable. Accordingly, the wrap-around mortgage and supporting documentation should include covenants of subrogation to establish the clear intent of the parties that subrogation to the lien of the senior loan is to occur with each payment by the wrap-around mortgagee to the senior lender. By inclusion of specific language to this effect, the doctrine of "conventional subrogation" may be sufficient to achieve this result.

From an underwriting standpoint, however, until this issue is definitively settled through judicial interpretation or otherwise, it is appropriate to analyze a proposed loan secured by a wrap-around mortgage as being a loan secured by a junior mortgage.

Some commentators have raised the additional issue of whether future payments by a wrap-around mortgagee to a senior lender enjoy priority over liens filed subsequent to the date of recording a wrap-around mortgage but prior to the date of payment of future installments to the senior lender. This issue is implicated because most wrap-around mortgages provide that the wrap-around mortgagee is required to pay the senior lender only to the extent of funds actually received from the wrap-around mortgagor, giving rise to the legal dichotomy between obligatory future advances and non-obligatory future advances .

The prevailing view is that this issue is adequately resolved through conventional subrogation and through the rule of "tacking", which provides that a mortgagee who pays a prior encumbrance (whether or not subrogation applies) is entitled to include such amount in the indebtedness secured by the lien of its mortgage.

Other covenants are useful or necessary to preserve the yield enhancement provided by use of a wrap-around mortgage. In particular, a covenant in the wrap-around mortgage that the underlying first mortgage may not be prepaid by the wrap-around mortgagor is essential, since it is the interest rate spread between the wrap-around mortgage and the underlying first mortgage that enhances the effective yield to the wrap-around mortgagee. Also, a cross-default provision in the wrap-around mortgage, providing that a default under the senior mortgage will constitute a material default under the wrap-around mortgage, is a useful protective covenant.

Proper documentation of a loan secured by a wrap-around mortgage loan is critical to maximize the potential benefits and afford the legal protections a wrap-around mortgage may provide.

Advanced Planning Is The Key

Wrap-around mortgages are useful legal devices that seldom arise except during periods of rising interest rates. When interest rates rise, wrap-around mortgages provide a legally sound tool for preserving the benefits of long-term low interest rate loans. Not only do they enable Investors and Banks to realize enhanced effective yields on commercial real estate loans, they can also make properties and loans more marketable by enabling the Buyer to pay a lower overall interest rate than may otherwise be generally available in the marketplace.

To take advantage of the benefits of a wrap-around mortgage when interest rates rise, the Investor/Borrower must plan now, while long-term interest rates are low, by negotiating loan terms that facilitate their use. Key among these provisions are elimination or limitation of the "due on sale" clause, and elimination or limitation of a negative borrowing covenant that prevents the property from securing other indebtedness. Similarly, all other provisions of the Mortgage loan must be carefully reviewed with an eye toward future use of a wrap-around mortgage to protect against unforeseen obstacles.

With proper planning and effective negotiation at the time of obtaining a low interest long-term loan secured by investment real estate, a wrap-around mortgage may provide a unique opportunity to profit when interest rates rise.

R. Kymn Harp

For nearly 30 years, I have represented borrowers and lenders in commercial real estate transactions. During this time it has become apparent that many Buyers do not have a clear understanding of what is required to document a commercial real estate loan. Unless the basics are understood, the likelihood of success in closing a commercial real estate transaction is greatly reduced.

Throughout the process of negotiating the sale contract, all parties must keep their eye on what the Buyer's lender will reasonably require as a condition to financing the purchase. This may not be what the parties want to focus on, but if this aspect of the transaction is ignored, the deal may not close at all.

Sellers and their agents often express the attitude that the Buyer's financing is the Buyer's problem, not theirs. Perhaps, but facilitating Buyer's financing should certainly be of interest to Sellers. How many sale transactions will close if the Buyer cannot get financing?

This is not to suggest that Sellers should intrude upon the relationship between the Buyer and its lender, or become actively involved in obtaining Buyer's financing. It does mean, however, that the Seller should understand what information concerning the property the Buyer will need to produce to its lender to obtain financing, and that Seller should be prepared to fully cooperate with the Buyer in all reasonable respects to produce that information.


Basic Lending Criteria

Lenders actively involved in making loans secured by commercial real estate typically have the same or similar documentation requirements. Unless these requirements can be satisfied, the loan will not be funded. If the loan is not funded, the sale transaction will not likely close.

For Lenders, the object, always, is to establish two basic lending criteria:

1. The ability of the borrower to repay the loan ; and

2. The ability of the lender to recover the full amount of the loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, in the event the borrower fails to repay the loan.

In nearly every loan of every type, these two lending criteria form the basis of the lender’s willingness to make the loan. Virtually all documentation in the loan closing process points to satisfying these two criteria. There are other legal requirements and regulations requiring lender compliance, but these two basic lending criteria represent, for the lender, what the loan closing process seeks to establish. They are also a primary focus of bank regulators, such as the FDIC, in verifying that the lender is following safe and sound lending practices.

Few lenders engaged in commercial real estate lending are interested in making loans without collateral sufficient to assure repayment of the entire loan, including outstanding principal, accrued and unpaid interest, and all reasonable costs of collection, even where the borrower’s independent ability to repay is substantial. As we have seen time and again, changes in economic conditions, whether occurring from ordinary economic cycles, changes in technology, natural disasters, divorce, death, and even terrorist attack or war, can change the “ability” of a borrower to pay. Prudent lending practices require adequate security for any loan of substance.


Documenting The Loan

There is no magic to documenting a commercial real estate loan. There are issues to resolve and documents to draft, but all can be managed efficiently and effectively if all parties to the transaction recognize the legitimate needs of the lender and plan the transaction and the contract requirements with a view toward satisfying those needs within the framework of the sale transaction.

While the credit decision to issue a loan commitment focuses primarily on the ability of the borrower to repay the loan; the loan closing process focuses primarily on verification and documentation of the second stated criteria: confirmation that the collateral is sufficient to assure repayment of the loan, including all principal, accrued and unpaid interest, late fees, attorneys fees and other costs of collection, in the event the borrower fails to voluntarily repay the loan.

With this in mind, most commercial real estate lenders approach commercial real estate closings by viewing themselves as potential "back-up buyers". They are always testing their collateral position against the possibility that the Buyer/Borrower will default, with the lender being forced to foreclose and become the owner of the property. Their documentation requirements are designed to place the lender, after foreclosure, in as good a position as they would require at closing if they were a sophisticated direct buyer of the property; with the expectation that the lender may need to sell the property to a future sophisticated buyer to recover repayment of their loan.

Top 10 Lender Deliveries

In documenting a commercial real estate loan, the parties must recognize that virtually all commercial real estate lenders will require, among other things, delivery of the following "property documents":

1. Operating Statements for the past 3 years reflecting income and expenses of operations, including cost and timing of scheduled capital improvements;

2. Certified copies of all Leases;

3. A Certified Rent Roll as of the date of the Purchase Contract, and again as of a date within 2 or 3 days prior to closing;

4. Estoppel Certificates signed by each tenant (or, typically, tenants representing 90% of the leased GLA in the project) dated within 15 days prior to closing;

5. Subordination, Non-Disturbance and Attornment ("SNDA") Agreements signed by each tenant;

6. An ALTA lender's title insurance policy with required endorsements, including, among others, an ALTA 3.1 Zoning Endorsement (modified to include parking), ALTA Endorsement No. 4 (Contiguity Endorsement insuring the mortgaged property constitutes a single parcel with no gaps or gores), and an Access Endorsement (insuring that the mortgaged property has access to public streets and ways for vehicular and pedestrian traffic);

7. Copies of all documents of record which are to remain as encumbrances following closing, including all easements, restrictions, party wall agreements and other similar items;

8. A current Plat of Survey prepared in accordance with 2005 Minimum Standard Detail for ALTA/ACSM Land Title Surveys certified to the lender, Buyer and the title insurer, including items 1 through 4, 6, 7(a), 7(b)(1), 8 through 11(a) and 14 from the Surveyor's "Optional Survey Responsibilities and Specifications" referred to as "Table A";

9. A satisfactory Environmental Site Evaluation Report (Phase I Audit) and, if appropriate under the circumstances, a Phase 2 Audit, to demonstrate the property is not burdened with any recognized environmental defect; and

10. A Site Improvements Inspection Report to evaluate the structural integrity of improvements.

To be sure, there will be other requirements and deliveries the Buyer will be expected to satisfy as a condition to obtaining funding of the purchase money loan, but the items listed above are virtually universal. If the parties do not draft the purchase contract to accommodate timely delivery of these items to lender, the chances of closing the transaction are greatly reduced.


Planning for Closing Costs

The closing process for commercial real estate transactions can be expensive. In addition to drafting the Purchase Contract to accommodate the documentary requirements of the Buyer's lender, the Buyer and his advisors need to consider and adequately plan for the high cost of bringing a commercial real estate transaction from contract to closing.

If competent Buyer's counsel and competent lender’s counsel work together, each understanding what is required to be done to get the transaction closed, the cost of closing can be kept to a minimum, though it will undoubtedly remain substantial. It is not unusual for closing costs for a commercial real estate transaction with even typical closing issues to run thousands of dollars. Buyers must understand this and be prepared to accept it as a cost of doing business.

Sophisticated Buyers understand the costs involved in documenting and closing a commercial real estate transaction and factor them into the overall cost of the transaction, just as they do costs such as the agreed upon purchase price, real estate brokerage commissions, loan brokerage fees, loan commitment fees and the like.

Closing costs can constitute significant transaction expenses and must be factored into the Buyer's business decision-making process in determining whether to proceed with a commercial real estate transaction. They are inescapable expenditures that add to Buyer's cost of acquiring commercial real estate. They must be taken into account to determine the "true purchase price" to be paid by the Buyer to acquire any given project and to accurately calculate the anticipated yield on investment.

Some closing costs may be shifted to the Seller through custom or effective contract negotiation, but many will unavoidably fall on the Buyer. These can easily total tens of thousands of dollars in an even moderately sized commercial real estate transaction in the $1,000,000 to $5,000,000 price range.

Costs often overlooked, but ever present, include title insurance with required lender endorsements, an ALTA Survey, environmental audit(s), a Site Improvements Inspection Report and, somewhat surprisingly, Buyers attorney's fees.

For reasons that escape me, inexperienced Buyers of commercial real estate, and even some experienced Buyers, nearly always underestimate attorneys fees required in any given transaction. This is not because they are unpredictable, since the combined fees a Buyer must pay to its own attorney and to the Lender's attorney typically aggregate around 1% of the Purchase Price . Perhaps it stems from wishful thinking associated with the customarily low attorneys fees charged by attorneys handling residential real estate closings. In reality, the level of sophistication and the amount of specialized work required to fully investigate and document a transaction for a Buyer of commercial real estate makes comparisons with residential real estate transactions inappropriate. Sophisticated commercial real estate investors understand this. Less sophisticated commercial real estate buyers must learn how to properly budget this cost.


Conclusion

Concluding negotiations for the sale/purchase of a substantial commercial real estate project is a thrilling experience but, until the transaction closes, it is only ink on paper. To get to closing, the contract must anticipate the documentation the Buyer will be required to deliver to its lender to obtain purchase money financing. The Buyer must also be aware of the substantial costs to be incurred in preparing for closing so that Buyer may reasonably plan its cash requirements for closing. With a clear understanding of what is required, and advanced planning to satisfy those requirements, the likelihood of successfully closing will be greatly enhanced.

Hello,

Lately, I have been receiving an increasing number of requests for a copy of an "air rights" article I wrote in 2003 which was circulated in the Winter of 2004, entitled "MONEY FROM THIN AIR - DEVELOPING URBAN AIR RIGHTS".

With the latest announcement [see Crain's Chicago Business, July 5, 2006] that Toronto-based Brookfield Asset Management Inc. has paid $27.5 million for the "air rights" associated with 300 S. Riverside Plaza, Chicago, Illinois, where a 1.1 million square foot office tower is about to go on the market, interest in understanding the transfer, ownership and development of "air rights" is bound to increase.

If you are interested in learning more about the subject of "air rights" transfer, ownership and development, hopefully you will find the attached article instructive. Please feel free to request the full article, with footnotes and case citations, via email.

The fundamentals of air rights transfer, ownership and development as described in this article remain useful today, notwithstanding that zoning district classifications under the Chicago Zoning Ordinance were modified effective August 1, 2004 (except as to Downtown Districts, which were modified effective November 1, 2004) [making references in this article to specific zoning districts and FAR requirements in need of reexamination].

"Air rights" are, of course, NOT a uniquely "Chicago" phenomena. The specifics of each applicable zoning ordinance must always be taken into consideration when planning to sell, acquire or develop an "air rights" interest.

Enjoy!

Kymn



MONEY FROM THIN AIR
*Developing Urban Air Rights

Prime commercial land is limited. Prices per square foot can be astronomical. Demand for efficiency to maximize return is growing. No wonder developers and property owners are looking to the sky, with varying degrees of success, to capture all the value they can from each urban parcel.

Owners and developers, and people in general, are conditioned to think of potential development sites as flat surfaces with essentially two dimensions: north/south and east/west. They see only the surface of the land, and envision the building they will construct for the particular purpose they have in mind; a bank, a drugstore, a restaurant, a strip mall, a parking garage, an office building. If the parcel is larger than they need, they may envision subdividing the parcel to make two or more lots. In most cases, however, they think primarily in terms of land coverage for the type of building they need. They visualize only the two dimensional space depicted on their Site Plan or Plat of Survey.

In 30 out of 50 states , including all Mid-Western states, the "Rectangular Survey System" is in effect. The Rectangular Survey System was adopted in 1785 to meet the needs of the Federal Government as it faced the challenge of dividing vast areas of undeveloped land lying west of the original 13 colonies. The system, developed under the direction of Thomas Jefferson, essentially divides the United States into rectangles, measured in relation to lines known as Meridians and Base Lines .

Development lots are instinctively viewed as the two-dimensional surface of land visually representing a potential development parcel. Descriptions of a parcel typically refer to "a parcel of land X feet by Y feet" located in relation to an intersection or other identifiable landmark.

Once a parcel is "developed", or designated for development, by construction of improvements on the land, it is natural to think of the parcel as being unavailable for further development (unless the existing improvements are to be demolished).

Classic examples of this are single story commercial buildings at prime commercial locations, a multi-deck parking garage or mid-rise building in a downtown development area, railroad tracks or spurs cutting across valuable urban land and, in some cases, roadways and alleys.

Each of these situations represent, potentially, underutilization of valuable real estate. Finding a way to develop the "air" above these existing or planned improvements maximizes the economic utility of these parcels and can be like creating "money from thin air."

The practice of finding ways to utilize the "space above" is often referred to as "air rights development". Air rights development requires thinking in three dimensions, and requires serious design consideration and legal planning but, when land values are at a premium and zoning permits, the economic return may be dramatic.

Though often overlooked, virtually all of Chicago's downtown business district is a "city in the air". People tend to think of streets and street level entrances to buildings in the downtown Chicago "loop" as being at "ground level". This is simply not the case. Most of what is thought of in the Chicago Loop as being at "ground level" is located 12 to 22 feet above the earth's surface . This explains the vast network of "lower" streets and passageways in downtown Chicago, such as "Lower Wacker Drive", "Lower Dearborn Street", "Lower State Street", etc. which most people seldom traverse. It also explains why, in 1992, the Chicago Loop business district was virtually shut down by "the Great Loop Flood of '92", but few people got wet or even saw any water as office and retail buildings were closed and workers were sent home because of "flooding".

The point of these observations is to reveal that "development of air rights" is not new. It is also not ". . . some exotic legal manipulation of doubtful efficacy dreamed up by big city lawyers for use only in big cities" . Development of so-called "air rights" is little more than efficient use of a limited resource when use becomes economically feasible and beneficial.

"Air rights" are part of the "bundle of rights" constituting fee simple title to real estate. The term "air rights" generally refers to the right of the owner of fee simple title of a parcel of land to use the space above the land. If this right did not exist, it would not be possible to construct improvements on the land, such as a home, fence or other structure above the surface of the land. While the ancient common law doctrine that "ownership of land extends to the periphery of the universe" has been limited to accommodate the modern world realities of air-travel, the fundamental concept that land ownership includes the right to use and occupy the airspace above the surface of the land is well established.

As one of the bundle of property rights comprising fee simple title to real estate, "air rights" may also be "unbundled" and alienated separate from other rights in the bundle. Conceptually, from a legal standpoint, the separation and transfer of so-called "air rights" is not materially different from subdividing and transferring a lot pictured in only two dimensions. Instead of subdividing and selling off, for example, "that part of Lot 1 lying east of the west 100 feet of Lot 1" as depicted on a plat of survey, the transfer of air rights subdivides and transfers a parcel based upon its vertical elevation. For example, one might subdivide and transfer "that part of Lot 1 lying above a horizontal plane located 100 feet above [some benchmark elevation].

By dividing a development parcel "vertically", it is often possible to "stack" uses in a mixed use development owned by more than one owner or developer, in the same way it is possible to subdivide and develop side-by-side a horizontal surface subdivision. In some cases, without even developing the open air above existing or planned improvements, it is possible to sell and transfer "air rights" to an adjacent property owner to allow construction of a taller building on an adjacent building site. Recognizing this potential can result in a substantial economic windfall to a property owner otherwise underutilizing a valuable development parcel.

Hypothetical Facts: Suppose you are planning to acquire a 20,000 square foot parcel in Chicago, IL zoned B6-6. Your purchase price is $4,500,000. You believe it is a perfect location for a restaurant/banquet/entertainment complex serving food and liquor, with live entertainment and dancing. You visualize a state of the art venue spread out over 2 floors, with about 19,000 square feet of usable space per floor, for a total restaurant/banquet/entertainment venue of 38,000 square feet. Fortunately, adequate parking is close by and available. Demand for offices and condominium housing is growing in the vicinity of your parcel, which you believe will further enhance the chances of success of your planned business by bringing more customers through your doors. Although you recognize development of offices and condominiums in your area is a "hot" development opportunity and might also be an excellent investment, you have no interest or experience in developing offices or condominiums and really just want to develop and open your dream restaurant/banquet/entertainment complex. You have calculated your costs of construction and operation, and believe the project is economically feasible, although you would like to find a way to cut your costs or otherwise increase your return on investment.

Consider this: The restaurant/banquet/entertainment complex you wish to construct is a permitted use in the B6-6 zoning classification under the Chicago Zoning Ordinance. Also permitted is a wide array of other business and service uses, as well as dwelling units as long as the dwelling units are not below the second floor.

The permitted floor area ratio (F.A.R.) for a parcel zoned B6-6 under the Chicago Zoning Ordinance is 12; which means that the total square footage of the building or buildings permitted on your 20,000 square foot parcel is 240,000 square feet. You are utilizing only 38,000 square feet which means, from a zoning standpoint at least, you are underutilizing your parcel to the extent of 202,000 square feet.

Suppose you were able to reconfigure your proposed project to free up 1000 to 1200 square feet per floor in return for recovering half (or more) of your total land cost. If this were possible, your restaurant/banquet/entertainment complex may be reduced in size to 36,000 square feet instead of 38,000 square feet, but your development cost for the project would be reduced $2,000,000 or more. Almost free money.

How could this work?

Scenario No. 1: With the hypothetical facts presented, it is certainly within the realm of possibilities to market and sell the "air space" above your proposed restaurant/banquet/entertainment complex for development of offices and/or condominiums. As mentioned, under the applicable zoning classification, 202,000 square feet remains available for development on your site. With prevailing land values of $225 per square foot (represented by your purchase price of $4,500,000 for a 20,000 square foot parcel), a condominium/office developer may well view your "air space parcel" as a bargain at $2,000,000 ($100 per square foot – measured in two dimensions for 20,000 square feet) since it would still enable construction of 202,000 square feet of floor area above the second floor.

Obviously, to make the "air space" usable, adequate means of access and support must be planned, which will require detailed planning for design and construction of both the ground level parcel and the "air space" parcel (which do not necessarily need to be constructed at the same time, although simultaneous construction may be more efficient and practical) and creation of legally sufficient easements of support, and easements for ingress and egress, utilities, loading and unloading, mail delivery, a street level lobby, elevators, standpipes, etc., as well as drafting of development specific covenants running with the land to promote non-interference and compatibility of use of each parcel. The necessity for easements of support, and easements (or conveyance of fee parcels) for a street level lobby, mail delivery areas, and loading and unloading areas, is the reason slight reduction in size of the proposed restaurant/banquet/entertainment complex is suggested in the premise to Scenario No. 1 – to free up space for these purposes.

While sale of an "air rights parcel" will require added expense for engineering (much of which will likely be undertaken by the proposed developer of the air rights parcel) and attorneys fees to negotiate and draft a workable declaration of easements, covenants and restrictions to legally facilitate the development and use of each parcel, the economic advantage of being able to sell the air rights parcel may more than justify the added effort and development expense involved.

Scenario No. 2. Assume the same hypothetical facts as in Scenario No. 1, except that instead of being the owner of the parcel referred to in Scenario No. 1 (the "Entertainment Parcel"), you own or wish to develop a parcel adjacent to the Entertainment Parcel. Perhaps the Entertainment Parcel has already been developed with the restaurant/banquet/entertainment complex referred to in Scenario No. 1. Assume your parcel (the "High Rise Parcel") is 40,000 square feet with B6-6 zoning, and you wish to construct (or to sell your parcel to a developer to construct) a mixed-use development with first floor retail, five floors of office space and six floors of luxury condominiums. Because zoning for the High Rise Parcel allows an F.A.R. of 12, you determine a twelve-story, 480,000 square foot building is the maximum you will be able to construct on your 40,000 square foot lot

In conducting a financial analysis of your project you determine that the marginal cost of each floor would result in you generating a substantially greater return on your investment if you were able to construct additional floors of office space, condominiums or even multi-level parking in your proposed project on the High Rise Parcel. Still, you are faced with the maximum F.A.R. of 12 for the High Rise Parcel as established by the Chicago Zoning Ordinance.

Is there a solution? Perhaps.

The Chicago Zoning Ordinance defines a "Zoning Lot" as follows: "A 'zoning lot or lots' is a single tract of land located within a single block, which (at the time of filing for a building permit) is designated by its owner or developer as a tract to be used, developed, or built upon as a unit, under single ownership or control. Therefore, 'zoning lot or lots' may or may not coincide with a lot of record".

One solution is that the owner of the High Rise Parcel might acquire the "air rights" over the Entertainment Parcel (by purchasing from the owner of the Entertainment Parcel, ". . . all of the Entertainment Parcel except that part thereof lying below a horizontal plane located x feet above the Chicago City Datum") and then designate the Entertainment Parcel as part of the Zoning Lot to be developed and controlled by the developer of the High Rise Parcel. The "Zoning Lot" would then be 60,000 square feet . Because the F.A.R. remains 12, the maximum floor area on the total Zoning Lot is 720,000 square feet.

Because 38,000 square feet has been used (or is to be used) for the restaurant/banquet/entertainment complex, 682,000 square feet remains available for development on the Zoning Lot (being, in effect, the High Rise Parcel) . Therefore, instead of being able to construct only a 480,000 square foot project on the High Rise Parcel, if developed alone, the developer would now be able to construct up to an additional 202,000 square feet (for a total of 682,000 square feet) on the High Rise Parcel – or, roughly, 5 additional floors at 40,000 square feet each, because the High Rise Parcel and the Entertainment Parcel, collectively, constitute the "Zoning Lot".

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Of course, if the developer does construct 682,000 square feet of floor area on the High Rise Parcel (in addition to the 38,000 square feet constructed on the Entertainment Parcel) under the foregoing Scenario No. 2, all floor area available for development of the combined Zoning Lot pursuant to the zoning ordinance will have been fully utilized. As a result, since the Zoning Lot is fully developed as a whole, no further opportunity exists to expand the square footage of improvements on the Entertainment Parcel. If the restaurant/banquet/entertainment complex fails, or is destroyed or otherwise demolished, the replacement improvements will be limited to a maximum square footage of 38,000 square feet.

To avoid this outcome, parties will sometimes negotiate an "air rights transfer" that raises the elevation of the delimiting horizontal plane and includes an express covenant running with the land that reserves potential floor area to the transferring parcel (in this case, the Entertainment Parcel).

Under Scenario No. 2, the sale of "air rights" is more akin to the sale of "development rights", but the legal principal is substantially the same as in Scenario No. 1. In each case, a property owner is selling the right to develop "the sky above" while retaining the ground level development parcel.

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"Air rights" are valuable property rights that can be sold, purchased and transferred. Under the right circumstances, "air rights" may represent a substantial untapped resource with great value to those who recognize their potential. Since the transfer of these property rights may not directly impair the owner's intended use of the surface level property, they often do represent "money from thin air".

R. Kymn Harp

There is no question we are in a fiercely competitive commercial lending market. Banks and other lenders have more money to lend than credit worthy borrowers seek to borrow. Interest rates remain historically low. Pressure continues to mount to lower lending costs to attract new customers.

Commercial real estate lending is no exception. Banks are battling for borrowers and, in the theme of cutting costs, many banks are placing more responsibility for documenting commercial real estate loans on loan processors with only limited knowledge of the fundamental risks involved. An unfortunate consequence is that many lenders are "lending blind".

What is "lending blind"? Lending blind is approaching commercial real estate lending with substantially the same approach as lending to residential homeowners. Lending blind is making loans secured by commercial real estate without fully understanding the underlying commercial real estate project and the collateral risks it presents. Lending blind is closing one's eyes to important legal, environmental and land use issues uniquely applicable to commercial real estate and ignoring available risk-shifting techniques in the hope or unfounded belief that if the issues are not carefully considered, maybe they won't exist.

Make no mistake: Commercial real estate lending is not the same as residential real estate lending. Many bankers and other lenders faced with customer resistance to higher loan costs may wish to close their eyes to this reality. Ignoring this reality, however, does not change it. Ignoring this reality may on the surface seem to cut costs, but it can endanger bank profits and jeopardize capital.

"Sound and safe lending practices" is not just a phrase used by banking regulators. It should be a way of doing business.

Failing to focus on genuine risks presented by commercial real estate lending is not a sound and safe lending practice.

Believing a commercial real estate loan is properly documented through use of pre-packaged computer generated loan documents, without also requiring qualified, in-depth analysis of land use controls imposed by documents of record and zoning, knowledgeable examination of survey, lease subordination, insurance, access, borrower authority and other legal issues, and without fully understanding environmental risks presented by existing, former or contemplated tenants, occupiers, and adjacent land owners, is not following sound and safe lending practices.

Blindly following a loan document check-list and filling the loan file with documents and materials that "evidence" a well documented loan, without a genuine understanding of the limitations, pitfalls, and legal red flags the documents may raise, is not following sound and safe lending practices.

Using the ostrich approach to lending is a game of Russian Roulette. The result can be catastrophic to bank profits and capital if and when the loan goes bad.

Banks and other commercial lenders following these unsound and unsafe banking practices do not like this message. They often assert their loan processors are "good people" with excellent training and years of experience using their canned document software.

The fact that a lender's in-house loan processors are "good people" is not in question. The fact that they are well trained to input relevant data so a computer can generate a beautiful set of loan documents is not the issue.

The issue is what may lie beyond the documents.

A perfectly generated set of "standard loan documents" may be of little value if they fail to adequately address unique issues raised by the commercial real estate project serving as collateral. To be certain, each commercial real estate project is different. Unlike owner-occupied residential real estate, it cannot safely be "assumed" that commercial real estate collateral is legally suitable for, or can even legally be used for, its intended use.

A beautifully drafted Mortgage on commercial real estate is of little value if the project does not have a legal right to commercially reasonable access or parking. CASE IN POINT: How secure is a loan on an 800 person banquet facility in a mixed use center if the banquet facility has a legal right to park only 155 cars? CASE IN POINT: What is the collateral value of a hotel on a highly visible highway interchange, which has as its primary means of access only a license to use a private drive that can be closed at any time? [Is the appraiser legally responsible for discovering this fact when making the loan appraisal? What kind of access does the typical title insurance policy insure?]

Obtaining a Lender's Title Insurance Policy with specialized commercial endorsements is a useful method of shifting risks away from the lender, but the lender must understand how to interpret each endorsement to know what it insures. CASE IN POINT: While attending a loan closing as an "accommodation" for a lender making a large loan to one of its "best customers" to purchase a warehouse and manufacturing building, with instructions from the lender to simply "oversee execution of closing documents (the lender had prepared) and approve title", it was discovered by lender's counsel upon review of the lender's required zoning endorsement that the borrower's intended use of the facility was expressly prohibited by the applicable zoning ordinance. The ALTA 3.1 Zoning Endorsement to be attached to the loan policy disclosed that the borrower's intended use was expressly excluded as a permitted use on the land. Neither the lender nor the borrower had read the endorsement or, if they had, they failed to understand its meaning. The transaction was aborted by the regretful but thankful borrower – who would have been unable to operate its business if the transaction had proceeded. Failure to recognize this restriction before funding would have almost certainly meant bankruptcy for one of the bank's "best customers" and a huge non-performing loan for the lender.

Experience shows that lenders should not assume that borrowers and their counsel will always conduct an adequate due diligence investigation to ascertain all associated risks that may impact the project and important underlying assumptions for a loan.

A lender must also avoid the trap of over-reliance upon a borrower's representations and warranties in the loan documents. If the borrower is mistaken, what is the consequence? Declaring a material default? CASE IN POINT: A Mortgage securing a $1,650,000 loan contained a warranty from borrower that "all leases encumbering the Real Estate are, and shall remain, subordinate to the lien of the Mortgage." One lease was, in fact, not automatically subordinate to the Mortgage. The Lender's Title Insurance Policy included an exception for all existing leases and tenancies. The non-subordinated lease contained a Lessee's Option to Purchase the entire strip center for $1,520,000. Will declaring a default for breach of warranty solve this defect? What is the lender's collateral position if the Lessee exercises its Option to Purchase?

The business of lending is about making sound and safe loans that profitably perform as planned. Yield is the key. Not foreclosure. The ability to declare a default and start enforcement and foreclosure proceedings is a remedy of last resort. It is not a viable substitute for diligent evaluation of material loan predicates and will rarely fix problems with underlying collateral.

Sound and safe lending requires comprehensive understanding of all relevant issues confronting each commercial real estate project serving as collateral. If lenders are going to make commercial real estate loans, they should be following sound and safe lending practices. To do this, they must either learn how to fully and meaningfully evaluate all of the attendant risks associated with their collateral, or engage counsel with specialized knowledge and experience in commercial real estate lending to perform this function.

Turning a blind eye to the uniqueness of commercial real estate collateral, and to the limitations of many well meaning but unknowing in-house loan processors, is neither a sound nor a safe lending practice.

Independent, focused and knowledgeable lender due diligence is a must.

R. Kymn Harp