Mortgage Loan Term Sheets Are So Long; So, Why Are They Missing All Of The Provisions Borrowers Should Be Looking For? Part 2.

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Last week, we started a list of loan terms that regularly seem to be left out of Loan Term Sheets prepared by lenders despite those term sheets using up an entire tree for what is included. If you didn’t see that posting and you are compelled to start at the beginning of our Ruminations, click HERE to start at the beginning. Today, we continue and then conclude our list. Don’t confuse “conclude our list” with “conclude the complete list,” because we know the limits of our ability and experience. A further caveat would be – every deal has its own factors to consider, but most loan term sheets attempt to fit all shape pegs into a round hole.

So, here we go with the rest of our list of “missing” terms in the common Loan Term Sheet:

Cash Management Accounts. If a borrower can avoid a “clearing account” (essentially, a “lock box”), it should. For those unfamiliar with how those work, the lender “owns” an account at the bank you choose and all rent checks go to that account. Your bank agrees, with the lender, to “sweep” all money out of that account every night and put the swept funds in your own account. That is, it will do that sweep until the lender notifies the bank to sweep the money into the lender’s regular bank account (at whatever bank the lender uses). That allows the lender to interrupt the cash flowing to the borrower when the lender thinks a “Trigger Event” has occurred. A Trigger Event could be the borrower’s default or it could be that the rental income, though exceeding the debt service payments, doesn’t exceed it by enough. It could also be when a key tenant has left the property. In fact, it could be anything the loan documents say it is, including receipt of a report of alien abduction signed by two adults. Though the last example is unlikely, it does illustrate that if the Loan Term Sheet calls for a cash management account, it should state what the Trigger Events would be. [Read more…]

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Mortgage Loan Term Sheets Are So Long; So, Why Are They Missing All Of The Provisions Borrowers Should Be Looking For? Part 1.

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 We think it’s called “document creep.” When documents were hand-written, they were pretty short and the world survived. Then, along came the typewriter, and a three page mortgage and a five page lease were probably seen to be somewhat burdensome by the party most burdened. Then, as typing got faster, the documents got longer. Rudimentary word processors, such as memory typewriters, made it easy to go even longer. Modern word processing allows for 100-plus page mortgages, leases, and other documents. Yes, now, we’re able to craft super-long documents “in a single bound.”

Even the term sheets for loans have succumbed to this “document creep.” A dozen or more pages? – No sweat. Doesn’t this benefit everyone, having a complete set of loan terms right up front so that the lawyers don’t wind up negotiating important items while the “outside closing date” looms close? Wish that were the case, because, as lengthy and detailed loan term sheets are getting (call them commitment letters, loan applications or whatever), for some reason they don’t exactly cover all of a borrower’s concerns. Ruminations doesn’t mean “all of a ‘particular’ borrower’s concerns.” We mean all of the concerns that any (or every) borrower should or does have. Like what, you ask? Like, the kinds of items we’ll be covering this week and next (and maybe even the one after that). [Read more…]

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