Commercial loan conditions

13 Replies

we are purchasing a 16 door unit.  Received loan docs and there are the following conditions.  Wondering if this is normal as its our first commercial loan. 

Provide yearly tax returns

Provide leases and tenants information and books every year

Contact lender if we change, sell or alter any of our personal or business assets for approval.  (Sounds to me like I have to ok anything we do personally with them eventhough the loan was done on the financials of the property)

We are supposed to close Tuesday and these conditions just came up.  I am hesitant but wondering if these are normal conditions for a commercial loan.  

Any information would be helpful. 

First 2 pretty standard, except the 3rd. I would ask for that to be taken out.

Also, many banks put in a lot of recurring requirements, but than don’t really ask for them every year. I give my banks update PFS and tax returns every year. But haven’t given them any new lease info. 

Yes all standard including 3. They want to make sure you do not do anything that will disqualify you prior to closing. They will not remove that one.

@Connie Steele - If you're signing a personal guarantee (recourse loan) then the bank wants to continually verify your ability to repay the loan.  A non-recourse loan typically would not have the provision about personal finances and assets.

This is typical.

Most lenders will at least want regular property reporting, specifically rent rolls and operating statements. In addition, the loan documents will typically call for regular financial reporting from the principals, including things like tax returns.

Whether your lender asks for it or not, many loan documents generally allow lenders to ask for any documents they feel are relevant to the transaction.

See below for an example from Fannie Mae's multifamily documents:

14.BOOKS AND RECORDS; FINANCIAL REPORTING.

(a)Borrower shall keep and maintain at all times at the Mortgaged Property or the management agent's offices, and upon Lender's request shall make available at the Mortgaged Property, complete and accurate books of account and records (including copies of supporting bills and invoices) adequate to reflect correctly the operation of the Mortgaged Property, and copies of all written contracts, Leases, and other instruments which affect the Mortgaged Property. The books, records, contracts, Leases and other instruments shall be subject to examination and inspection at any reasonable time by Lender.

(b)Borrower shall furnish to Lender:

(1)(i) except as provided in clause (ii) below, within 45 days after the end of each fiscal quarter of Borrower, a statement of income and expenses for Borrower's operation of the Mortgaged Property on a year-to-date basis as of the end of each fiscal quarter, (ii) within 120 days after the end of each fiscal year of Borrower, (A) a statement of income and expenses for Borrower's operation of the Mortgaged Property for such fiscal year, (B) a statement of changes in financial position of Borrower relating to the Mortgaged Property for such fiscal year, and (C) when requested by Lender, a balance sheet showing all assets and liabilities of Borrower relating to the Mortgaged Property as of the end of such fiscal year; and (iii) any of the foregoing at any other time upon Lender’s request;

(2) (i) except as provided in clause (ii) below, within 45 days after the end of each fiscal quarter of Borrower, and (ii) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a rent schedule for the Mortgaged Property showing the name of each tenant, and for each tenant, the space occupied, the lease expiration date, the rent payable for the current month, the date through which rent has been paid, and any related information requested by Lender;

(3) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, an accounting of all security deposits held pursuant to all Leases, including the name of the institution (if any) and the names and identification numbers of the accounts (if any) in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for Lender to access information regarding such accounts;

(4) within 120 days after the end of each fiscal year of Borrower, and at any other time upon Lender's request, a statement that identifies all owners of any interest in Borrower and the interest held by each, if Borrower is a corporation, all officers and directors of Borrower, and if Borrower is a limited liability company, all managers who are not members;

(5) upon Lender's request, a monthly property management report for the Mortgaged Property, showing the number of inquiries made and rental applications received from tenants or prospective tenants and deposits received from tenants and any other information requested by Lender;

(6) upon Lender's request, a balance sheet, a statement of income and expenses for Borrower and a statement of changes in financial position of Borrower for Borrower's most recent fiscal year; and

(7) if required by Lender, within 30 days of the end of each calendar month, a monthly statement of income and expenses for such calendar month on a year-to-date basis for Borrower's operation of the Mortgaged Property.

(c) Each of the statements, schedules and reports required by Section 14(b) shall be certified to be complete and accurate by an individual having authority to bind Borrower, and shall be in such form and contain such detail as Lender may reasonably require. Lender also may require that any statements, schedules or reports be audited at Borrower's expense by independent certified public accountants acceptable to Lender.

(d) If Borrower fails to provide in a timely manner the statements, schedules and reports required by Section 14(b), Lender shall have the right to have Borrower's books and records audited, at Borrower's expense, by independent certified public accountants selected by Lender in order to obtain such statements, schedules and reports, and all related costs and expenses of Lender shall become immediately due and payable and shall become an additional part of the Indebtedness as provided in Section 12.

(e) If an Event of Default has occurred and is continuing, Borrower shall deliver to Lender upon written demand all books and records relating to the Mortgaged Property or its operation.

(f) Borrower authorizes Lender to obtain a credit report on Borrower at any time. 

I understand most of this.  But in these documents it looks like I have to get permission from the lender to purchase other assets,  dispose of any assets, change in our current business, etc.  These are  not assets or anything that is tied to the purchase of the duplexes.  The duplexes will be their guaranty but it sounds like we are tied to them for everything in our lives.  Maybe its all standard, it just sounds bizarre, but then again I haven't had a commercial loan before. 

@Connie Steele

Hi Connie. I agree with @syed that you can inquire about the third one. It may be possible to have the onus rest with the bank to request an updated PFS at some regular interval or as needed by the bank rather than having it be your responsibility to report each change to them.

As has been stated above, in some way, shape, or form, the lender will want to have a regular update on your personal financial situation and this is normal. The cadence of the reporting, however, can change from loan to loan and lender to lender.

Of course, your time constraints also need to be considered but it wouldn't hurt to ask.

Hope it works out for you,

Kiley

It seems to me like the loan has a personal guaranty. So why would they remove it! Just because property qualifies doesn’t make PG a non issue. 

Originally posted by @Connie Steele :

But in these documents it looks like I have to get permission from the lender to purchase other assets,  dispose of any assets, change in our current business, etc.  These are  not assets or anything that is tied to the purchase of the duplexes. 

Can you share the language as drafted?

As a former banker, I was careful of dictating how a borrower runs their business via loan covenants due to the risk of lender liability. That said, the boiler plate language generally required the loan parties to notify the bank of any material changes in condition or business purpose. 

We own a business in CA and are purchasing out of state units.  We will be relocating and selling our business in the next few years.  Wondering if that is cause for breaking the covenants if we do it without letting them know.  And if we let them know will they say no.  Even if they are receiving their mortgage payment..

I agree with @Syed H. that the first 2 are typical but the 3rd is not. If you have 0 real estate or business or investment experience and you are using every asset/capital to qualify for the loan, I could see the 3rd item being a condition. If you have experience then the lender should remove the 3rd item.

Originally posted by @Connie Steele :

We own a business in CA and are purchasing out of state units.  We will be relocating and selling our business in the next few years.  Wondering if that is cause for breaking the covenants if we do it without letting them know.  And if we let them know will they say no.  Even if they are receiving their mortgage payment..

If I was your banker, I would say "thanks for the info" and move on so long as you kept making the payments. If I tried to declare an event of default due to you prudently executing your personal wealth strategy, I'm pretty sure I'd have a hard time foreclosing the asset on a non-monetary default.