Sample Release Clauses For Blanket Loans

16 Replies

I was wondering if someone knew of a good spot to review sample legal language for some sample release clauses for blanket loans. We're about to contract with a seller who will finance a small development project for us and this information could be helpful in our discussions.

Any help or advice is appreciated. Here is what I have thought of that we want:

-Non-recourse to borrower. Carve-outs for bad boy provisions okay, but I doubt this will even come up

-No points and market-based rate

-80%+ LTC

-Blanket loan with release clauses (I'll start doing some research on language for these today)

-Release clauses should allow us to build on any of the lots and not prevent "checker boarding" (the lots are all adjacent so I can't imagine this is an issue less some of the flag lots)

-Release clauses should keep seller's security interest in tact and allow our group to take pro rata distributions as projects sell. In other words we'd get paid as the projects sell and not fully repay the debt first

-Bullet as far out as is possible if required

Bryan, you really need to get with an attorney, the particial release is an agreement incorporated in the note and the release is done by a Deed of Release for each parcel released filed after the Deed of Trust.

The note itself should be identified as to the type of debt created in the top margin. Such as: Limited Recourse Promissory Note (which is what i think you are wanting). The other title is simply Non-Recourse Promissory Note.

With carve outs, it's not a true non-recourse if recourse is granted under certain conditions. You could say that...for and in consideration of the collateral granted by the maker(s) hereof, the lender agrees to advance funds without personal liability of the maker(s) for the debt hereby created. However, your company has the liability to pay as agreed, so if you do the project in a seperate LLC, you're not personally liable unless you do those bad boy things under which case you can't write yourself out of acting without liability for intentional acts.

You may wish to incorporate a hold hamless agreement withing the note whereby the lender, for and inconsideration of the interest rate stated, the lender agrees to hold hamless and indemnify the maker(s) from and against any loss, damge, expense or finding arising from or out of this debt created notwithstanding the terms and agreements made in that certain deed of trust for the assignment of collateral granted,made of even date, or those promises made under the debt created for the payment of any and all amounts due.

Now, everyone knows that this is not legal advice and is simply the generalized language I have used before in similar instances as an example, I'n not an attorney, so go see yours. There may be verbage required in Texas.

I know that you'd love to have a hold harmless agreement incorporated, but the lender needs to take great care in the use of a HH agreement, in all fairness. If you draft this note and it is seen as preditory or unfair, you could get hammered and the whole thing could be at risk. SO it's very important not to just agree for the sake of getting someone to agree, because they will, you need balance in any HH Agreement and in the structure of the entire deal.

This is really not a DIY matter, I know you're a very clever and smart guy, but to protect yourself to ensure you end up with what you want, especially if things blow up, you really need to see an attorney...what's 500 bucks in the scope of things (?) when you probably have 6 figures going here....that's cheap....draft one and get it blessed with legal water. Good luck

Thanks Bill....quite helpful.

I plan to see an attorney and we actually have one on our team of finders that is helping a bit. I am really just looking for more information and/or examples at this point to get a sense for what all I should be trying to negotiate that I don't know about. I don't want to spend the attorney's time educating me. I want to spend it writing things according to our wishes/desires and what the seller is willing to do.

Any thoughts/advice or ideas about how I can see examples efficiently without having to dig through reams of paperwork?

How do you want to structure your end first, under your existing group or comopany or under a seperate entity/partnership for this project?

Please rate the "investor" for me, sophisticated or a first timer?

Is the seller of the land the man or a cash investor?

What terms would you want?

SFDs, multi, mixed, what's the simple version of the project and will any release be needed prior to other sales, common areas, amenities, etc.?

Originally posted by Bill Gulley:
How do you want to structure your end first, under your existing group or comopany or under a seperate entity/partnership for this project?
We'd probably need to set up a new entity given how complicated things are currently

Originally posted by Bill Gulley:

Please rate the "investor" for me, sophisticated or a first timer?

Right now all parties to the deal are big boys

Originally posted by Bill Gulley:

Is the seller of the land the man or a cash investor?

Seller is a developer. I don't know his level of sophistication, but he seems to be pretty snappy.

Originally posted by Bill Gulley:

What terms would you want?

I haven't shopped the market for rates, but non-recourse is a big deal for us since some SDIRA entity money is in play. I wouldn't want a bullet any sooner than about 3 or so years out and would really prefer to have some commitment to turn the loan into a perm if the economy went south. The rest of the bullets I can think of are in the original post.

7%ish rate is what I am thinking, but that may be off a bit.

Originally posted by Bill Gulley:

SFDs, multi, mixed, what's the simple version of the project and will any release be needed prior to other sales, common areas, amenities, etc.?

Dead-level simple. The projects are all SFRs and are fully developed and ready to build on. Nothing fancy for development costs. No common areas, deed restrictions, or anything crazy.

Generally, you'll have a LTV secured or a CLTV with other financing that needs to stay in place with the remaining lots as particial releases are provided. You mentioned flag lots, those prime spots that may or may not sell first. How does the seller see the lot, all with a price per foot or as a more valauble lot as that makes a difference on you LTV needing to be weighted overall or providing for a release with higher security given in say all other lots or perhaps just a few more, in other words, raising the loan to value from say 75 to 85 on three other lots to equal the higher dollar value of a prime lot being released. Or, must/will homes be built and sold before moving on, spec building vs contract jobs. Also, is this a closed sub or will you sell off lots to the poblic/or contractors?

You can also agree to a specific dollar amount to release each numbered lot, often the longest way to describe, but the easiest way to compute instead of doing percentages of area and values. The list might get long, Lot 1 release amount 41,200, Lot 2=38,600, etc. keeping the release fees constant for the LTV until the total amounts are fully paid.

To incorporate agreed release fees you'll want to simply use an addendum to the note agreement saying that it is agreed that the collateral secured shall be fully released upon the payment to principal amouts as described in Exhibit "C" attached and made a a part of this obligation created.

You can provide for extensions upon certain occurances, but not from your failure to perform, like not selling a house. Those could be interest rates increased say on NY Prime or some index.

You could also roll over the loan with an interest rate adjustment, additional reduction of debt or both. Name your poison...

Originally posted by Bill Gulley:
Generally, you'll have a LTV secured or a CLTV with other financing that needs to stay in place with the remaining lots as particial releases are provided. You mentioned flag lots, those prime spots that may or may not sell first. How does the seller see the lot, all with a price per foot or as a more valauble lot as that makes a difference on you LTV needing to be weighted overall or providing for a release with higher security given in say all other lots or perhaps just a few more, in other words, raising the loan to value from say 75 to 85 on three other lots to equal the higher dollar value of a prime lot being released. Or, must/will homes be built and sold before moving on, spec building vs contract jobs. Also, is this a closed sub or will you sell off lots to the poblic/or contractors?

He sees the flags as more valuable because they are larger. I think they're actually less valuable because they're flags. We'd probably just need to establish a value for everything we agree to in the one contract. Averaging the values of everything would make sense to me.

We're selling them to end buyers.

Originally posted by Bill Gulley:

You can also agree to a specific dollar amount to release each numbered lot, often the longest way to describe, but the easiest way to compute instead of doing percentages of area and values. The list might get long, Lot 1 release amount 41,200, Lot 2=38,600, etc. keeping the release fees constant for the LTV until the total amounts are fully paid.

This would be okay too.

Originally posted by Bill Gulley:

To incorporate agreed release fees you'll want to simply use an addendum to the note agreement saying that it is agreed that the collateral secured shall be fully released upon the payment to principal amouts as described in Exhibit "C" attached and made a a part of this obligation created.

Cool...where can I see actual example language easily?

Originally posted by Bill Gulley:

You can provide for extensions upon certain occurances, but not from your failure to perform, like not selling a house. Those could be interest rates increased say on NY Prime or some index.

I'm wondering how long to ask for. Things should sell in 2 years so 3 years should be way more than enough time, but it never hurts to have additional time if it is needed for some strange reason. I am sure we could find financing for what remains.

Originally posted by Bill Gulley:

You could also roll over the loan with an interest rate adjustment, additional reduction of debt or both. Name your poison...

We'd agree to this as well if he needed a sweetener.

Exhibit "C" To Blanket Limited Recourse Promissory Note

For and in consideration of the payments hereinafter mentioned as assigned to each parcel secured, the Lender Agrees to provide at the time of payment by certified funds a full deed of release for each of the properties collectively secured, all being fully described in that certain deed of trust made of even date. Any payment in addition to those required under this obligation shall be deemed to be fully applied to outstanding principal on the date made without special accrual required or any modification of the original terms.

Properrty Identification Amount Required For Release

1. All of Lot 1 Wildfire Sub. $38,200
2. All of Lot 2 Wildfire Sub. $36,800

Etc.

A full release shall be provided upon the full payment by certified funds and the Lender shall provide such release as may be required for title insurance requirements.

Maker shall provide reasonable notice of intent to make any additional payment as generally necessary for closing instructions required and any or all releases necessary.

In the event any property can not be clearly released arising from any title encumbrance the borrower may elect any other parcel of lesser secured value to be released with reasonable notice given and any remainder paid down shall be applied toward principal and credited to any other future release.

Other agreements....

Bothe lender and maker execute with a notary.

And again, I ain't an attorney, see yours, but this is very close to what I have used in the past....

I gotta run, if I think of other astuff I'll post it as applicable for ya!

Nice...thx Bill. We'll certainly be using an attorney.

Question: Where is it specified that the borrower can take out their pound of flesh as long as the blanket loaner's security interest remains in tact in relation to the original LTC? I get that a value will be assigned to each lot, but how do I tell that I get to take out some cash as projects sell? The way things are written above it would seem the lender wants to be paid back in full out of sales prior to us taking any cash out. This is not what we want. It actually is not clear about this in the language above unless I am missing something....which is certainly possible.

Thoughts? Ideas? The goal is to allow the lender to keep their security interest level throughout the sales and partial releases according to the values assigned at the original closing.

Take the loan amount and divide it by the sq. ft of the total project then times the area for each lot and that gives you the release amount. That's the easy way, if all the lots have close to the same value.

If there are significant differences in the valuations, there are several ways, the easiest is to follow the above method as a LTV with the expected sale price. The illustration above allows different values to be assigned.

Sorry, I assumed there would be valuation differences in all of this, you could simply say in the release that a release amount of XXXX dollars for each lot would be paid for the release of any lot sold. KISS, LOL But my assumption is that you have other funds in the deal and going off just an ltv may not cut it for you.

When you sell, you go to closing and only the release fee is paid for that lot sold and a deed of release is filed on that lot, anything left over from the sale goes to the seller (you)

If that is unclear you can insert release amount. I'm pounding all of this out of my head on the fly as I recall some of the issues, otherwise I'd need to go to storage and dig out files and copy stuff.......hmmm (?) no thanks...:)l The language above is the full payment of the release fee, not the full amount of the total loan,

The purpose of having a release amount is so the lender can't require say 90% of your sale price be applied to the loan.

As to the roll over.....will monthly payments be required or interest payments on a regular basis? Generally a roll over will require that all payments had been made as agreed.
You can certainly incorporate a future commitment letter in the deal instead of messing with the note, much easier.

Originally posted by Bill Gulley:
I'm pounding all of this out of my head on the fly as I recall some of the issues, otherwise I'd need to go to storage and dig out files and copy stuff.......hmmm (?) no thanks...:)l The language above is the full payment of the release fee, not the full amount of the total loan,

Yup....that is what I am trying to avoid too ;-) This stuff isn't easy to find. I guess that is why lawyers get paid well!

10 of 14 lots are $75k each and the others are $90k each according to the seller. We have not contracted yet so this remains to be established. I would rather just divide the contract amount by 14 and keep things simple if possible. The large flags that he wants a premium for are less valuable to me so this seems fair.

So we could just write the releases identifying which lots get $75k in release and which lots get $90k in release. This isn't the right amount because we'll have a down payment, but we can just scale the release by the LTC I guess.

Thanks for your help Bill. Any other thoughts and commentary is appreciated and welcome. Hopefully we'll have a contract next week.

Bryan, I should have asked, is the land free and clear?

SOunds like you're buying the lots, he is financing it and you're going to all this brain damage.

Have you considered him simply subordinating the lots and selling the lots at each closing?

And yes, just use the LTV assigned by the price for 14 lots.

They are free and clear, but he won't subordinate. He wants a better security interest via a 1st position DOT.

All of the brain damage is because he won't accept a financing contingency in the contract. We'd happily contract now if he wasn't burned previously and now demanding a ton of option money to go hard immediately. Nothing like me having to pay for some idiot wholesaler's sins now.

I'm going to let him spend the legal dollars to get something on paper and have the money at risk if he keeps his stance on everything he is wanting. Hopefully we won't lose the deal in the interim, but I'm not going to have a lot of dough at risk because someone else could not perform.

Will you need any bank financing....construction loans? If so, better put the brakes on as they will require a subordination, they don't make those as seconds.

While going full speed with several homes at one time has many advantages, you might just take these lots down one at a time too.

We would pay cash for the houses if needed. We probably will be better off with our own new loan. He won't do a take down.

As a buyer, in seller financing you don't contract with money down until the terms of financing have been cast in stone. You could end up with money in escrow, not being released for some time arguing about what is reasonable or having the terms dictated or lose your earnest money, contingencies in a sale contract can become a problem.

Yeap.....that is why we are where we are. Hopefully we can come to terms this week.

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