Joseph Vargas
March 2007

Los Angeles Business Journal

From time to time almost every commercial developer will need to obtain financing for a real estate project. Whether the proposed financing is a construction loan, short term bridge loan or permanent loan, the careful negotiation of the loan commitment can help ensure a smooth and cost effective loan closing process for the developer.

Perhaps the most important goal of developers in negotiating a loan commitment is to control lender costs, both in the underwriting and documentation process. Other than confirming that a proposed loan commitment contains accurate business terms such as loan amount, term and interest rate, the desire to limit expense often remains at the forefront in the mind of the developer. Accomplishing this goal can prove to be a daunting task unless the developer (and its counsel) focus on the key issues in the commitment where savings can be obtained.

The developer-borrower will almost certainly need to provide the lender with one or more deposits or fees in order to initially fund the lender’s underwriting approval process. These deposits or fees are used to pay for lender expenses, including appraisal, engineering and environmental costs. The initial draft of the loan commitment typically states that these fees and deposits are nonrefundable. However, the developer would be wise to make sure the an commitment is clear that any unused portion of the deposits is to be returned to the developer, whether at closing, if the loan funds, or at termination of the commitment, if that should occur. If the loan does not close, a lender may be less willing to refund such deposits if it determines that the failure to close is caused by the developer. To avoid any uncertainty, the parties should specify in the commitment under what circumstances the deposits or fees will be refunded. The failure to do so could leave the developer in the precarious position of demanding the return of a deposit from a lender without clear loan commitment language to support its position.

An issue related to the refunding of deposits and fees is the limitation of both due diligence and closing costs. It is customary for lenders to require that borrowers pay for all closing-related due diligence and closing costs. One common approach is to request that the lender agree to “cap” the costs at certain thresholds. While an attractive option, such an approach will often be rejected by the lender due to the lender’s inability to control these costs, many of which are third party expenses. There are, however, a few things that a borrower may be able to do that can limit expenses. One idea is to try to convince the lender to use existing due diligence reports (such as surveys, environmental and property condition reports) rather than having new reports prepared.

While these reports would need to be updated to bring them current and even certified to the lender, the costs of updating and certifying should be significantly less than the expense of preparing new reports. In addition, the choice of title and escrow company can save the borrower money. Often a developer maintains a relationship with a title company that provides the developer with preferred pricing. If that is the case, the borrower could request that the lender use that title company to issue the lender’s loan policy. Lenders are often open to this idea provided the title company meets the lender’s underwriting requirements for title companies.

Finally, perhaps the area where the developer can have the greatest impact on expense is the actual negotiation of the loan commitment, and later, the loan documents themselves. A borrower is wise to ensure that the loan commitment includes precise and detailed provisions addressing the borrower’s key concerns. As a general rule a detailed and precise loan commitment leads to a more efficient loan documentation process. Since the loan documents are meant to reflect the business terms agreed to in the loan commitment, greater detail in the commitment allows the drafter of the loan documents to specifically comply with the agreed upon business terms. Accordingly, the greater precision leads to less negotiation and therefore less expense in the loan documentation process.

Loan commitments have a reputation for being non-negotiable with regards to deposits and expenses. However, while each lender has its own policies and procedures, there may be some common areas of flexibility that a borrower can avail itself of. By focusing on those few key areas, a borrower may be able to better manage the loan commitment process and significantly limit its expense.

Joseph Vargas, an attorney with Buchalter Nemer, specializes in real estate finance. He can be contacted at (213) 891-5260 or .