While you may not be able to account for all the issues that can come up in a commercial real estate loan transaction, you can certainly create an environment to deal with them effectively and without delay, Doug Kerner, a partner in Higgs Fletcher & Mack’s real estate practice group, tells GlobeSt.com. Kerner represents developers, investors and financial institutions in a variety of commercial real estate and lending transactions, in addition to representing represents public and private clients on a wide range of land-use and environmental matters. We spoke exclusively with Kerner about what makes for successful commercial real estate loan transactions and what to avoid.
GlobeSt.com: What are the main things to keep in mind for a smooth CRE loan transaction?
Kerner: No one plans for a commercial real estate loan transaction to go sideways. At the outset, borrowers and lenders have the same goal: get the deal done as efficiently as possible. There might be other loans that must be paid off by a certain date, which makes closing on time all the more critical. Yet sometimes deals get off track. Many times, however, that could have been avoided.
The keys are in understanding what must occur for any deal to close successfully. While you may not be able to account for all the issues that can come up, you can certainly create an environment to deal with them effectively and without delay.
GlobeSt.com: What’s the first thing that must be done?
Kerner: Create a closing checklist. This checklist should be created by the lender’s legal team once a term sheet comes in. It specifies all the items that are needed for the deal to close. At minimum, it includes a list of all the loan documents that must be drafted and negotiated, such as the loan agreement, promissory note, deed of trust and any guaranties; an outline of all the due-diligence items that must be received and reviewed; and any additional entity information and organizational documents required from the borrower and guarantors.
The closing checklist should also identify who is responsible for each task and by when. Deals can often get delayed, or even derailed, if this isn’t spelled out. This is particularly true when fees are involved in accomplishing the tasks.
GlobeSt.com: Once the checklist is in place, what’s next?
Kerner: Conduct a kickoff call. After the closing checklist is created, it’s best to get all parties together— usually by conference call—to go over it line by line. The lender and borrower, along with their attorneys, should participate. Each stakeholder should highlight their expectations and any immediate issues up front. It can seem unnecessary—after all, the closing checklist is usually self-explanatory—but it sets the right tone, introduces all the team members to one another and helps identify any significant issues early on. Then, when obstacles arise during the course of the transaction, it makes it easier to pick up the phone and address it with the appropriate person before it becomes insurmountable.
As documents are drafted, and due-diligence material arrives and is under review, the closing checklist should be updated by the lender’s lawyer. It is best to circulate an updated checklist to the entire team at least once a week.
GlobeSt.com: What else should the parties do to stay on track?
Kerner: Hold regular meetings. Some deals may require weekly conference calls if they are particularly complex or time sensitive or both. If not, a kickoff call, followed by update calls on an as-needed basis will suffice. It’s a good idea to check in formally with all parties regularly to reduce the chances that a small problem cascades to a large one. They don’t have to be long, but enough to keep things moving. Often, there are items needed that depend on third parties to complete, such as an appraisal, an inspection, an environmental assessment or a zoning report. The calls can be used to check in the status of those items and to remind the parties responsible to follow up with the third parties to ensure timely completion.
The common goal with these items is to mitigate—if not completely avoid—the element of surprise. Incorporating these “must’s” into your deals will increase your chances of a deal going smooth and closing on time.