Post-Loan Commitment Due Diligence

AuthorGregory M Stein - Michael D Goodwin - Morton P Fisher Jr
Post-Loan Commitment
Due Diligence
§ 5.01 Due Diligence and the Loan Commitment
When the lender extends the loan, it makes available a significant
amount of money in reliance on the skill and expertise of the borrower
and the value of the mortgaged property. The lender assumes that
the borrower will be a capable property manager that can develop
and operate the property successfully and produce cash flow that is
adequate to repay its debt. If the borrower is not sufficiently skilled
(or lucky), and thus is unable to meet its obligations to the lender,
the lender needs to be confident that the property can be sold for
enough money to satisfy the debt. The lender knows from the outset
that it needs to be comfortable with the ability and experience of
the borrower; with the physical, legal, and financial attributes of
the property; and with the quality of the legal documents and the
remedies they contain. The loan commitment should have already
addressed all these issues.
After the parties have executed the commitment, the lender
will obtain additional information during the due diligence period.
This information helps the lender decide whether all conditions
precedent have been satisfied, thereby requiring the lender to pro-
vide the funds to the borrower at the closing. The due diligence
ste54861_05_ch05_247-268.indd 247 8/3/16 11:12 AM
responsibilities that the lender faces parallel, to a great extent, those
that the buyer confronts between the date of the purchase agree-
ment and the date of the closing. In each case, the party that is
spending money or extending credit in exchange for an interest in
property must learn all that it can about the property so that it does
not face unpleasant surprises later. Once the buyer or the lender
parts with its own funds, its options become far more limited. These
parties can no longer threaten not to close and instead must rely on
their contractual remedies, which may not lead to complete satisfac-
tion. Before the closing, the lender, like the buyer, must maximize
its knowledge of the property and of the party with which it has
contracted so that it can decide whether to proceed.
Comment: The lender’s due diligence standards may exceed those of the
buyer in many respects. Buyers are not as risk averse as lenders: a buyer
may be willing to take certain risks when acquiring property that a lender
will refuse to take when making a loan. Lenders such as banks, insurance
companies, and pension funds are also subject to regulatory limits on
their lending and the amount of risk they are permitted to assume. Thus,
the lender’s level of caution in scrutinizing tenant leases, for example,
may be greater than that of the borrower.
The review of the loan application and the negotiation of the
loan commitment constitute the first steps in the lender’s due dili-
gence. The lender will usually require that the borrower complete
a loan application and furnish the lender with extensive materi-
als regarding the borrower and the property. Then the lender will
include a wide variety of representations, warranties, covenants,
indemnities, and closing conditions in the loan commitment. By
executing a commitment that includes these provisions, the bor-
rower discloses information about itself and the property. If this
information turns out to be inaccurate, the commitment will place
the lender in a position to pursue the remedies set forth in the com-
mitment and to refuse to close.
A prudent lender will not rely solely on these disclosures from
the borrower and will use the post-commitment period to under-
take an independent due diligence review of the borrower and the
property. During this period, the lender will confirm the informa-
tion that the borrower has provided to it, will gather new informa-
tion on its own, and will decide after evaluating this information
whether to proceed to close the loan.
ste54861_05_ch05_247-268.indd 248 8/3/16 11:12 AM

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT