Before signing a commercial loan agreement or agreeing to an LOI, be sure to review and negotiate the terms with particularity. Loan documents are prepared by the Lender’s attorney. Thus, many terms may benefit the Lender, but limit protections for Borrower.
Below are just some of the most consequential terms that you should read and understand thoroughly before signing:
- Prepayment Penalty. This fee ensures that the lender receives their agreed interest on the loan. However, some lenders will agree to remove the prepayment fee if the interest rate on the loan is increased a few points. Also, some clauses may include a provision that prohibits prepayment for a period of time. If there is any chance you will sell the property during the term of the loan, then be sure to negotiate this point accordingly.
- Due-on-Sale Clause. This clause states that the loan is immediately payable in full if the property is sold without the lender’s consent. It also could prohibit the transfer of equity interest from borrower to a third party. If requested, a lender may allow an exception for transfers such as: to a minority interest, a trust for estate planning purposes, or upon the death of a member borrower as long as key individuals remain in control.
- Insurance and Casualty Issues. A number of issues can arise under real estate loan documents with respect to casualty insurance and loss. With the right negotiation skills, the lender may agree to change some of these clauses.
- Late Fees. A lender may agree to negotiate late fees and even provide a grace period to avoid such fees.
The length of loan documents couples with complex legal jargon can be daunting for borrowers. In this regard, DPA Attorneys can assist with finding you a Lender, preparing loan applications, negotiating terms, reviewing loan documents, and handling closing.
