I have represented lenders and borrowers in CRE and C&I loan transactions for over two decades. The goal of outside counsel is always to accurately reflect the “business” deal of the parties, properly allocate risk and get the transaction closed as efficiently as possible. Of course, there are a number of variables that come into play in any given transaction, which can result in closing delays and/or post-closing headaches. Nonetheless, I have noticed a few basic issues which come up with some frequency:

1. Lack of Specificity at Term Sheet/Commitment Letter Stage: Key facility terms and covenants, financial or otherwise, should be reflected with specificity on the front end to avoid extended negotiations and delays on the back end. For instance, a commitment letter for an ABL facility may provide for a borrowing base of 85% eligible accounts receivable plus 50% eligible inventory without a substantive definition of all components of eligibility. While several of these components are pretty standard, the list varies a bit across lenders, and there are often nuances based on the borrower’s business. Historic borrowing base calculations should be run based on the lender’s eligibility categories, and these calculations should be shared with the borrower and any outside counsel engaged by lender to ensure the loan documents accurately reflect borrowing base terms. Similarly, at the term sheet stage, the financial covenants may be presented somewhat generically, without any definition around the various inputs. The parties need to understand any adjustments to GAAP definitions that are to be used in connection with these covenants. For an EBITDA-based covenant, what additional add-backs and adjustments are intended? Will the borrower be making permitted acquisitions during the term of the credit facility that need to be addressed? What other non-recurring gains or losses may need to be reflected? Again, historic and pro forma covenant calculations run as part of lender underwriting should be shared with outside counsel for use in drafting.
2. Lack of Coordination Regarding Due Diligence and the Closing Checklist: In the current environment, it seems like lenders and borrowers need to move from the commitment stage to loan closing quicker than ever before. The first step to a successful closing should always be a detailed closing checklist, setting forth all items that will be required conditions precedent to closing and the party’s responsibility for each such item. The lender should walk through the checklist with counsel and the borrower to ensure everyone is on the same page. The party managing the checklist, whether counsel or the lender, should send checklist updates on a weekly basis to reflect items received. It is a simple concept, but I have seen a number of situations where the parties are waiting on a third-party item, such as a survey, Phase I or landlord waiver, simply because there was a miscommunication and the item was requested late.
3. Limited Borrower Engagement: This relates to (2) above and, in my view, is critically important. Simply put, the borrower needs to be engaged throughout the closing process, whether through internal counsel, external counsel or a financial officer. Questions invariably come up during diligence and preparation of loan documentation, and it is important these questions be addressed promptly from the borrower side, particularly when the parties are working under an aggressive closing timeline. Where disclosure schedules are included within the loan documents, the borrower should be the party preparing. I have seen a number of situations where the borrower provides documentation that may be responsive to a disclosure request (such as providing copies of leases or material contracts) but leaves it to the lender or its counsel to actually compile and populate the schedule. This is not only inefficient, from a time and cost standpoint, but can lead to errors in the documents.
4. Misunderstanding of Lender’s Internal Requirements: This ties in with (2) and (3) and is another issue I see often. At my firm, there are a number of financial institutions we work with routinely and with whom we have developed customary processes and procedures and/or developed form loan documents and checklists. However, there are others who we work with only periodically or engage us only for a specified matter due to certain unique circumstances associated with a particular loan. In these situations, counsel may be unaware of certain lender requirements. For instance, a lender may have specific title endorsement, survey, KYC and beneficial ownership requirements, require specific SOFR or related index rate language or require, as a matter of course, delivery of review memoranda or borrower legal opinions. Lenders should not assume these requirements have been previously communicated to outside counsel or that the requirements are “standard.” Similarly, as counsel, we do not want to assume that what was “good” for a prior transaction is “good” for the present one. Communication on the front end regarding lender-required items and the inclusion of the same in the closing checklist will avoid issues later. As outside counsel, you never want to get a call from your bank client six months after a loan closing with a list of open audit exception items from the closing.
5. Use of Hybrid Loan Documents: When I refer to “hybrid” loan documents, I mean a situation where some of the documents evidencing or securing loans to a particular affiliated borrowing group have been prepared internally by the lender, using third-party software, and other documents have been prepared by outside counsel or where certain existing loan documents are to be cross-defaulted and/or cross-collateralized with new loans to the same borrowing group. Often, a lender will start with internally prepared documents and engage outside counsel as the facilities increase in size or otherwise become more complex due to cross-collateral or other issues. This creates a few challenges. Fundamentally, it can be difficult to understand the overall structure, outstanding credit exposure and collateral. A significant amount of time may be required to review the existing paperwork in order to determine the current status and to work through any modifications that may be necessary. For example, a mortgage may have been recorded in connection with a term loan from 2000. The intent of the lender was for that same mortgage to secure a new credit facility to the same borrowing group in 2020 under a dragnet clause. However, that mortgage specified a 2015 maturity date for the secured debt and was not modified in connection with the 2020 credit extension. Second, there will likely be inconsistencies between internally and externally prepared documents. While third-party loan document software serves a purpose, it is pretty inflexible. There is limited ability to build out covenants and related definitions within a software-prepared document set. Thus, there may be a situation where there are ambiguities or inconsistencies among loan documents, differing default triggers or related issues, all of which can create difficulties in the administration of the credit facilities. Given the foregoing, in these situations, I always try to roll all outstanding loans under a common loan agreement when possible to ensure consistency and make the loan document set more cohesive. I also explicitly modify or ratify mortgages, other collateral documents and guaranties whenever additional secured loans or modifications to existing facilities are made in order to eliminate any potential ambiguities.

I recognize that many of the above points may be obvious; however, sometimes, the simplest of steps are the easiest to overlook. Ultimately, as lender’s counsel, our goal is to provide a smooth closing process, which helps you solidify the relationship with your borrower client. Hopefully, this article serves as a helpful reminder for your next loan transaction.

Aaron B. Johnson has a broad-based transactional practice, focusing on commercial lending, real estate, corporate finance and general business matters. Aaron regularly represents lenders and borrowers in various types of financing transactions, including acquisition and construction financing, asset-based lending, syndicated credit facilities, tax credits and working capital lines of credit. He has experience in all aspects of commercial real estate development, including land acquisition and disposition, negotiation of design and construction documents, tax increment financing and leasing and related matters. Aaron also routinely advises clients in a variety of industries on mergers and acquisitions, corporate governance, debt and equity financing and general commercial matters.