Ep. 56 | Key Things To Look For, Or Dodge, In Bank Docs

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On this episode of The Mobile Home Park Lawyer, Ferd talks about some loan documents and what to look out for when loaning money. Ferd gives 4 things to look out for and offers up some advice and stories to help us all.

 

HIGHLIGHTS:

0:00 – Intro
1:30 – You can’t modify loan documents a lot, but you have to know what is in them
2:13 – Smaller banks use LaserPro docs and you can only change what’s written in bold – in Ferd’s opinion, these are the worst
3:14 – The second worst is agency loans because you have to stick with the contracts, but there are a few things that you can change in them
3:56 – Negotiated docs are where the lender hires a real estate or banking lawyer to represent the bank. This isn’t as common as the other types of loan documents
6:16 – The first thing to look for in these documents is recourse
8:55 – The second thing to look for are your standard terms
9:20 – The third things is any additional terms that are specific to you
12:09 – The next thing that bank wants is some documents “to make them feel warm and fuzzy”
13:04 – Lenders typically want a subordination agreement

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation, Ferd Niemann here again, talking about loan documents tonight. Why am I talking about loan documents? Because, well, I’m closing on a mobile home park tomorrow and not the time to sweat it, frankly. I better make sure it’s a good deal because I’m about to sign away a little bit of my family’s future here if I screw up. So that’s how it works with recourse, which is one of the things I’m going to talk about here. But ultimately closings are exciting, right? It’s I’m buying deals, it is fun. It’s part of wealth creation. It’s what I love about the business, right? It is going through the process. Closings are fun. Operations can be messy, but I actually like operations too. But today we’re going to talk about the next in our little miniseries here of legal documents. We’ve covered things like closing documents, you know, deeds, affidavits, bills of sale, assignment of leases, talked about PPMS and operating agreements and contracts and leases.

Loan docs were one that one category that sometimes you can’t really modify them a lot. I’ll be honest. But you got to know what’s in there and I’m in the middle of the deal I’m closing tomorrow is, it’s a local, it’s a Missouri deal, but the bank is from Illinois. I’ve got a good relationship with the Illinois bank and I’m pretty used to their documents, right? So I don’t even really read them at this point because I’ve done, I don’t know, seven or eight deals with this bank and they’re all the same. But I negotiated the terms and the term sheet. And I figured out through my loan application and my loan cover letter request, kind of the terms that we would, we agreed to. And then that’s what gets put into the template docs. So from loan docs, you really got about three categories of, I say, lawyering on the other side, you got the smaller banks that pretty much use like laser pro docs, which are basically cheapo templates. And the bank really can’t modify it, or it jacks with their liability coverage.

So the way that you get into modifying, is you can and modify the terms that are in bold, so you can put stuff like, you know, sign your name Ferd Niemann “comma” subject to section 17 in my email, I mean, I’ve actually done it in like trash contracts and stuff, but a loan doc I’ll get them to change some of this stuff sometimes in the bold. And that’s how you get the sales guy, frankly, the loan officer to work around some of the loan committee rules. Not that they want to get into trouble, but really just to correct errors that instead of having to go through some legal department in New York City that doesn’t know anything about anything on the deal. They just know this is what our malpractice coverage is going to do, laser pro, right? So laser pros are the worst for negotiation.

The second worst is probably agency loans. I’m going through a refinance. And I just went through closing and refinance for clients on two, oh no, I guess three Fannie Mae and Freddie Mac loan docs. And they even tell you out of the gate, you cannot change these documents. If you to it’s over, you know, you have to basically preordain that you’re okay with their template. And for the most part, that’s the way it’s going to go because the loan originators are working on behalf of the federal government agency. So they’ve got limited flexibility. But there are some provisions you can change on a limited basis, particularly as it pertains to the bad boy carve-outs, which I’ll get into. So that’s Fannie Mae, Freddie Mac docs.

The third doctor are going to negotiate docs. And negotiate docs is where the seller, not the seller, excuse me. In this case, the lender hires a real estate lawyer or a banking lawyer of some sort to represent the bank. Typically they charge you the borrower. So in MHP deals is kind of rare. But I used to do retail deals and it was more common. It’s expensive frankly because you’re paying for the lawyer for your side and their side and the bank still has a quality lawyer representative. It’s not like you can get everything, but sometimes you can get them to modify terms. That’s better for high-net-worth individuals that have a bunch of other balls in the air, if you will. But ultimately loan docs, there’s a number of documents the banks, they make you sign. They’re largely boilerplate things like a business loan agreement, a promissory note, they’re going to want to record. It’s called a deed of trust or a mortgage. Those are the two most common. Some states I know, like Georgia, has like a deed to secure debt. It’s basically the same thing.

They’re going to want some sort of LLC or personal resolution authorizing you to close. There’s going to be a guarantee document identifying who has a guarantee on the loan often it’s the borrower or the parent, the subsidiary and you, the person. They’re going to know who the certificate of beneficial owners are. Basically, if it’s my LLC, if I own more than 20%, I need to be a guarantor on the loan and they need to know who’s, you know, at the end of the rainbow, if you will, within the LLC, they want to see the structure of the operating agreement. Those doctors don’t typically make it into closing, but they’ve already reviewed them as part of the certificate of beneficial ownership. There’s often a, what they call a commercial security agreement. And there’s some documents like that that are also related to personal property, like the homes. It’s got through the UCC for purposes of they call it perfecting the lien. And there’s often a subordination agreement if you will. Which basically just subordinates other interests to the lender, which is, in particular, is of importance on syndications when there’s other classes of citizens so to speak like, you know, class A limited partner membership interest. So those are the documents.

But today I’m going to just briefly go through, I’m going to call them like four categories, four categories of things you want to look for. And these are the things that you might be able to change, or you at least want to verify. And the number one, in my opinion is recourse. Like, okay, I think we all know what recourse is. It means, if all goes to hell on the deal, do you lose your house or not? Okay, so most agency loans which would be Freddie Mac or Fannie Mae, and frankly, most conduit loans like CMBS loans, they’re non-recourse. Now there are exceptions to that for bad way carve-outs, things like fraud, deceit, waste in the property. Basically, you really Jack it up, they’re going to come after you. But that’s pretty rare that you have those bad boy provisions that come into play. On a regular local bank or regional bank deal, you typically have a recourse deal. And then recourse means it’s a personal guarantee. So like I’m doing a deal right now. The loans about 2.1 million, the banks got personal recourse to me, right? And I actually could have went in the agency on that, but I’m choosing to go local because there’s happens to be frankly, unbelievably better terms with my local bank. Wanting to have good relations with them too. Because right now we’re in the COVID world and agency loans have COVID reserve, really kills the yield, and you got to put up anywhere from, it depends on the loan and term, but at least six months of payments in reserve, that’s a couple hundred thousand bucks that you got to borrow on paper and putt in a piggy bank with 0% interest. And then you’ve got to pay the agency. You’ve got to pay lender legal, you got to pay for a property condition assessment. You got to pay for different levels of survey and things like that. There’s a lot of soft costs in agency loan, the benefit is you can kick the recourse, but you want to make sure that you know what you’re getting in the recourse.

If I have partners on a deal who own more than 20%, the bank typically wants them to sign the recourse also. If that’s the case, I want them to shave down my recourse, right. I just closed on a deal and the partner had 25% of the deal. So he signed on 25% of recourse. I signed on 75%. Now some banks make you have extra coverage. My old business partner, I don’t remember we were doing retail. He was high-net-worth guy. The bank made him sign a 100%. And if I had 10% of the deal, I just signed 15%. So 150% of my interests, they are going to sign, you know, a 100% of his 90% interest. So the bank was covered. Obviously, this got to be worth a ton of money. If the deal in South, the bank was going to give him that phone call that, Hey, it’s time we’re coming for you for recourse now. He could come after me under the operating agreement, but the bank always wants to go to the deepest pockets, which is why if I got a junior partner in the deal and I got deeper pockets, I want my recourse to be limited prorate. Let’s negotiate, it’s a really big deal. That’s why I got to number one on the four things to look for.

Number two are your terms, your standard terms, these are the things you should have in your loan commitment. Just want to make sure they’re there. You know, like I’ve got an 80% loan to value loan at 3.25% interest, with the five-year fixed rate. So the five years of fixed with a ballooned into five years, sometimes you have interest only. Sometimes you have a 10-year fixed when you have, sometimes you have, sometimes you have other provisions that are just basic terms, but then really, I dig into number three, the additional terms, and these are the things that are more kind of you specific. And a lot of people don’t think of these and to some degree, they don’t matter until you get a bigger portfolio. But I mean, like for my deals now, the bank wants me to have, you know, wants the deal to have a certain debt coverage ratio. They want to have a certain lease-up or infill ratio. If it’s a heavy infill project, they want me to have a global debt coverage ratio because I have other assets or, you know, expenses and debts and liabilities, like most people. And I’m doing a bunch of remodel projects and a bunch of infills at one time, that’s not good for my coverage ratio. If I’ve got a bunch of stabilized deals, but it is, right. And then I got other incomes from things like legal fees or passive investments. And I got a lot of expenses you know, putting my kids in private school. Gosh, those additional terms are important.

Sometimes you want to look for a prepayment fee. You can probably negotiate the prepay fee, frankly, to just a refi fee. If you go to a different lender, you know, refi out, which I’ve agreed to that fee a few times, but frankly, not that the bank’s not that smart, but you could, there’s only if you refi. So there’s just, you can just pay it off cash, which is not simple obviously it’s a bigger number a lot of times. You can pay it off cash, get the lien released, and then do a cash-out refi on a deal, no debt on. And I’ve even asked the bank I could do that. And they said, yes. So they just don’t like being, and you should have good relationships and maintain relationships, which is just generally, you know, bad taste of refi out with a different lender, unless it’s an agency lender. And then they kind of get it. Cause you spit the hook on the recourse, right?

Another thing banks sometimes these additional terms is reporting requirements. Oh, I got it. I made the mistake. I had one bank. This is a Missouri bank. And I was doing a bunch of reporting for my investors in the syndications. So the bank knew about it. I gave the banks reports. Then my Illinois bank, I was looking at another deal and I told them, yeah, I got these reports. I got this great software, Rent Manager. They’re like, Oh, well we want that. We want that now too. So now I’m doing monthly reports to the lender that I had basically got away with not having to do for three or four years. So that’s kind of a pain. And those reports are typically things like at least the P and L in a rent-roll. But sometimes they will want a trial balance or balance sheet. They want quarterly. They want you to, they want annual reports, annual tax returns. They want annual personal financial statements from all the guarantors. That’s pretty standard. And they typically give you some time and it’s like 30 days after you file your tax return. So if you file extensions and you file an October 15th, you can turn the bank, November 15th. So not the big of a deal.

And the next thing the bank wants is some sort of, I call them documents to make them feel warm and fuzzy. These are things like an agreement to provide insurance, which makes sense, right? Like you need to list the bank as an additional insured or lender of record or lien holder on your casualty insurance, on your liability coverage, on if you own personal property. And then depending on the bank they may want life insurance. So I now have banks that require life insurance on me. In case I get hit by a bus or something, that the money can go to pay down the loan frankly so that they don’t have to worry about, you know, who’s sitting on, you know, on deck if you will, for the team.

So I’ve actually got the point where I’ve pre-purchased larger life insurance packages. So don’t tell my wife, but I’m worth more dead than alive. And with those packages right now, those proceeds go to the investment, go to my investors, frankly, to the LLCs. But the impetus for them was to resume the lender requirement. Another thing lenders require sometimes is subordination agreement and banks typically want these, if there’s some distinction, if you will, amongst members, just me and dad a deal, it’s clear that it’s just us. There’s nobody else. But if there’s a preferred return to a limited partner, they’re going to start to wonder, wait a second, who is this limited partner? Does this person deferred giveaway, you know, superior rights. And rather than try to deep dive into the 195-page, private placement memorandum operating agreement, the bank just wants me to sign some sort of subordination agreement and I’ve got a resolution to closing, it says like I can sign. Here’s why, I’m the manager of the entity. Okay. Then I sign off on behalf of my limited partners that their interest is subordinate to the debt, which is the deal I cut with them. And then by definition, essentially that’s what preferred equity is and preferred return. So it makes sense.

But really those are the key things to look for. There’s a whole bunch of other stuff. And if you get into seller finance deals, you know, things like the promissory note, perhaps become more important. You can negotiate a better, maybe you even spit the recourse, things like that. But ultimately there’s the four things I look for. I could categorize them as recourse. Yes or no, you know, deal terms, additional terms, and then provisions and documents to make the bank, the warm and fuzzy. There’s a whole bunch of other answer documents that I mentioned in the beginning that I won’t mention again, but ultimately those four things will get you home. Till next time, have fun, dodge the recourse, God bless.

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