Preemptive Wordsmithing: Considering Future Alterations of Commercial Property at the Outset


Borrowers often envision future alterations to enhance the economic value of the commercial real estate asset, when closing the initial loan. Such alterations can be in the form of capital improvements, tenant improvements, renovations, and/or expansions of the facility. At term sheet negotiation, the borrower should consider the long-term and short-term plans for the property, so that the loan contains appropriate flexibility to deal with future alterations. Obtaining the lender's consent after the loan documents have been signed is typically more difficult and expensive than obtaining such consent up front. In addition to any finance professionals working on the loan, legal, leasing, development, and property management teams need to be involved in such discussions, so that appropriate feedback is obtained for strategic planning. 

Under most loans, future construction or significant alterations are not permitted, unless the lender's prior, written consent is obtained. The easiest and most convenient way to deal with construction plans is to address it directly in the loan and to obtain lender's advance approval over the terms of such construction and development. If not addressed in the loan documents, the lender will likely have broader discretion as to whether it will be permitted, and the borrower will have limited leverage in negotiating favorable requirements after the initial loan closing.

It is important, prior to signing the loan documents, to provide the lender with as much information as to the proposed plans as possible. The lender will want to become comfortable with the planned construction and consent in advance.  It is critical that (i) the project is clearly defined as to scope, cost, schedule, and (ii) detailed present plans are presented to the lender in advance. It is important to build into the loan a specific approval process for details, as they become more specific. In the loan documents, the lender would typically require deliveries of (i) detailed plans and specifications, (ii) an officer's certificate confirming no default, (iv) copies of permits and variances, (v) security documents or funds, (vi) proof of insurance, and (vii) any tenant or third-party consents required in connection with the proposed development. It is possible that for minor or limited construction or redevelopment the lender's consent may not be required, if it falls below certain thresholds, which can also be negotiated as part of the loan. Such factors may include whether the alterations would (i) have a material effect, (ii) exceed a dollar amount or percentage of the loan amount, or (iii) be structural in nature. The issues referenced above are non-exhaustive, and the host of lender concerns with releasing a portion of the real estate collateral underscore the need to clearly document such parameters clearly and preemptively, so as to minimize unbudgeted time and expense in obtaining the lender's consent down the road It is important that an attorney be engaged to properly memorialize and capture such nuances.


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