Legal Advice for Owners and Investors of Income-Producing Property
Owners of commercial real estate need to depend on positive margins between the revenues generated by their properties and the costs of borrowing, but the nature of commercial real estate rental and mortgage markets can make the necessary balances difficult to achieve and maintain over time. The advice of experienced commercial real estate attorneys can help commercial borrowers improve the terms of their mortgage commitments while expanding their options for taking advantage of market swings either in the leasing business or in mortgage interest rates.
Contact Accisano Law Offices in Freehold to learn how our lawyers can protect your interests in commercial property mortgage negotiations and documentation. We can show you how to make the most of your leverage in obtaining attractive mortgage terms in new financing, refinancing and interim financing for construction or renovation.
Professional Advice for Professional Real Estate Owners and Investors
Close attention to the cash flow necessary to meet the mortgage payments on profitable terms is essential in commercial mortgage borrowing, but favorable interest terms, amortization schedules and loan-to-value ratios are not the only factors to consider in securing mortgage financing. Commercial real estate owners need to understand the effect of prepayment penalties, cross-default and cross-collateralization terms, or personal guaranties on the continuing securities of their investments.
Our role as commercial mortgage counsel for the borrower is to make sure that our client understands the significance of the lender’s initial terms while working to ensure that the final mortgage loan agreement reflects our client’s interests and priorities to the greatest degree possible.
Negotiating Alternatives to Unfavorable Prepayment Terms
Many of our clients find that the prepayment penalties for retiring mortgage debt prior to maturity can be especially problematic. The ability to periodically refinance or liquidate a high-interest property without penalties to the borrower adds considerable flexibility to the management of a commercial property portfolio. While lenders are generally interested in yield maintenance terms that essentially assure the value over time of a particular loan, the borrower can negotiate for defeasance rights.
Here’s how mortgage defeasance works: Under certain market conditions, the borrower can profitably replace the collateral represented by the property with U.S. Treasury securities that will yield an equivalent cash flow to the lender over the same period of time at virtually no risk. Meanwhile, the borrower obtains a release of the collateral and relief from a high mortgage rate.
Another approach to prepayment that works satisfactorily under certain business models is a graduated prepayment option, which reduces the penalty as maturity approaches.
Avoiding Cross-Default, Cross-Collateralization or Guaranty Terms
Borrowers on the security of commercial real estate should be wary of additional mortgage terms such as personal guaranties, cross-default or cross-collateralization terms. Commercial property lenders typically look more to the value of the collateral and less to the creditworthiness of the borrower in making loan decisions, and typically lend at a lower percentage of value than residential lenders. Such additional security in favor of the lender is generally unnecessary in the usual situation.
In fact, most commercial properties will be titled in single-asset LLCs in order to insulate the nominal borrower from competing claims in the event of bankruptcy. Unless the bank is financing other operations of a diversified borrower, it is usually possible to avoid personal guaranties or cross-default or collateral clauses.
Call 732-462-5770 in Monmouth, Ocean, Middlesex and Mercer Counties
The commercial real estate and leasing attorneys of Accisano Law Offices have more than 35 years of experience on behalf of property owners, managers, leasing agents and investors in southern and central New Jersey. Our familiarity with the practical aspects of commercial property financing can help participants at any stage of growth or scale in this dynamic market. Contact us in Freehold for additional information or drafting of CAM terms in retail, office or industrial property leasing or visit our website at http://www.acclegal.com.