Using software to generate loan documents is a great way for private lenders to save time and money. However, there may be some cases where a generic loan document cannot be used because the agreement has unique components that need to be addressed. Lender Link’s CEO, Rocky Butani visited Lightning Docs’ office in July 2023 to interview Nema Daghbandan, Esq. on some of the complexities private lenders may come across when using software for loan documents. Watch the video or read the transcript below.
ROCKY BUTANI:
When we think about commercial real estate deals, like large retail properties or a hotel, what are some of the complexities around that in terms of loan documents?
NEMA DAGHBANDAN:
When you deal with commercial real estate as an asset class, Lightning Docs which was created by Geraci Law Firm, was designed to do whatever it needs it to do, [plus] it can do anything in commercial real estate transactions. It’s not like we go to a different system when we have to write a commercial real estate secured loan. We’re gonna go right back to Lightning Docs ourselves to be able to write that sort of transaction. But you really have a lot of new issues that have popped in and usually our clients probably think of it from an underwriting perspective, but it’s really legal in nature.
So I’ll give you examples. A hotel, “is it a franchise hotel?”, “Is there a franchisor?”, “What does that franchise agreement say?” Because you need to understand this as a lender, always thinking ahead. If I foreclose and it’s a Ramada, does a Ramada have any obligation to me? Or they’re gonna tell me “you can’t operate as a Ramada anymore.” My agreement was with the borrower. You and I are not counterparties. Just because you end up owning the property doesn’t mean you get the same rights as the property owners because we had an agreement in place separately. And so, there could be covenant defaults whenever you’re dealing with commercial real estate, you’re typically dealing with third parties. They could have tenants. They could have other lenders on the property. There’s all sorts of counterparties that now get introduced. You have a lot of complexity in real estate that oftentimes shows up in these scenarios that once you’ve come to a conclusion, meaning, okay, I now know that I need to enter into these counterparty agreements or others, it’s fine. You can probably go to a software solution to generate the loan documents but you often really need a strategy component going into the transaction. And no software is going to give you the strategy.
ROCKY BUTANI:
I’m assuming when you get into these complex deals, that, maybe that adds to the legal costs of dealing with the loan docs?
NEMA DAGHBANDAN:
Yes, and because now when you are introduced to these new facts and complexity you oftentimes have to write around them. Let me give you an example. Let’s just say you’re going to lend on a property that has a cannabis dispensary as one of the retail tenants. You don’t want that tenant there. And the landlord agrees with you. So you say, “You know what? I don’t need this tenant in the property. They’re on a month-to-month, I’m going to get them out of the property.” Fine, no problem. But we need some agreement between each other now that I will let you close on this loan. We will do this together. But I need, within 90 days of us entering into this loan, I need that tenant gone. So there’s usually and oftentimes in bridge financing, there’s a lot of storytelling you need to do in the documents. Because typically people think of this as, oh, I have to do a construction loan, and, well, let’s talk about the complexity of that construction. Is it just a single draw or is it multiple draws? Do you need a third party funds control involved? How complex is the construction? Is it ground up? These sorts of things. And some of that can be automated out. And you can say as well, you know, based on the difficulty of the transaction, there’s three levers you might want to pull of legal language you want to drop in there.
But sometimes it’s very fact intensive, which is “I want to make sure that they don’t get the money, until the following conditions have been met.” And those conditions can vary on that specific loan. So oftentimes the way you see this manifest is that if you look at a term sheet of the lender, all those terms sheets in the letter of intent, you want to see it in the loan documents, otherwise, there’s no agreement. It’s hopes and dreams. And so you have see a one-to-one match of letter, LOI, to a set of loan documents. And unless it’s always repeated in the exact same way, which sometimes it is, or you can make a good estimation of that. But it’s not always the case. And so typically when you deal with larger loan amounts, particularly in short-term financing, there’s usually a bigger story to tell at the end of the day and that you’re trying to make sure [you have] all of the things that you need from an underwriting perspective for this to be a viable project so that they actually can exit successfully. Usually it’s very specific conditions that now need to get dropped into the loan documents to make sure that whatever you had agreed upon with your borrower, that they’re going to fulfill their obligations and you’ve got some recourse against them if they don’t.
Another example of this is, ceasing construction. So what happens if they cease construction? Do you care if it’s ceasing construction for 30 days, 60 days, 90 days? Does it matter? These sorts of things can be kind of custom tuned to your underlying transaction. And so you just want to make sure that you cover all the facts. And that goes back into what you talked about a second ago as well, which is when’s the software solution good? When’s it not? Well, it kind of depends. Is your business typically that really simple LOI and typically smaller balance loan transactions? [If so], yes, software is a good solution in this example because you’re repeating a set of facts. It’s the known facts [in loan documents] that are particularly [good] for something like Lightning Docs which was custom-built for business purpose lenders. As a law firm we saw things many, many times over. And so we needed to come up with consistent language ourselves to deal with repeated fact patterns, and so that will fit really nicely into a piece of software. But sometimes it doesn’t, and I think as a lender, you probably know when that [time comes] when you’re like, “Oh, I like everything about this. It’s totally run-of-the-mill but there’s this one exception I want to address”. So as long as we make sure that we agree to this one thing, that one thing is probably something that you need to consult with an attorney on to make sure that gets incorporated into the loan documents.
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