Private real estate lenders often create tailored loan documents for their clients, recognizing that a one-size-fits-all approach is impractical in the diverse realm of real estate. Each type of property possesses different features and it’s the responsibility of the loan company to draft documents that conform to the specifications of the property type. Private Lender Link’s CEO, Rocky Butani visited Lightning Docs’ office in July 2023 to interview Nema Daghbandan, Esq. on what specific questions private lenders should consider before drawing up loan documents for their clients. Watch the video or read the transcript below.
ROCKY BUTANI:
Whether you’re using the software or you’re involved in advising the client on a particular transaction, you pretty much can cover all the different types of loans that most private lenders will do? You’ve got your standard bridge purchase or refinance, commercial or residential property. You’ve got your fix and flip, ground-up construction, DSCR. You may have some long-term multifamily and long-term commercial.
NEMA DAGHBANDAN:
Yes, a hundred percent. Oftentimes what happens is there’s a different set of questions that you really should be asking a potential lender. So let’s say for example if it’s a one to four family residential, sometimes it’s a matter of practice. And I’ll say it’s okay, if the collateral is an SFR, it’s pretty A typical to also require ownership of the business pledged in the transaction. Let’s say if you have an entity borrower or an LLC borrower, some lenders will say, in addition to the real estate I also wanna secure ownership of that LLC so I don’t have to necessarily foreclose on the real estate, I can also foreclose on that LLC directly and then step into the shoes of the LLC. And now I’m owner because I own the LLC, not the real estate and the LLC happens to own the real estate. That’s how I got ownership. That’s an A typical solution for SFR. It’s much more typical in a commercial real estate secure transaction. Another example of this is in a residential transaction you rarely need what’s known as a collateral security agreement, because typically as you say, I’m going to secure this piece of real estate. But then you have questions of, in residential real estate, it’s like, what about the drapes and what about the AC that’s outside? And, do you own that too by virtue of owning the real estate? What is the real estate in this context? And so for residential transactions you don’t typically need an agreement to deal with all of the outside collateral. Most states will say, ‘Hey as long as you’ve got the real estate you’ve got kind of all the things attached to the real estate.’
In commercial very different ballgame, because commercial oftentimes has something that residential doesn’t, which is equipment. You have giant stoves. They may not be attached to your property but they may be fundamental to running that pizza store. And so do you actually have a right to those pizza ovens when you foreclose? You have a car wash, do you have a right to the car wash equipment? All of these things are really, in legal parliament, they’re personal property. They’re not real property. They have nothing to do with real estate they’re just things that you go out and buy in the marketplace. But you as a lender oftentimes assume that because I have a loan on the real estate that I also have a loan on all that personal property. And you can do that. You just have to make sure you get a collateral securement you file a UCC filing. There’s things that you need to do to supplement a standard set of loan documents to conform to your business in that context. And so that’s why, you know I hate to beat a dead horse but that’s why loans are so different, right? The facts matter in these loans because it depends on what is your collateral, what do you want to secure?
But that usually differentiates the use of a product like Lightning Docs which is the first thing I always ask, “tell me about the type of lending that you do”. Because that matters a lot. A simple example for you, you’re doing a one to four family bridge loan, you’re never going to impound that loan. You’re never going to require taxes and insurance impounds. It’s just an irrelevant thing. I mean, I guess you could, but you know 1% of lenders will do something like that. In a DSCR loan, you always do that. And in impounds in a set of loan documents, there are probably 10 different provisions it’s kind of touching upon. Because what does it deal with? It deals with your monthly payment. It deals with this concept called ownership, which is who owns those funds? Your segregating funds, is it the borrower’s money? What if they file bankruptcy? Is that their money or is it your money? The documents are going to control in this situation. So, with these little concepts, it [starts] ballooning into much bigger circumstances. And so when I think of it from a software perspective, I think of it as features. What features does this loan possess? And similar as, run of the mill stuff like prepayment penalties or those sorts of things where that tends to just kind of be modular saying, what does the LOI say on a DSCR loan? It’s typically five years, 5% if you pay in the first year all the way down to 1% if you pay in the fifth year. So a 5, 4, 3, 2, 1 sliding scale is what you typically see in DSCR, and in bridge, it’s negotiated. Most bridge lenders in today’s market, at least, will typically not require a prepay penalty because they’re out of market if they do. But the software can do all of these circumstances. You just need to make sure that you’re thinking through them, [asking yourself], what does this loan possess?