Lender Language: Borrowers And Borrowing Entities
Let’s take a look at the language of lenders.
Jointly And Severally
Ever wonder what the lender in a commercial real estate transaction means when the term jointly and severally liable is used? You hear it as a key part of loan terms when there are co-borrowers in a real estate transaction.
The term jointly and severally usually applies to situations when the borrower in a transaction is a) a real person and b) is actually more than one person. In other words, it applies to co-borrowers. It refers to the fact that each co-borrower is fully responsible for repayment of the loan. Specifically, it means each co-borrower is 100% responsible for the full repayment of the loan regardless of borrower ownership fraction in the property. It does not matter if the co-ownership share in the property between, for example, two co-borrowers is 50% each — in the event one of the co-borrowers becomes incapacitated, the other co-borrower is on the hook for repayment of 100% of the loan. Another way to put it is that jointly and severally means the debt is not shared.
That’s fine for individuals making a loan request. But what about when individuals aren’t making the request, but rather form a legal entity that then borrows to finance a commercial real estate deal?[DISCLAIMER: As always, never take anything you read here at The Source as legal advice. Always retain qualified commercial real estate counsel!]
Speaking only generally, the phrase “borrowing entity” is a bit of jargon in lending that is synonymous with the “legal entity” that is created and requests the loan. In its simplest terms, the borrowing entity is a) not a real person b) an organization concocted by a person or a set of persons that provides a distinct legal identity set apart from the persons forming it. A classic form of this legal entity is a corporation, but it could also be a limited partnership or a trust.
The borrowing entity can borrow capital, own property, sue and be sued under its own name, and make contracts. As such, it provides protection to its principals, and it’s the name on the deed when the deal is done. As you can probably guess, this only scratches the surface in terms of describing possible borrowing entities. The structure of a borrowing entity can be straightforward, or it can be incredibly complex, requiring organizational flow charts maintained by counsel to keep track of management responsibilities, general partnerships, shells and the like. Because lenders will need to know who they are lending to, the structure must to be clear to them, or there just won’t be a loan.