Reducing Costs (& Headaches) at Term-Sheet Stage

By Michael Scheinberg, Partner, Pircher, Nichols & Meeks

 With the increasing size of funds, expansion of activity by REITs and family offices and inflow of foreign capital, portfolio transactions are occurring with greater frequency.  Addressing issues unique to portfolio loans in the term sheet can reduce surprises and make loan document negotiations more efficient and closing easier. Set forth herein are some silent issues that may be considered at the term-sheet stage, and some thoughts on addressing such issues.

Dove-tailing with PSA Transaction:  The term sheet should account for kick-out rights or conditions to inclusion of properties under the portfolio purchase agreement.  Borrowers beware: differences between purchase-price allocations and loan allocations could limit loan proceeds and decrease leverage.

Property Pools:  Borrowers may try, in the term sheet, to divide portfolios into different “pools,” thereby limiting cross defaults for some property-specific defaults to properties only within a specific pool.

Concentration Limitations on Release:  A “release price” for sale or refinancing is typically some multiple (e.g., 115 percent) of allocated loan amount.  Lenders may also impose “concentration” limitations, such as limiting the percentage of NOI, geography or affiliated tenants represented by one remaining property (or a specific group of properties) in relation to all remaining properties.  The term sheet should address these limitations to be consistent with borrower’s business plan and disposition strategy.

Relationship Lenders:  Syndication among lenders is common for portfolio loans.  If a borrower chooses a relationship lender, it may want assurance in the term sheet that such lender will be the “lead” and try to limit which lender decisions will require approval of all (or some percentage) of participating lenders.

Post-Closing Estoppel and SNDA Delivery:  If it is impractical to obtain Estoppels or SNDAs from all required tenants prior to closing of the loan, the term sheet may establish a lower threshold and obligate borrower to use commercially reasonable efforts to obtain estoppels or SNDAs from key tenants post-closing.

Organization and Loan Document Structure:  Use of an SPE for each property can insulate against risks from other properties.  Alternatively, a single entity can be administratively efficient and limit transaction costs.  With multiple SPE owners, some lenders require all owners to sign a single note as co-borrowers; others will have a parent holding company as borrower and the property owners giving mortgages, effectively as sureties.  Additionally, for a multi-state portfolio loans, lenders may have special structuring requirements to address so called “one-action” foreclosure protections.  Addressing structure in the term sheet will lead to more efficient execution.