Pub. 6 2018 Issue 2

www.uba.org 20 A lthough a loan closing can feel like the end, it is also a new beginning. Once the ink dries on the loan documents, lenders enter a world of post-closing diligence, covenant reporting, restricted accounts, changes in loan parties, and much more. This is particularly true for real estate-secured construction loans, where reviewing advance requests, set-aside letters, releases of collateral, and lease reviews (among other things) can require significant attention. And even beyond these loan-specific forces, macro changes in the market or regulatory environment can send lenders into a scramble. Some of these issues can be resolved under the existing loan documents. But, for more complicated issues, the old loan must learn some “new tricks.” Typically, these new tricks are “taught” by way of a modification to the loan documents. When the need for a modification arises, lenders may want to consider the following factors to improve the quality of the modification: 1. Watch the Calendar Lenders may want to take a long look at the calendar when they first become aware of a modification need. When is the next payment due? When is the next extension option, report- ing period, or maturity date? With respect to the collateral, are there any expected changes or milestones in the near future (i.e. will there be a significant debit to the accounts receivable, will a plat be recorded, will a distribution be paid, etc.)? Calendar- ing questions like these can drive more than just the timing, but also the content of the modification. For example, a lender may want to postpone partial release of collateral until after a financial reporting deadline to get a better understanding of the borrower’s financial health. Or a lender may refuse to increase the loan amount until after a major covenant is satisfied (i.e. working capital threshold, preleasing requirement, etc.). If these important milestones are not considered during the modifica- tion process, a lender may miss out on valuable opportunities to mitigate risks and protect its interests. If the borrower is inflexible as to the timing, lenders can use conditions precedent in a similar way. Rather than delaying the modification until certain milestones are reached, lenders can move-up future requirements like principal pay-downs, finan- cial reporting, and more. Lenders can also require date-down endorsements, new financial covenants, or additional guar- antors in exchange for entering into the modification. These can strengthen the lender’s position while accommodating the borrower’s business needs. 2. Re-Evaluate Financial Metrics During underwriting, the loan amount was carefully manicured and the collateral was evaluated to ensure that the lender was not overexposed. Financial covenants were also crafted to com- pare borrower’s level of achievement against the lender’s risk tolerance. And, although the lender’s pre-closing predictions may not have been accurate, the modification process gives lenders some new, post-closing data points to consider. Lenders may want to review these data points, together with changes Effective Modification Agreements: Teaching an Old Loan New Tricks By Braden Johnson, Snell & Wilmer