Pub. 8 2020 Issue 2

www.uba.org 12 DO YOUR HOMEWORK: KEY DUE DILIGENCE CONSIDERATIONS IN EVERY COMMERCIAL REAL ESTATE LOAN By Landon A. Hardcastl, Jones Waldo Holbrook INTRODUCTION It goes without saying but, before closing any loan, a lender should understand and feel confident about the collateral securing its loan. This is especially true, but a little harder to do when the collateral for a loan is commercial real estate since every piece of commercial real estate comes with its own set of unique issues and corresponding risks. Consequently, prior to closing any loan secured by commercial real estate (a “CRE Loan”), a lender should perform detailed due diligence to both understand and seek to mitigate any risks associated with its collateral. To that end, a standardized, comprehensive method of reviewing and evaluating information regarding the real estate collateral is critical. The purpose of this article is to advise lenders of a few key due diligence considerations in every CRE Loan. This article also advocates that lenders should prepare a thorough due diligence checklist for every CRE Loan. KEY REAL ESTATE DUE DILIGENCE CONSID- ERATIONS Due diligence for a CRE Loan will vary depending on the spe- cific facts and circumstances of each transaction. However, in all CRE Loans, a lender should pay particular attention to the following key items and related issues: TITLE At the beginning of the due diligence process, the lender should obtain a current title insurance commitment for the real property along with copies of all recorded exception documents referenced therein. In reviewing these recorded documents, special consider- ation should be placed on the following items: • Recorded documents relating to property use requirements or restrictions. These documents may be entitled “Covenants, Conditions and Restrictions” (i.e., CC&Rs) or something similar and, in addition to use requirements or restrictions, may set forth other important items the lender will want to know about such as construction guidelines and mainte- nance obligations for the improvements, assessment rights for owners’ associations, access to common areas, landscaping buffers, setbacks, reciprocal rights to use the property for access or parking, etc. Many times review of these documents reveals potential issues with the current or proposed use of the property that will need to be resolved before closing. • Recorded easements that burden the property, including blanket easements that burden the entire property. Based on its review of the survey, the lender may want to obtain endorsements to its title insurance loan policy that provides insurance in case any easement encroaches onto existing or planned improvements. • Recorded easements that benefit the property, including access easements in the event the property, does not abut a publicly dedicated street. In the event beneficial easements exist and are not included in the legal description contained in the title commitment, the lender will want these easements added to the insured legal description in its title insurance loan policy.