Structuring Financial Covenants, Cash Management, and Other Lender Protections in Mortgage Documents

Description

The current commercial real estate market has presented new challenges for borrowers and lenders and has impacted the initial drafting of loan documents or required modification of existing documents. Lenders might include new covenants and obligations in loan documents, while borrowers will want to negotiate for protections related to factors beyond their control.

Lenders and borrowers should consider whether relief from debt service coverage and other financial covenants will be necessary. If borrowers own properties where tenants seek rent reduction or forgiveness, borrowers should consider the impact on any financial and leasing covenants. Lockbox provisions may need to be revised to provide the lender with more flexibility in addressing tenant vacancies or debt-service coverage ratio (DSCR) triggers.

In construction loans or other loans with a future funding component, borrowers may be unable to satisfy conditions precedent to disbursement due to force majeure clauses and their inability to make continuing representations and warranties required by lenders. Current and future documents may need revisions to address disbursement issues.

Documents may also need to contemplate additional indebtedness and whether the borrower will be entitled to loan forgiveness or to prepay the loan before the maturity of the senior debt. Also, current market conditions may force borrowers and lenders to revisit nonrecourse or "bad-boy" carveouts as well as provisions regarding springing liability for bankruptcy or insolvency.

Listen as our authoritative panel discusses financial covenants, cash management, and other lender protection provisions in real estate finance documentation.