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OCC Lending Handbook Needs Parenting on Important Legal Topics

Posted in Articles, Training, Workout Issues

In an earlier posting, I reviewed the OCC’s new Commercial Real Estate Lending handbook .  The purpose of the handbook is to give parenting – I mean guidance – on risks inherent in commercial real estate lending.  On legal topics, the handbook takes a mind-boggling approach: it swings from legal light, to “I know it when I see it,” to neglect.   Even with this inconsistency, my main complaint with the handbook is that, with a few exceptions, it misses the opportunity to give bank examiners and lenders guidance on important legal topics.  Based on this, I give the handbook a gentleman’s C.  (One reader followed up with me, and gave it a D.)  As we all know, guidance often comes in a list (starting with your first ”star chart” on the kitchen refrigerator). The OCC lending handbook needs a “star chart” on important legal topics.   In this posting, I’ll identify and list some of the legal topics that create risks in commercial real estate lending.  Of course, this is “not an exhaustive listing” – and you ou can add to the list (or chart) by commenting below. Topics in the list are not described in detail.  The value in the list is the indentification of some (but not all) of the more prominent legal issues, when little or no guidance is offered in the OCC Commerial Real Estate Lending Handbook.  The goal is NOT perfection – it simply is about being better. Fortunately, legal lists do not need to be created.  They are everywhere.  One place to start is by looking at topics covered by key legal education providers or by legal organizations at their annual meetings.  I’ll start with two of my favorites. At the annual meeting of the American College of Mortgage Attorneys, members (actually, “Fellows”) present papers and discuss legal issues of immediate importance to lawyers working on real estate finance transactions.  This is a top-notch group.  If they identify the following legal topics as important, then . . . this list is a good list.  Here are a few of the topics from the recent annual meeting (no priority order and with my comments in parentheicals):

  • credit enhancement tools: letters of credit (currently in disfavor); earnout provisions (stay away from subjective triggers); guaranty agreements (choice of law and service of process provisions are important); and master leases (you’re better off with a guaranty)
  • intercreditor agreements (never, ever use the “standard” form – craft it to the deal)
  • ground leases (approval of any changes to the ground lease by the mortgage lender)
  • golf course loans (a trap for the inexperienced; and be sure to include websites and other technology rights in the collateral package)
  • Islamic Shiriah loans (a trap for the inexperienced)

Recently, I’ve been speaking on legal technology at the University of Texas Law School’s Mortgage Lending Institute.  This annual seminar draws accomplished speakers on a wide variety of important real estate lending topics.  Again, here are a few of the topics presented at the seminar (no priority order and with my comments in parentheicals):

  • construction lending (lien waivers; payment and performance bonds; and full-funding conditions)
  • tenant subordination agreements (might not be needed if already addressed in the lease; lender will NEVER accept liability for anything arsising prior to lender acquiring full legal title to the project)
  • impact of oil, gas and other mineral interests (merely relying upon local drilling ordinances could be risky)

Every list, of course, should end with a statement that “this list is not an exhaustive listing.” In future postings, I’ll list other topics.  Right now you can locate other topics by using  the “search” function (near the top of the page) to look for information and my perspective on other issues. If you want to dig even deeper, “click” on the “Resources” tab (near the top of the page) for instructions on accessing Winstead’s on-line training and presentation materials. Again, use the comment field below to list some of our favorite topics.