Mid Atlantic Real Estate Journal — August 30 - September 12, 2013 — 13A
www.marejournal.com
C ommercial R eal E state L aw
n the aftermath of the Great Recession, commer- cial real estate developers By John D. Cromie, Connell Foley LLP Term Sheets, Proposal Letters and Commitment Letters: Practical Advice for Real Estate Developers I
documentation process. While specific lender requirements can vary, proposal letters are often issued prior to full un- derwriting of a prospective credit facility. As with term sheets, most proposal letters include affirmative language which make it clear that the terms set forth in the letter are not a “commitment” and that the lender’s obligation, if any, is subject to further ongoing discussions, as well as compli- ance with the lender’s under- writing requirements and loan documentation. Most proposal letters include a provision re- quiring a developer to make a
good faith deposit for expenses, and a similar commitment from a lender that the unused balance will be refunded if the loan is not fully approved and accepted. Proposal letters are useful for developers because they enable a borrower to solicit feedback from lenders quickly on a non- binding basis. However, many lenders are concerned that bor- rowers will “shop” a prospective proposal letter to other lenders to seek more favorable terms. As a result, it is not uncommon for lenders to impose a confi- dentiality provision in proposal letters. From a developer ’s
point of view, any attempt to prohibit a borrower/developer from discussing terms and con- ditions of a credit facility with other lenders, even subject to the confidentiality clause, can be viewed as transforming the non-binding proposal letter into a binding commitment letter. The third category of pre- liminary loan documentation is a commitment letter. In most jurisdictions, a commitment is a written undertaking by a lender to provide a credit facil- ity to a developer on mutually agreed upon terms by which the parties evidence an intention to be bound by the terms of the
commitment. In legal terms, a commitment is a “contract.” If breached, the developer can sue a lender for breach of contract. Commitments are issued in writing and reflect a mutual agreement by real estate devel- opers and lenders with respect to the basic terms set forth in the commitment. The absence of agreement on certain terms or provisions that provide cer- tain items are to be later ne- gotiated or documented to the satisfaction of the parties does not undermine the existence of a commitment if there is mate- rial agreement on the other continued on page 16A
have the ben- efit of a vari- ety of lessons regarding the or i g i nat i on and documen- tation of com- mercial real estate loans. As the credit
John D. Cromie
markets and commercial real estate markets continue to heal, it is timely and appro- priate to review the various options available with respect to the initial documentation of a commercial real estate loan and the respective pros and cons of each. A term sheet is generally utilized to clarify and confirm a developer’s preliminary un- derstanding with respect to po- tential financing. Term sheets can be used to summarize the key business terms and pro- vide the opportunity for future discussion of those issues. In most cases, term sheets are non-binding and offered for discussion purposes only. To further confirm the non-bind- ing nature of term sheets, most lenders reserve the right to unilaterally withdraw the term sheet at any time. Term sheets are typically used as a means to assist developers and lenders to reach a basic understanding of deal terms pending further negotiations. In general, there are no fees or expenses incurred or required from a developer in connection with a term sheet. Aproposal letter represents a more formal version of a term sheet. In today’s competitive development and lending envi- ronment, a loan proposal letter can be an efficient method to confirm, on a preliminary basis, the terms of a credit facility be- tween a lender and real estate developer. While specifics can vary, a proposal letter generally involves a concise letter which sets forth a summary of loan terms. Proposal letters help to identify critical issues that require the parties’ attention. For both the lender and com- mercial developer, a proposal letter can assist in defining the loan structure and identifying potential problems. A proposal letter can be used to memorial- ize essential deal terms and to allow lenders to react quickly to developer inquiries. Proposal letters can also be used to help facilitate the loan
75 Years
Connell Foley
Celebrating
Connell Foley’s Real Estate and Land Use Practice Group provides clients with advice in connection with land use and development laws and regulations that can identify challenges early in a project’s life cycle and offer solutions. We are experienced in issues related to zoning, federal, state, and local permitting, and all manner of real estate regulatory requirements and have particular experience in navigating issues pertaining to highly regulated projects governed by specific statutes such as those pertaining to coastal protection, wetlands, the Pinelands, the Highlands Preservation Area, and the New Jersey Meadowlands. The group has a broad practice that addresses nearly every facet of real property, including: Real Estate and Land Use
For more information about Connell Foley’s Real Estate and Land Use Practice Group, please contact John Cromie at jcromie@connellfoley.com or Philip McGovern at pmcgovern@connellfoley.com
or visit our website at www.connellfoley.com
O Acquisition and Sales
O Leasing
O Land Use, Permitting, and Approvals
O Urban Development/Redevelopment
O Redevelopment O Solar O Mixed Use Development/Redevelopment O Investment Funds O Financing
O Workouts, Restructures, and Foreclosures
O Condemnation/Eminent Domain
O Tax Appeals and Tax Matters
O Condominiums
Roseland 85 Livingston Avenue Roseland, NJ 07068 973.535.0500
NewYork 888 Seventh Avenue 9th Floor New York, NY 10106 212.307.3700
Jersey City Harborside
Cherry Hill Liberty View Building +DGGRQÀHOG5RDG Suite 230 Cherry Hill, NJ 08002 856.317.7100
Spring Lake The Atrium, Suite E 309 Morris Avenue Spring Lake, NJ 07762 732.449.1440
Philadelphia 1500 Market Street 12th Floor, East Tower Philadelphia, PA 19101 215.246.3403
Financial Center 2510 Plaza Five Jersey City, NJ 07311 201.521.1000
www.connellfoley.com
Made with FlippingBook - Online catalogs