One way for borrowers to have a more pleasant loan closing experience and for the lender to see its customer achieve long-term business success is when a borrower chooses to retain an experienced commercial attorney (“ECA”). Such an individual can assist the borrower to structure the transaction favorably for the borrower.
As those of you involved in closing commercial loans know, receiving necessary due diligence from your borrower is a key to a successful SBA loan closing. Unfortunately, many times, the due diligence received contains discrepancies or fails to meet the lender’s requirements. Worse, the transaction structure and poorly drafted contract documents due to lack of an ECA pose risks to both the borrower and lender. While lenders cannot require that borrowers retain an ECA, they can often recommend this. If a lender does not believe it is worth it to make such a recommendation, please consider the following common example.
Your borrower forms a limited liability company (“LLC”). When the formation documentation is provided, by-laws are received instead of an operating agreement. The principals refer to themselves as directors and officers (i.e. Chairman, President, and Secretary) in the documentation. As we recognize, LLCs are controlled by operating agreements (see SBA requirements in its 2018 7(a) Loan Authorization Boilerplate). Operating agreements are executed by the Members of the LLC. Generally there will be a management section in that Operating Agreement providing management power either to the Members or the Managers of the LLC, and those are the parties who should be executing the lender’s loan documents. With borrower providing the wrong documents to the lender, the lender now has to go back to the borrower for documents that are required based on the type of entity the borrower has established. Often borrowers just don’t know how to handle this type of situation.
An ECA would provide advice about the proper entity or entities to be formed. An ECA could set up the entity properly and draft an appropriate operating agreement. Moreover, an ECA can teach the principals about the responsibilities and the requirements of owning/running such a business.
An ECA can draft a required lease. Can an inexperienced borrower? Lenders’ hands can be tied in these situations. They want to help their borrowers avoid legal fees as much as possible, but also realize that they could be at risk of lender liability if they go too far in helping the borrower. Many times the borrower asks the lender to provide a lease. Of course, a lender should not provide a completed lease to a borrower for execution or the lender is potentially opening itself up to lender liability risks.
Another benefit of a borrower having an ECA is that counsel can help to make sure that the borrower is informed about all aspects and risks of the transaction. Especially worrisome is when there is a real estate purchase involved and the borrower is not represented. If the property is a condominium or planned unit development, there will be documentation of record with the rules and regulations of the governing association. If the borrower is not represented by an ECA, the borrower may not even realize it should review the recorded documentation. If the borrower chooses not to review the documentation, there can be future issues (i.e. when Association needs to approve any lease of the property) and that future issue could affect the business’s operations. However, if a borrower is represented, an ECA will review the title documents and advise borrower of its rights and responsibilities.
Finally, the parties can benefit when a borrower is represented by an ECA when the closing actually occurs. The ECA can review the loan documents and explain them to the borrower, as well as assist with providing copies of all the executed transactional documents required by the lender from the closing.
In summary, both the lender and borrower can benefit from the borrower being represented by an ECA. The business is protected from the start and the continued guidance often leads to the borrower’s long-term success. For more information, contact the attorneys at Starfield & Smith, PC at 215.542.7070.