Seek the assistance of an experienced West Jordan Utah real estate lawyer when you are negotiating with a lender for funds to develop your property in Utah.
Generally, lenders recoup their costs and make a profit from charging interest on their loans and charging fees for the privilege of borrowing their money. Interest, as discussed earlier, is earned throughout the life of the loan. Financing fees are earned prior to or at the time when the loan is provided. Some fees are direct pass through of costs incurred by the lender; other fees are charged as a flat amount or percentage of the loan to cover the lender’s staff time for underwriting or considering the loan request and profit. The following are common fees and charges:
• Application fee—A lender usually charges a flat fee to consider a loan application.
• Commitment fee—A commitment fee usually is assessed as a percentage of the total amount of the loan that the lender agrees to provide. The fee must be paid by the buyer in order to receive the lender’s written commitment to make the loan and only after the bank has committed verbally to make the loan to the borrower.
• Loan discount or origination fee—A lender may charge the borrower a loan discount fee at the time when the loan is provided. This fee, usually assessed as a percentage of the loan provided, allows the lender effectively to increase the interest rate on the loan indirectly. For example, if the lender provides the borrower with a $1,000,000 loan at 10 percent interest per year, amortized over 30 years, the regular monthly payments to fully amortize the loan would be $8,820. However, if the lender also charges a 1 percent discount fee for the loan, the borrower must pay ,000 at the time it borrows the money.
• Appraisal fee—The lender will order an appraisal of the property from a list of its approved appraisers. Lenders will seldom accept an appraisal from an appraiser selected by the borrower. The lender will require the borrower to pay for the appraisal, often in advance of both the appraisal’s completion or the lender’s commitment to the project. To the extent possible, in order to limit uncertainty, buyers should negotiate with lenders in advance to predetermine the appraisal cost and all related costs.
• Credit reports—Most lenders will require the borrower to pay the costs incurred to secure a credit report on the borrower and/or its principal partners.
• Property inspection fee—Many lenders, especially construction lenders, will hire an architect or construction manager to inspect the property prior to payment of a draw request. These costs will be passed on to the borrower.
• Attorney’s fee—The lender will pass through to the borrower all of its legal costs incurred to process and close the loan.
Before you sign any document given to you by the lender, have the document reviewed by an experienced West Jordan Utah real estate lawyer.
Many borrowers learn long after they have borrowed money from one or more lenders that those lenders will not let them pay off their loans any time they wish to do so. Some loans cannot be paid before their maturity date for any reason, others can be prepaid only at certain times, and others can be prepaid only upon payment of a prepayment penalty, which can be as much as 4 percent or 5 percent of the outstanding amount of the loan. Lenders often have good reasons for these prepayment restrictions; for example, they may be facing similar restrictions imposed on them by the secondary markets to which they will be selling the loan.
The important point about prepayment provisions is that the buyer must be aware that they may exist in the loan agreement and must be sure that they do not conflict with any fundamental financial assumptions.
Security Required by Lenders
A lender generally will not make a real estate loan unless it knows that it has some protections, other than the borrower’s promise to pay, in case the borrower fails to pay off the loan according to plan. These protections are considered “security” to the lender in case of a loan default. Lenders generally require borrowers to provide security in the form of a mortgage or deed of trust, an assignment of leases and rents, or security agreements for chattels and other tangible property.
Mortgage or Deed of Trust
A mortgage or a deed of trust gives the lender a legal “security” interest in the property. These two instruments are almost identical and serve identical purposes. They provide the lender with the legal power, after a loan default by the borrower, to sell the property in order to raise funds equivalent to the unpaid portion of the borrower’s loan. A mortgage is an instrument used in some states to make real estate security for a debt. It is a two-party instrument between the mortgagor (the borrower) and the mortgagee (the lender). A deed of trust serves the same purpose but is a three-party instrument among a trustor (the borrower), a trustee (designated by the lender to act on its behalf), and the beneficiary (the lender). A mortgage or deed of trust must be recorded in the land records of the jurisdictions where the property is located.
Assignment of Leases and Rents
An assignment of leases and rents gives the lender a legal “security” interest in property leases and the rents generated by these leases. This instrument generally allows the lender, in case of a loan default by the borrower, to control who leases what space in the property and to receive the rents paid by the occupants.
Security Agreements for Chattels and Other Tangible Property
A security agreement for chattels and other tangible property gives the lender a legal “security” interest in everything else (apart from the real estate itself) that is owned by the borrower at the property. The mortgage or deed of trust provides the lender with legal protections as to the land and improvements (real property); the security agreement provides the lender with legal protections as to everything but the land (personal property). This agreement provides the lender with the legal power, after a loan default by the borrower, to sell the personal property—light fixtures, lawn mowers, and maintenance trucks, for example—in order to raise funds equivalent to the unpaid portion of the borrower’s loan.
Lien Priority Position/Good Title
A lender generally will not want to make a loan to a borrower if another lender or entity previously has recorded a claim against the real and/or personal property that is being offered by the borrower to secure the loan. Parties who record claims first have the right to have their debt paid first, in the event of a foreclosure sale of the property. This priority is called a first lien position. The higher the lien position, the less risk there is to the lender that its debt will not be repaid upon foreclosure.
The first lienholder is provided the greatest amount of security, and each lienholder that claims an interest subsequently is provided less and less security. If for-profit lenders are being asked to provide loans that can be secured only in a second position or worse, the lenders either will not participate or will charge a higher interest rate to reflect the increased risk. A lender will determine what lien position is being offered by the borrower by reviewing the title insurance commitment on the property.
The lender will provide you with the documents to be executed for the mortgage. Before you sign them, have them reviewed by your West Jordan Utah real estate lawyer. Sometimes there may be clauses in the documents that may have an adverse impact on you later. Once you sign the document, you cannot wriggle out of your obligations under the document.
What Lenders Look for in a Project
When you approach a lender for a loan for your real estate project, the lender generally will consider the following issues when evaluating or “underwriting” a loan request:
Your track record
Reasonableness of Income and Expense Projections -The lender will look very carefully at each line item and category in the sponsor’s income and expense projections, including reserves, to determine their reasonableness. Generally, the lender will want to know the assumptions on which the projections were based. If the projections were based on past operating history of the property, the lender will often request copies of the income and expense reports for the periods reviewed. The lender will be very concerned about income and expense projections because it will want to make sure that there will be enough net operating income (NOI)—the money left over after paying all expenses—to cover the debt service on its loan and any other debt anticipated by the borrower.
Debt Coverage Ratio – Even after the lender is able to convince itself of the reasonableness of the income and expense projections, it will still not be satisfied. Lenders generally will want to see that the income and expense projections actually provide enough NOI to cover the debt service and to create a cushion for unanticipated expenses. Lenders evaluate the sufficiency of NOI by analyzing the debt coverage ratio for the project—the ratio between NOI and the debt service projected for the project.
A lender generally will not provide a borrower with a loan in an amount equal to or greater than the appraised value of the property that is serving to secure repayment of the loan. Although some public lenders may provide loans that equal 100 percent of the property’s value, most lenders lend only a portion of the appraised value of the property. The relationship between the amount of a mortgage loan and the value of the real estate that secures it is known as the loan to value (LTV) ratio.
Ability to Sell the Loan in the Secondary Market
A lender’s concerns about the creditworthiness of a borrower can be minimized if the lender knows that it will be able to sell the loan into the secondary market as soon as the loan is closed. The lender must worry more about the borrower’s ability to repay the loan if the loan is going to be held in the lender’s portfolio throughout the loan term.
Ability to Have Repayment of the Loan Guaranteed or Insured
A lender’s concerns about the creditworthiness of a loan also can be minimized if the lender knows that the repayment of the loan will be guaranteed by a personal or corporate guarantee or insured by a state or federal agency. many lenders are requiring developers to guarantee their loans with their own personal or corporate assets. These loans are known as recourse loans. If the borrower has assets sufficient to secure repayment of the loan upon default, then the lender will be less concerned about the economic viability of the real estate project being financed. The same is true if the borrower can insure repayment of the loan by securing a state or federal mortgage insurance commitment. These guarantees often supplement other guarantees or insurance.
When you are looking for a loan to develop land, seek the assistance of an experienced West Jordan Utah real estate lawyer. Your lawyer will assist you negotiate with the lender and ensure that your rights as a borrower are protected. The lawyer can review the lenders documents before you sign them and advise you if any changes or modifications need to be made to those documents. The lenders documents will be prepared by the lender’s lawyer. For the lender’s lawyer, the lenders rights are important and he will draft the documents keeping in mind the lender’s rights. He will not be worried about your rights. More often than not, the lender’s documents are tilted in favor of the lender. Never sign any document that the lender has asked you to sign without showing them to your West Jordan Utah real estate lawyer.
West Jordan Utah Real Estate Lawyer Free Consultation
When you need legal help with real estate in West Jordan Utah, please call Ascent Law LLC (801) 676-5506 for your Free Consultation. We can help you with quiet title actions. Evictions. Title Opinion Letters. Boundary Disputes. HOAs. Easements. Real Estate Litigation. And More. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506