Real Estate Finance Outline
Spring 2008 – Prof. Rider
Loan Application
1) Client comes to you with a loan application with the problem that he is sending the application to four different potential lenders.
i) This might be a problem as the client might be making four offers and get multiple acceptance
(1) The lawyer needs to be able to tell client whether the application is an offer or not.
(a) If application is going to be an offer, then need to get everything in it that client wants—negotiate beforehand.
Loan Commitment
1) Your client sent in the application and the lender analyzes the risk and determines that it is a good loan. Then the lender turns around and issues a commitment.
a) This will naturally contain more terms and be more complex than the offer.
i) Thus the commitment is most likely a counter-offer.
(1) The client may want to negotiate before accepting.
2) Alternatively the client can issue a conditional acceptance letter where you respond to the offer with different terms; this is a counter-offer.
i) This process continues until the terms are sufficiently similar and that an offer and acceptance can be found.
3) Legal Requirements of Loan Commitment (Statute of Frauds—TX Business Commercial Code §§ 26.01, 26.02)
a) Agreement not enforceable unless signed in writing includes “contract for the sale of RE” or “lease for term of more than 1yr.”
i) This has been interpreted by courts as anything that provides for transfer of interest in RE so this includes a liens & loan commitments
(1) SOF only applies to RE finance loans if there is a creation of a RE interest.
(2) Section §26.02 only applies to loans over $50K, and certain institutions, including banks, credit unions, and mortgage companies.
(a) Does not include traditional commercial RE lenders like insurance companies.
(b) Limited scope to certain institutions, but broad in that it applies to all loans including any transactions involving RE
b) Statute of Frauds Requirements (Parties, Amount, Maturity, and Description of Collateral)
i) The Parties: the Borrower and the Lender
(1) SOF requires that the commitment name the borrower and the lender
(a) The DNA of the deal may require other parties like a guarantor
ii) The Amount: the law requires a definite amount
(1) Not necessarily a fixed amount
(2) If not a fixed amount, the formula to obtain the amount must be definite and attainable with certainty
(a) i.e. Judge must be able to calculate it
iii) Maturity (amortization)—certain enough to be made definite
(1) Law requires that the timing and payments must be certain—may be fixed or formula
(a) Eg. Loan payment
rest— The Interest rate is not implied, and must include in the contract
i) Fixed Rate: can be determined in the future; e.g. parties may agree that the interest rate on the loan will be 2% higher than the 10yr treasury rate on the day the loan is closed.
(1) Contract rate is not fixed until the day of closing.
ii) Floating Rate: As a matter of contract interpretation, the interest rate must be definite enough to determine the contracted rate.
b) Prepayment
i) Perfect Time/Perfect Tender
(1) The Texas default rule, which is the minority rule, is that installment notes are not pre-payable unless have agreed otherwise.
(a) Effect: If you cannot pre-pay, then you may not refinance the deal.
(2) Need to negotiate away from this at the commitment stage if borrower wants it.
ii) Majority Rule: Installment notes may be prepaid.
(1) Thus, refinance is possible.
c) Liability, Recourse, Exculpation
i) If I don’t repay the loan, what is at risk? This depends on what type of liability your client has:
What Kind of Liability Does Your Client Have?
