Real Estate Finance: Structuring Earnout, Release Parcel, and Partial Prepayment/Defeasance Provisions

Description

Commercial mortgage loans often include a holdback of proceeds at closing, with certain conditions to be satisfied before the funds are released. Earnout requirements for retail or office properties may consist of execution of new leases, completion of buildout, and occupancy by the new tenants. Multifamily or hotel loans may require increased occupancy for a given period to meet the debt service requirements of the fully funded loan. Counsel must draft these provisions to include detailed and thorough release conditions.

For properties that are being developed in phases or with an outparcel that the borrower wants to develop later, the documents may include a provision to release such collateral from the mortgage at an agreed-upon release price. These provisions can be highly complex, including conveying the property to a separate entity, proper subdivision (if applicable) and execution or a reciprocal easement defining parking, access and utility rights, permitted uses and non-compete provisions relating to the released and unreleased parcel.

In connection with the above scenarios, partial prepayment or defeasance of the loan may be required. Typically a deadline is placed on the ability of the borrower to achieve an earnout, after which the reserve funds can be applied to pay down or partially defease the principal balance. The release of a parcel may be conditioned on prepayment or defeasance of a portion of the loan in the amount of the release price.

Listen as our authoritative panel discusses the nuances of holdbacks, earnout reserves and partial release provisions and the prepayment and defeasance provisions to consider in each instance.