Structuring Financial Covenants, Cash Management, and Other Lender Protections in Mortgage Documents

Description

The economic fallout caused by COVID-19 presented new challenges for commercial real estate borrowers and lenders, and has impacted the initial drafting of loan documents or required modification of existing documents. Lenders might include new covenants and obligations in loan documents, while borrowers will want to negotiate for protections related to factors beyond their control.

Lenders and borrowers should consider whether relief from debt service coverage and other financial covenants will be necessary. If borrowers own properties where tenants seek rent reduction or forgiveness, borrowers should consider the impact on any financial and leasing covenants. Lockbox provisions may need to be revised to provide the lender with more flexibility in addressing tenant vacancies or DSCR triggers.

In construction loans or other loans with a future funding component, borrowers may be unable to satisfy conditions precedent to disbursement due to force majeure clauses and their inability to make continuing representations and warranties required by lenders. Current and future documents may need revision to address disbursement issues presented by the pandemic.

In light of the PPP and other CARES Act lending programs, documents may need to contemplate additional indebtedness, and whether the borrower will be entitled to loan forgiveness or to prepay the loan before the maturity of the senior debt. The COVID-19 pandemic may also force borrowers and lenders to revisit nonrecourse or "bad-boy" carveouts as well as provisions regarding springing liability for bankruptcy or insolvency.

Listen as our authoritative panel discusses financial covenants, cash management, and other lender protection provisions in real estate finance documentation.