Commercial real estate lending in the credit union industry once again has traction.
Most credit unions that close commercial real estate loans were not likely closing them 10 years ago, and clearly not closing them 15 years ago – and regardless, had a hiatus following the financial crisis in 2007-2008 and the Great Recession years that followed.
But today most credit unions want commercial real estate loans on their books. This requires talented and experienced loan officers, underwriters, closers and legal counsel.
As a lawyer who represents lenders – from major banks to small credit unions – I have some perspective on the closing process. And yes, clearly some biases. But the purpose of this article is solely to provide perspective.
Credit unions closing commercial real estate loans, or buying participations in such loans, employ different closing models. Some rely upon legal counsel, some don’t. Some recognize the need legal counsel and some do not recognize the need for legal counsel.
Banks, life insurance companies and other lenders making commercial real estate loans rely on outside legal counsel more often than not, yet credit unions seemingly avoid outside legal counsel more often than not.
No credit union lending officer would write a will and gift funds to family members without a lawyer, but often they are less risk-averse to closing loans without a lawyer and disbursing millions of dollars to non-family members.
Most commercial real estate loans are complex. Issues are sometimes nuanced and not easily perceived. It is not simply a form loan documents practice. Depending on the type of property, different legal issues may need to be identified. As examples:
If it is an owner-occupied property, does the lender want a separate entity that owns the property from the business on the property (sometimes referred to a sandwich lease).
If it is a hotel or motel property, are special issues being addressed depending upon whether the property is being master leased, managed by operator or self-managed?
If the property is unique in character, e.g. mobile home park, mixed use office-retail or apartment-retail, senior housing – are legal issues in lending unique to these type properties being addressed, or are standardized loan documents being utilized?
If there is a ground lease, are all ground lease issues being addressed and ground lessor estoppel obtained?
As a generation of bad loans (pre-2008) is now behind us, it is without question that the biggest problems encountered with respect to enforcement of defaulted commercial loans resulted not just from faulty loan documentation, but also from failure to adequately address a myriad of issues that legal counsel would have identified or better drafted against.
Legal fees to resolve these issues – and not always with successful results – were in multiples of what it might have cost for legal counsel to review these issues at time of loan origination and closing.
Credit unions relying on legal counsel employ different models. Some prefer a la carte legal representation for each loan (e.g., title review and organizational document review) and/or simply having a lawyer “on call” for when there is a perceived need “to engage legal.”
Better than no outside legal assistance counsel, yes. Recommended models, no. Why? Issues lawyers are likely to identify may not in all instances be identified in a la carte legal engagements, and use of a lawyer “on call” when issues come up, presupposes that loan officers have identified those issues.
Finally, a mortgage broker commented to me that his loans to credit unions were in the third drawer down. The “third drawer” is reserved for hard-to-place loans. If a lender for loans in the first or second drawer is a bank, life insurance company or other lender with better borrowers or loan products without issues, and those lenders are relying on legal counsel, to close third-drawer loans without legal counsel arguably defies prudent lending.
Gordon L. Gerson is managing principal of Gerson Law Firm in San Diego. He can be reached at (858) 869-8686 or firstname.lastname@example.org.