Negotiating Loan Covenants In Commercial Loan Documents - Nervous Lender Clauses, Etc.

[Bryan Hancock]

We're in the process of negotiating more favorable terms on large guidance lines of credit for spec projects in Austin, TX.  I was hoping some of our experienced lenders or developers could share their wisdom with how negotiations or selections of lender partners have gone in the past.  We're fortunate to have more lenders willing to make us loans than we have projects to finance.  This presents us with the ability to negotiate with those willing to modify their documents or select lending partners if some offer better covenants than others.  

One of the items I am the most interested in negotiating is the so-called "nervous lender clause" so that I'm not technically in default immediately if the lender gets a hair up their rear-end. There is also a concern that the smaller lenders that are more willing to negotiate these types of clauses have higher FDIC risk and thus they present different types of risks in the event we have another mortgage crisis or similar event risk.

Other items I have investigated include bad boy carve outs, guarantees (limited or full), grace and cure periods, cross-default, dragnet clauses, etc.  If you were looking to negotiate things like this how would you go about finding resources (attorneys, experienced developers, former bankers, etc.) that may be able to assist with these negotiations when selecting the BEST lending partners?  

Any advice or general commentary you can provide is appreciated as well.  

[Bill Gulley]

Bryan, best advice I can give you is to read to docs very carefully and therein you'll find how nervous they really are (LOL) ....okay,

Lending and borrowing under open lines of credit is really an exercise in phycology almost as much in finance and banking.

I assume were talking 1M+ as you didn't indicate the stress level. Borrowers often miss the confidence a lender must have in a borrower concerning management abilities, track record, past performance and business goals of the borrower. Collateral must be there, but it is really secondary in making any lender feel warm and fuzzy inside. These are the aspects to stress in negotiating a loan, not so much what the lender may cast his net around. The more confidence the lender has, the less concern there will be about their ability to call amounts due.

Lines of credit, open lines are probably the riskiest aspect in commercial lending, a bank is probably nervous during closing, especially with a new borrower.

The provisions you mention are going to be in any line of credit arrangement. Bad boy clauses are or shouldn't be an issue, these are to fraud, gross mismanagement or misallocation of funds issues, if these were omitted (which they won't be) a lender can still sue and accelerate a loan under some of these aspects, the clause saves perhaps months of court and legal time. The issue will be to the meanings of the words used and how widely the swath is cut for the lender to identify some action, or lack thereof, to be covered under the clause.  Ambiguous phrases are intentionally used to cast the net.

The principles behind these clauses are not going to be eliminated, not likely especially with a new borrower. The best you should expect to do is to negotiate specific or more narrowly defined events of default.  

In doing this, you don't want to come across as being too overly concerned, the attitude shown is more like...."well, this crap isn't ever going to happen", (as to your, say, mismanagement), but this seems a little too broad. Newish borrowers, IMO, are a bit too "hat in hand", I won't say begging for the loan, but are reluctant to point out the down sides of the lender.

What's the down side? The lender's strength, how solvent are they, well managed, any liquidity issues, are we bumping near any reserve requirement matters or limitations to one borrower or in this category?   The bank president is a great guy, my loan officer is a great guy, but the issue is, just as I might drop dead, so can they and the next guy may not be so great. Just because he gets cold feet isn't really a justification to put me out of business!

You mentioned "FDIC risks", bank ratings are classified, only regulators and a hand full of bankers really know what issues a bank may have, the Board of Directors, President, maybe the Executive Sr, Vice President, the compliance officer/folks and key department heads. Good or bad, it's classified because the public doesn't need to know, the system doesn't need a run on any bank! So, you won't really know what risks are. You can speculate, use good judgment, look at their public disclosures and financial statement, be aware of the quality of loans that are made in a community (how often does this bank end up in court or foreclosure matters?) as you need to know they can operate smoothly too.

Borrowers need to play on these aspects more to dealing on a two way street, but tactfully.

Grace and cure periods are pretty much by law, look to the cure period for different types of defaults, not paying a hazard policy on time (should be addressed quickly) but shouldn't be an excuse to bail. You could have a principal or "key man" incapacitated, what is a reasonable time to cure management problems?  

Probably the best target of your concerns will be cross-default, of loans by other lenders, you should be able to get rid of that. You deal, as I understand it, with private investors and investors, they may not be as sophisticated in their dealings. If an investor cries foul and they take legal action or call an obligation, this, coming under the management issues of your operation should not be cause for your lender to get cold feet and bail on you too. Now, loans they may have with you are a different matter, again being new, you will need to swallow this, but may negotiate a time frame to cure before declaring other obligations due.

Dragnet, cross collateralization should be managed when collateral is offered. Rights of offset apply to deposits, best thing there is use more than one bank, never be a captive borrower.

I doubt you need a negotiator, are you getting over $10M? Again, consider management aspect of a borrower. At the amount you at, is it really customary for borrowers to bring in hired guns? How does that look? It is wise and prudent to do at large transactions, you may see it as a large transaction, but does the bank? It could tell me, that my borrower feels they lack the ability to even negotiate this loan, from a management point of view I might become more concerned with their management than their ability to rewrite my docs (which, if happened would be minor details), not good! Borrowers that sweat too much make me nervous, Now, if you're at $50M, take a team, that is serious.

Finally, I suggest you take care in pitting one lender against another. If you're looking at local and regional banks, they often participate at larger loan amounts, very common in developments to reduce risks of one lender. There is a bit of a political side for you here too, tick one off, they may not participate which means the lead lender may tighten up as well.

Bryan, I have watched you over the years, yes we had head knockings but what I've seen is you growing into your professional career and you're coming along very well. Best of luck to you! :)