Enter to open, tab to navigate, enter to select
Commercial Loan Due Diligence Toolkit
Practical Law Toolkit w-020-1026 (Approx. 21 pages)
Commercial Loan Due Diligence Toolkit
by Practical Law Real Estate
| Maintained • USA (National/Federal) |
A collection of due diligence resources for use in a loan transaction. This Toolkit contains a compilation of resources that explain how to review and evaluate the organizational structure and status of the borrower parties; the condition of the property, including its physical condition, property leases and other agreements; and the state of the property's legal title and zoning. This Toolkit also includes resources pertaining to specialty property types and different loan types.
Loan due diligence is the review and evaluation of information pertinent to a loan transaction, conducted by the parties and participants to that transaction. For a general discussion summarizing the role of due diligence in commercial real estate financing, see Practice Note, Commercial Real Estate Loans: Due Diligence.
Loan due diligence examines the real property being mortgaged (see Property Condition, Agreements, Title, Survey, and Zoning) and the borrower's organizational structure, governance, and financial strength (see Due Diligence of the Borrower Parties). All loan due diligence shares common characteristics, but the scope and depth of loan due diligence is also affected by:
- The type of loan (see Special Loan Types).
- The property type (see Special Property Types).
- Whether the mortgaged real property is the primary loan collateral or is only tangential to the transaction (see Practice Note, Real Estate Due Diligence in Corporate Transactions).
- The state in which:
- the real property is located; and
- the borrower parties are organized (see State-Specific Materials).
- Whether the lender intends to sell the loan in the secondary mortgage markets as part of a securitization (see Practice Note, Commercial Mortgage-Backed Securities (CMBS) Finance: Overview).
- The parties' respective roles and interests in the transaction. For example, in a loan refinancing, the borrower's role is primarily limited to complying with the lender's due diligence requests. In contrast, for acquisition financing, the borrower is contemporaneously performing much of the same property due diligence as the lender (see Purchasing and Selling Commercial Real Estate Toolkit).
This Toolkit contains continuously maintained Practice Notes, Standard Documents, Standard Clauses, Checklists, Articles, and 50-State Charts and includes State Q&A Tools that answer frequently asked questions posed to local counsel on matters such as financing, leasing, ownership, brokerage agreements, construction, management, and foreign investment in real property (see State-Specific Materials). This Toolkit is appropriate for lenders, borrowers, developers, investors, and other participants in commercial real estate lending transactions.
Property Condition, Agreements, Title, Survey and Zoning
Special Loan Types
Mezzanine Loans
A mezzanine loan is subordinate financing secured by a pledge of the ownership interests in the entity that owns the mortgaged property (see Standard Document, Pledge and Security Agreement (Mezzanine Loan) (DE)). Extra due diligence of the borrower's organizational documents is necessary to ensure the lender attains the highest lien priority possible. UCC insurance (not title insurance) insures the lien of a mezzanine loan.
Construction and Development Loans
Construction loan due diligence differs from permanent financing. The real property improvements cannot be occupied or produce rental income until after construction is completed (see Practice Note, Construction Financing: Overview). Construction loan due diligence does not end at loan closing. The lender instead must closely monitor the progress of the work and ensure the project's lien-free completion.