Avoid the Rush – Preparing for Pacing Items in Real Estate Financing

By Adam Adkin

Real estate developers and owners typically need to close their finance transactions as quickly as possible. Nonetheless, the closing frequently slips a few weeks from the target date. Actively managing the pacing items for the transaction is one of the best ways to facilitate a smooth (and timely) closing.

Pacing Items

Closing a real estate finance transaction is a team effort that involves satisfying requirements that take weeks to months to complete. Some of the most common pacing items are:

1. Obtaining the title company’s commitment to issue a title policy acceptable to the lender, which may require obtaining consents, waivers, and confirmations from third parties to remove objectionable exceptions;
2. Completing a survey and obtaining zoning, environmental, and property condition reports;
3. Obtaining litigation and lien search results demonstrating that the borrower and project are not subject to unanticipated liabilities;
4. Satisfying lender requirements for evidencing that the project will be adequately insured;
5. The borrower’s legal counsel issuing opinion letters on matters ranging from the borrower’s organizational status to the validity of the security interests granted in connection with the financing; and
6. Obtaining invoices and payoff statements to enable the lender to eliminate outstanding debts on funding of the loan.

To complete many of the items listed above, the borrower will need to engage multiple third-party service providers. These parties often have a full schedule and need weeks of lead time before they can begin their work, in addition to the time they need to perform. Contacting prospective service providers early to confirm their availability, timing, and cost is a critical step in the financing process.

Identify Applicable Pacing Items and Confirming Who Is Doing What

Sophisticated lender teams often prepare detailed checklists of the tasks and documents that need to be completed for closing. Even with a detailed checklist, it is important for the borrower and lender teams to connect early in the transaction to confirm requirements and who will lead each effort. Some lender teams are more organized than others, and it is not uncommon that an unaddressed requirement will be raised for the first time as the parties approach closing.

For the right transaction, borrowers may be able to convince the lender to waive costly or time-consuming requirements. Borrowers have more leverage to obtain a waiver if they make these requests early, even at the letter of intent stage. It is always better to confirm that a particular item will not be required than scramble later in the transaction to keep closing on track.

Manage the Transaction

A real estate financing is a complicated project that can only proceed smoothly with active management. To ensure that lender requirements are addressed promptly and the transaction stays on track, borrowers should task one person, whether a member of the borrower’s business team or outside legal counsel, with monitoring and managing the process. Without active management and communication, tasks can stall and small delays can compound to disrupt a timely closing.