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Why are legal fees higher to close a CMBS transaction compared to a bank loan?

At the heart of a commercial real estate financing transaction is the loan documentation. The complexity, flexibility, and legal fees incurred to prepare and navigate varies by transaction type. Legal fees can range from $10,000 to $15,000 for a regular bank loan and $25,000 to $35,000 for CMBS financing. Let’s explore the nuances that drive this cost difference and why, in many situations, the benefits of a CMBS transaction type can be worth the higher legal expense.

To better understand the reasons behind the higher legal costs for CMBS financing, let’s look at the healthcare industry. Studies have shown that more than 80% of serious medical errors are due to a botched transition or miscommunication during the hand-off between medical providers.

There’s a similar transition process in a CMBS transaction. Loan agreements are struck between the lender and the borrower and then often transferred to a third-party servicer. When the lender sells the loan through securitization, the loan documents associated with the loan also transfer to the new buyer of the loan. Therefore, to ensure a seamless transition – and insulate all parties from a future case of he said/she said – detailed loan documentation outlining the rules, process, and how potential issues will be resolved is agreed to upfront. Many borrowers complain that CMBS loan documents are too onerous and unnecessarily complex. Actually, this thoroughness ensures clarity and eliminates uncertainty of outcome. Because this documented road map governs all parties for the life of the loan, it’s critical for borrowers to engage expert legal and financing advocates to represent their interests and negotiate the most borrower-favorable terms possible.

Yes, CMBS loan documents are long and detailed, but the terms outlined within them can be negotiated. This is where having the guidance of both an experienced lawyer and intermediary who understand the market and have closed transactions with the lender in the past can be a game-changer for a borrower. The legal and financing team will know what language has caused problems for borrowers in the past, which levers can be pushed and pulled, and what concessions lenders will reject outright, ensuring flexibility and saving the borrower time and headache.

Loan pre-payment, including type and calculation method, is a good example of a loan tenet that can be negotiated. Yield maintenance always is better than defeasance. While the calculations are the same, yield maintenance is much simpler and cheaper for a borrower.

Another negotiable element is when PIP repair funds are released for a hotel. This includes the amount of reserves, as well as the minimum amount needed to withdraw the reserves so a borrower doesn’t have to spend money first and wait for reimbursement. Other commonly negotiated documentation areas include: cash management triggers, including opening of lockbox accounts and start and stop of sweeps; cure provisions in the event of default; service-level agreements, such as the number of days servicer has to respond to requests; the ability and cost to assume the loan; when and how much additional funds can be borrowed; and the ability to transfer shares of ownership without a change in control.

Most community and regional banks, as well as credit unions, use auto-generated loan documents, which typically are cheaper for the borrower but tend to be one-sided and only protect the lender because – in these types of loan transactions – the borrower agrees to full recourse. Because the borrower is on the hook personally to pay the loan, the documentation can use simpler, blanket language. With a full-recourse loan, if there are any future disagreements, issues, problems, or gaps in definition of terms, the onus and risk rests with the borrower.

Whether borrowers choose the CMBS or bank loan transaction path, because the decisions they agree to now may affect how future situations will be handled, having strong legal and financing resources by their side is critical. As they say, hindsight is 20/20, and these experts have done this before, and they can identify potential disrupters or enablers for future success.

rushi shah

Rushi Shah is Principal and CEO of the commercial mortgage and real estate investment banking firm and AAHOA Allied Member Mag Mile Capital. As a leader in hospitality financing, Shah specializes in structuring and placing high leverage, nonrecourse bridge and permanent debt with cash out for full- and limited-service hotels nationwide. Since joining the firm’s predecessor, Aries Capital, in 2015, Shah has structured and closed hundreds of millions in financing for all property types. Shah has held previous positions at Northern Trust and has an MBA from the University of Chicago’s Booth School of Business.


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