A Guide to Commercial Financing Documents
Maybe you are thinking about purchasing that commercial condo unit on the corner to open a coffee shop, or have your eye on a mixed-use building in a burgeoning neighborhood that you know would make the perfect yoga studio and with rental apartments upstairs. This guide will help you navigate the most common paperwork involved in obtaining a traditional bank loan to purchase commercial property.
Unless paying cash, most people take a loan from a bank to purchase their business property. On the day of your closing, the bank will pay the purchase price to the seller (minus your down payment), and your company will sign documents promising to pay the bank back for the loan. Then, if your company does not pay back the loan, the bank can sue it on the basis of breaching its contract. Here are the most common documents signed at a commercial closing and how they work.
· Promissory Note
A promissory note (or simply, note), is just a fancy way of saying a contract for payment. In this case, the contract is between your business and your lender whereby the business promises to repay the amount of the note, typically by paying interest every month as well as a pre-determined amount of the principal amount of the loan until paid back over 5, 10, 20 or more years. The amount of the note usually reflects the purchase price of the property, minus the sum you are required to pay as a down payment. If you miss payments, the lender will attach the note to a lawsuit and ask a court to give it a judgment in the amount you owe under the note.
A mortgage is another agreement between your business and the bank that acknowledges that if the business does not pay back the bank, the bank will have the right to take the property back from you through the foreclosure process. When the property is sold at a foreclosure sale, the proceeds from that sale will be applied to pay down your company’s loan or pay it off if there is enough money. A mortgage is recorded in the public records so that anyone who wants to determine if the property has a mortgage on it can do so. That prevents other lenders from unknowingly giving another loan for the property which might leave the owner owing more money than the property is worth. A lender with a mortgage is said to be “secured.”
· UCC Lien
A UCC lien is a document filed with the Secretary of State under the Uniform Commercial Code (“UCC”) that tells the whole world the lender lent you money and can recover that money from your business’s non-real estate property if the loan goes unpaid. Using the coffee shop example, if your coffee shop does not make payments on the loan for the building, and it is subject to a UCC lien, the lender could sell the equipment, inventory, furniture and fixtures from the coffee shop to apply the money to the loan balance. This means the lender is “secured.” It is common for a loan to be secured with a mortgage and also a UCC lien so the lender has two avenues of recovery – real estate and other non-real estate assets.
A guaranty is a promise from someone (usually a person or business connected to the borrower) to repay the loan if the borrower cannot pay it. For example, let’s say you open your yoga studio
and it turns out that the neighborhood is not quite ready to “namaste” and you have to close up shop. Most likely, your lender would have required you to personally “guaranty” the repayment of the loan. So, the lender could sue you and try to reach your personal assets to pay back the loan.
Many lenders will require your company to complete a corporate resolution, a document that will assure the lender your company voted on and is authorized by the members with majority control to take out a loan on the company books. In other words, the lender will want to be assured that whoever is procuring the loan on behalf of the company is doing so with authority.