cre-loan-agreement-review

name

cre-loan-agreement-review

description

Comprehensive skill for reviewing commercial real estate loan agreements (both single-asset and portfolio transactions). Covers the most commonly negotiated provisions in CRE mortgage loan agreements with lender and borrower positions, market benchmarks, and analysis frameworks. Derived from well-negotiated institutional loan documentation for stabilized hospitality and commercial portfolio transactions. Use this skill when reviewing, redlining, or negotiating any CRE mortgage loan agreement.

CRE Loan Agreement Review Skill

This skill provides market benchmarks and negotiation guidance for the most heavily negotiated provisions in commercial real estate mortgage loan agreements. It is organized by provision, with each section identifying the lender's preferred position, the borrower's desired position, and a market benchmark reflecting well-negotiated institutional transactions.

Usage Note: When reviewing a loan agreement, identify each provision below and compare the draft language against the market benchmark. Flag deviations in either direction. For borrower-side reviews, prioritize pushing toward the borrower's desired position on the highest-impact items first (extension conditions, cash sweep triggers, non-recourse carveouts, transfer restrictions).

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1. Extension Options

Lender's Desired Position

• No extension options, or a single extension option at lender's sole discretion.
• Full re-underwriting required at extension, including new appraisal, updated environmental, new title, rating agency confirmation (if securitized).
• Stringent financial tests with no ability to buy down or cure: high debt yield thresholds (e.g., 9–10% combined), DSCR floors (1.10x–1.15x), and LTV caps (60% or lower).
• Extension fee of 0.50% or greater of the outstanding principal balance.
• No default of any kind (including non-monetary defaults) at either exercise or commencement.
• No right to revoke extension notice once delivered.
• Lender approval of replacement interest rate cap counterparty in its sole discretion.

Borrower's Desired Position

• Two (2) extension options of one (1) year each, exercisable as of right upon satisfaction of objective conditions.
• Financial tests with a "pay-down" cure: if debt yield or DSCR thresholds are not met, borrower may prepay a portion of the loan (or post cash collateral) to satisfy the test.
• Moderate financial test thresholds: combined debt yield of 8.0%–8.5% for the first extension and 8.5%–9.0% for the second; combined DSCR of 1.00x for the first extension and 1.05x for the second; combined LTV not exceeding 65%.
• Extension fee no greater than 0.25% of the outstanding principal balance.
• Only Event of Default or monetary Default (not all defaults) blocks exercise.
• Notice period with right to revoke (borrower pays lender's out-of-pocket costs on revocation).
• Replacement interest rate cap from an "Acceptable Counterparty" (defined by objective rating criteria, with lender approval as an alternative).
• Extension notice window: not earlier than 120 days and not later than 30 days before the then-current maturity date.
• Bring-down of representations allowed to reflect passage of time, provided updates do not disclose covenant breaches or Events of Default.

Market Benchmark

Well-negotiated institutional CRE loans typically include two (2) one-year extension options with the following conditions:

• No Event of Default or monetary Default at exercise and commencement.
• Extension fee: 0.25% of the outstanding principal balance per extension.
• Financial tests (with pay-down cure):
  • Combined Debt Yield: 8.5% (first extension), 9.0% (second extension).
  • Combined DSCR: 1.00:1 (first extension), 1.05:1 (second extension).
  • Combined LTV: not exceeding 65%.
• Replacement interest rate cap from an Acceptable Counterparty with a strike price no greater than the original strike price.
• Notice window: 30–120 days before the then-current maturity date, with revocation rights (borrower pays lender's costs).
• Officer's certificate confirming accuracy of representations (with updates permitted for passage of time).
• KYC/AML refresh as required by lender's then-current policies.
• If mezzanine debt exists, it must be simultaneously extended.

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2. Prepayment and Exit Fee

Lender's Desired Position

• Full lockout for an initial period (12–24 months or longer), followed by yield maintenance or defeasance through the loan term.
• Exit fee of 0.50%–1.00% on any prepayment (including at maturity).
• Exit fee payable on casualty/condemnation prepayments without deferral.
• Prepayment notice irrevocable once delivered.
• No partial prepayment except in connection with mandatory prepayment events (casualty, condemnation).
• Prepayment after default includes yield maintenance, exit fee, and default rate interest.

Borrower's Desired Position

• Short or no lockout period; open prepayment after initial yield maintenance period expires.
• Exit fee of 0.25%–0.45%, with deferral (not waiver) for casualty and condemnation prepayments.
• Exit fee reduced or waived if lender refinances the loan (lender refinance loan).
• Prepayment notice revocable, with borrower paying lender's reasonable out-of-pocket costs on revocation or adjournment.
• Partial prepayment permitted for extension test compliance and individual property release.
• No yield maintenance or prepayment penalty on mandatory prepayments from casualty/condemnation proceeds (other than post-default).
• 30-day notice period (not 60 or 90 days).

Market Benchmark

• Lockout: Initial period through a specified date (often 12–24 months post-closing), during which voluntary prepayment requires a yield maintenance payment.
• After lockout: Open prepayment with payment of the exit fee.
• Exit fee: 0.45% of the amount prepaid, applicable to both voluntary and involuntary prepayments. Deferred (not waived) for casualty and condemnation prepayments. Reduced for lender refinance loans.
• Yield maintenance: Payable only during the lockout period. Not payable on mandatory prepayments from casualty/condemnation proceeds (other than post-default).
• Prepayment notice: 30 days, revocable (borrower pays lender's out-of-pocket costs).
• Partial prepayment: Permitted for individual property release, extension test compliance (DSCR/debt yield cure), and mandatory prepayment events.
• Post-default prepayment: Includes default rate interest, yield maintenance (if within lockout), and exit fee.

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3. Cash Management and Cash Sweep

Lender's Desired Position

• Hard lockbox from closing: all revenue deposited directly into lender- controlled account, swept daily.
• Cash sweep triggered by any default (not just Event of Default).
• Cash sweep triggered by low DSCR test (e.g., below 1.30x or 1.25x).
• No cure rights for cash sweep events, or cure only with lender consent in sole discretion.
• Post-default: lender applies all funds in any order in its sole discretion, including reserves.
• Manager's payroll and operating expenses paid only at lender's discretion during default.

Borrower's Desired Position

• Soft lockbox: revenue flows to operating account; surplus transferred to cash management account after payment of operating expenses per approved budget.
• Cash sweep triggered only by Event of Default, manager bankruptcy (if affiliated), or DSCR trigger event (at a lower threshold, e.g., 1.10x or 1.15x).
• Objective cure rights for each cash sweep trigger:
  • Event of Default: cure accepted by lender (may be in lender's discretion).
  • Manager bankruptcy: replacement with qualified manager.
  • DSCR trigger: achievement of required DSCR for two consecutive quarters.
  • Mezzanine loan default: cure accepted by mezzanine lender.
• Cap on number of permitted cures per category (typically 3–5 during the loan term).
• Post-default: lender must continue to pay taxes, insurance, ground rent, payroll, and essential operating expenses from the cash management account before applying to debt (until a "priority payment cessation event" such as foreclosure initiation or acceleration).
• Borrower retains access to operating account for budgeted expenses absent an Event of Default.
• Peg balance (working capital) retained in operating account.
• Hotel pass-through income (guest deposits, advance bookings, gift certificates) excluded from lender's post-default sweep.

Market Benchmark

• Structure: Operating accounts maintained by borrower/operating lessee; surplus funds transferred monthly to lender-controlled cash management account. Lender has sole dominion and control over the cash management account.
• Cash management waterfall (no default):
  1. Basic carrying costs reserves (taxes, insurance, ground rent).
  2. Debt service payment.
  3. Other amounts due under loan documents (excluding principal).
  4. FF&E reserve.
  5. Interest and operating expense reserve.
  6. Mezzanine debt service (if applicable).
  7. During cash sweep period: excess cash flow to excess cash flow reserve.
  8. Outside cash sweep period: excess cash flow released to borrower.
• Cash sweep triggers: (a) Event of Default; (b) bankruptcy of affiliated manager; (c) DSCR trigger event (combined DSCR below 1.20:1); (d) mezzanine loan default (if applicable).
• Cure rights: Cure permitted up to 3–5 times during the loan term, with borrower paying lender's reasonable costs for each cure. Specific cure mechanisms:
  • EOD: Lender acceptance of cure (sole discretion).
  • Manager bankruptcy: Replacement with qualified manager.
  • DSCR trigger: Achievement of specified DSCR for two consecutive quarters (a "DSCR Yield Cure").
  • Mezzanine default: Mezzanine lender acceptance of cure.
• Post-default protections: Even after an Event of Default, lender continues to pay taxes, insurance, ground rent, payroll for property employees, and essential housekeeping from cash management account until a Priority Payment Cessation Event (acceleration + foreclosure commencement or receiver appointment).
• Hotel pass-through income excluded from post-default sweep.
• Peg balance (monthly working capital) retained in operating account.

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4. DSCR and Debt Yield Tests

Lender's Desired Position

• DSCR trigger at 1.25x or higher; debt yield trigger at 8% or higher.
• Tests measured on trailing twelve months (TTM), with no adjustments favorable to borrower.
• NOI calculated with deductions for management fees at market rate (3–4%), FF&E reserves at 4%–5% of gross income, and franchise fees.
• No DSCR yield cure or pay-down option.
• Tests measured quarterly.

Borrower's Desired Position

• DSCR trigger at 1.10x–1.15x; lower debt yield trigger.
• NOI calculated with exclusions for interest on credit accounts; management fees at actual (not assumed); franchise fees at actual (not assumed).
• FF&E reserves deducted at the greater of (a) actual FF&E reserve amount under franchise agreement and (b) a specified percentage (e.g., 4%) of gross income, but without duplication of actual replacement expenditures.
• DSCR yield cure: borrower can cure by achieving required DSCR/debt yield for two consecutive quarters.
• Pay-down cure for extension tests: borrower can prepay loan (or post cash collateral) to achieve required thresholds.
• Tests measured quarterly (not monthly).

Market Benchmark

• DSCR trigger (cash sweep): Combined DSCR below 1.20:1, measured quarterly.
• DSCR cure: Achievement of specified combined DSCR of a specified threshold (e.g., 1.25:1) for two consecutive quarters.
• Debt yield (extension test): Combined Debt Yield of 8.5% (first extension), 9.0% (second extension). If not met, borrower may prepay or post cash collateral.
• Debt yield (spread increase): Combined Debt Yield of 7.5% as of a specified date (e.g., 24 months post-closing). If not met, spread increases by 25 bps.
• NOI calculation: Excludes interest on credit accounts; uses the greater of (a) actual management fees and (b) assumed 3% of gross income from operations; uses the greater of (a) actual FF&E reserves under franchise agreement and (b) a specified FF&E percentage of gross income (without duplication); and deducts franchise fees.
• DSCR calculation: Uses actual debt service (not stressed rate) on the loan (and mezzanine loan if combined test).

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5. Non-Recourse Carveouts (Exculpation)

Lender's Desired Position

• Expansive list of "bad boy" carveouts triggering full recourse to borrower and guarantor.
• Loss carveouts broadly drafted to capture any loss "arising out of or in connection with" the triggering event, including consequential damages.
• Full recourse triggers include: voluntary bankruptcy, SPE violations (without substantive consolidation requirement), unauthorized transfers, unauthorized liens, unauthorized indebtedness.
• All carveouts joint and several between borrower and guarantor.
• No materiality, knowledge, or cure qualifiers on carveouts.

Borrower's Desired Position

• Loss carveouts (damages limited to actual loss): fraud, intentional misrepresentation, gross negligence, willful misconduct, intentional physical waste, misappropriation of insurance proceeds/condemnation awards/rents/reserves, failure to pay mechanics' lien claims, failure to maintain interest rate cap, SPE violations.
• Full recourse triggers (entire debt becomes recourse) narrowly limited to: voluntary bankruptcy by a loan party or principal; collusive involuntary bankruptcy; SPE violation only if cited as a factor in a substantive consolidation order; unauthorized transfer of property or equity collateral; unauthorized mortgage or mezzanine debt lien; franchise agreement termination.
• Exclusion of special, consequential, and punitive damages from loss carveouts (except to extent lender must pay such damages to third parties).
• Carveout for physical waste should exclude waste caused by insufficient cash flow.
• Carveout for mechanics' liens should exclude situations where (a) sufficient specifically-allocated reserve funds exist, (b) lender's access to such funds was not constrained by borrower, and (c) lender failed to make payment.
• Carveout for interest rate cap should be a loss carveout, not full recourse.
• No full recourse for mere failure to deliver transfer notice (only for the actual unauthorized transfer itself).
• Good faith defense preserved: borrower/guarantor not liable under "obstruction of remedies" carveout for defenses raised in good faith.

Market Benchmark

Loss carveouts (liability limited to actual damages, excluding special/ consequential/punitive damages except to extent paid to third parties):

1. Fraud or intentional misrepresentation.
2. Gross negligence or willful misconduct.
3. Intentional physical waste (excluding waste caused by insufficient cash flow).
4. Removal of furniture/fixtures/equipment not replaced in the ordinary course.
5. Misappropriation or conversion of insurance proceeds, condemnation awards, rents, advance rents, operating account funds, and any earn-out or similar payments.
6. Failure to pay mechanics' lien charges (with reserve fund carveout: no liability if sufficient specifically-allocated reserves exist and lender failed to apply them).
7. Interest rate cap default or failure to maintain.
8. Obstruction or opposition to lender's exercise of remedies (with good faith defense preserved).
9. Unauthorized franchise agreement or rebranding.
10. SPE violations (including pre-closing SPE failures and liabilities arising from pre-closing conduct).
11. Voluntary unauthorized indebtedness, lien, or transfer that does not trigger full recourse.
12. Insurance deductible amounts.
13. Franchise agreement termination costs (de-identification, re-branding, PIP costs, economic harm from delay).
14. Manager breach of assignment of management agreement obligations.

Full recourse triggers (entire debt becomes recourse):

1. Voluntary bankruptcy by loan party or principal.
2. Collusive involuntary bankruptcy.
3. SPE violation cited as a factor by the court in a substantive consolidation order.
4. Unauthorized mortgage/mezzanine debt lien on property or equity collateral.
5. Unauthorized transfer of property, equity collateral, or interest in a restricted party (but not mere failure to deliver notice, standing alone).
6. Franchise agreement termination (other than by lender) without consent.
7. Guarantor failure to pay franchise liquidated damages.
8. Loan party or affiliate acquisition of mezzanine loan interest.
9. Minimum ownership/control test violation.
10. Voluntary ground lease termination or rejection in bankruptcy without lender consent.

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6. Transfer Restrictions

Lender's Desired Position

• No transfers of any kind without lender's prior written consent (sole discretion).
• No assumption of the loan.
• All transfers of direct or indirect interests require lender consent.
• "Transfer" defined broadly: sale, conveyance, mortgage, pledge, encumber, assign, grant options, partition—including by operation of law.
• All PACE loans prohibited.
• No transfers of interests above 5% without consent.

Borrower's Desired Position

• Permitted transfers without lender consent:
  • Death/incapacity transfers.
  • Transfers of indirect interests below a threshold (e.g., 10%) that do not change control.
  • Intra-family/estate planning transfers.
  • Transfers among existing equity holders.
  • Public company stock exchange transactions.
  • IPO or similar capital markets activity of parent.
• Higher threshold (10%+) before notice and consent required.
• 30-day prior notice (not consent) for transfers above the threshold that do not change control.
• Consent required only for transfers of direct interest in borrower or operating lessee, or transfers resulting in a change of control.
• Qualified transferee/assumption right (with conditions).
• Prohibited competitor protections: lender cannot assign 51%+ of loan to a prohibited competitor; borrower can update the prohibited competitor list annually.

Market Benchmark

• No assumption of the loan.
• Prohibited without consent: Direct transfer of any property or equity collateral; PACE loans; any transfer resulting in a change of control.
• Permitted without consent (but with 30-day prior notice for transfers of 10%+ interests): Transfers of indirect interests in mezzanine borrower or restricted parties (other than direct interest in borrower or operating lessee) where:
  • No person acquires 10%+ direct or indirect interest (if they didn't already hold 10%+).
  • No change of control occurs.
  • Satisfactory lien/judgment searches obtained.
  • All representations remain true.
  • Guarantor and control requirements continue to be satisfied.
  • OFAC/sanctions compliance confirmed.
• Permitted transfers (no consent or notice):
  • Death or legal incapacity transfers.
  • Public stock exchange transactions of a publicly traded parent.
  • Compliance transfers required by law or regulation.
• Prohibited competitor protection: Lender cannot assign 51%+ of the loan to a prohibited competitor (excluding securitization). Borrower can update the prohibited competitor list annually with lender's reasonable consent.
• Minimum ownership/control test: Specified parties must maintain a minimum direct or indirect ownership percentage and control throughout the loan term. Satisfaction of the test is a condition to closing and a continuing covenant.
• Eligibility requirements for any replacement controlling party: total assets in excess of a specified threshold (e.g., $3B+) and operational experience in the property type (e.g., 8,000+ hotel rooms under management).

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7. Interest Rate Cap Requirements

Lender's Desired Position

• Initial cap from closing; replacement cap required for each extension.
• Counterparty must be rated A+ / A1 or better (long-term unsecured debt rating).
• Strike price at or below the stressed rate used in underwriting.
• If counterparty is downgraded, immediate replacement required (5 business days).
• Cap must be collaterally assigned to lender with full legal opinions.
• No "Substitute Interest Rate Cap Agreement" concept (only full replacement).

Borrower's Desired Position

• Acceptable counterparty defined by objective rating criteria, with lender approval as a fallback (for counterparties that don't meet ratings but are otherwise creditworthy).
• Strike price: 5% or higher (higher strike = lower premium cost).
• Longer cure period for downgrade (10–30 business days).
• On downgrade, multiple cure options: (a) replace cap, (b) obtain guaranty from qualifying affiliate of counterparty, or (c) cause counterparty to post collateral securing obligations.
• Substitute interest rate cap permitted (caps that don't meet all formal requirements but provide substantially equivalent protection).
• For extension: replacement cap need only cover through the end of the interest period in which the extended maturity date occurs (not through the full extension term plus buffer).
• Legal opinions "as reasonably required by lender" (not any opinion lender may demand).

Market Benchmark

• Acceptable counterparty: (a) Long-term unsecured debt rating of at least the equivalent of "A+" from S&P (or equivalent from Moody's/Fitch), or (b) otherwise approved by lender.
• Strike price: 5.0% (Term SOFR or alternate rate index).
• Term: Through the end of the interest period in which the maturity date (or extended maturity date) occurs.
• Collateral assignment to lender with counterparty acknowledgment letter and legal opinions.
• Downgrade cure period: 10 business days.
• Downgrade cure options: (a) Replace with new cap from qualifying counterparty, (b) obtain guaranty from qualifying affiliate, or (c) cause counterparty to post collateral.
• Substitute interest rate cap permitted if it meets substantially similar economic terms.
• Extension caps: Replacement cap required if existing cap expires before the extended maturity date.
• Failure to maintain: Constitutes both an Event of Default and a loss carveout (personal liability for actual damages).

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8. Reserves

Lender's Desired Position

• Upfront reserves at closing for taxes, insurance, FF&E, interest, and operating expenses.
• Monthly deposits into all reserves from day one.
• FF&E reserve at 5% of gross income from operations.
• Large interest/operating expense reserve (6–12 months of debt service).
• Excess cash flow swept into reserve during any cash sweep period, held as additional collateral.
• All reserves applied to debt upon default, in lender's sole discretion.
• No investment earnings credited to borrower.

Borrower's Desired Position

• Upfront reserves limited or waived if no cash sweep event exists.
• Monthly deposits only during a cash sweep period (except for basic carrying costs and FF&E, which are ongoing).
• FF&E reserve at 3%–4% of gross income, or at the rate required by the franchise agreement (whichever is greater).
• Interest/operating expense reserve limited to 2–3 months and funded only if cash sweep is in effect.
• Excess cash flow reserve held in interest-bearing account; released to borrower upon cure of cash sweep event.
• Reserves applied in priority waterfall even during default (taxes, insurance, ground rent, payroll first).
• Clear release conditions for each reserve account.

Market Benchmark

• Basic carrying costs reserve: Monthly deposits of 1/12th of annual taxes, insurance premiums, ground rent, and assessments. Ongoing throughout the loan term.
• FF&E reserve: Monthly deposits equal to the greater of (a) the amount required under the approved franchise agreement, and (b) a specified percentage (typically 4%) of gross income from operations for the applicable period.
• Interest and operating expense reserve: Upfront deposit of a specified number of months (e.g., 3–6 months) of debt service and operating expenses. Replenished if drawn below threshold.
• Excess cash flow reserve: Funded only during a cash sweep period. All excess cash flow (after payment of items higher in the waterfall) deposited into the reserve. Released upon cash sweep event cure.
• Special-purpose reserves: Transaction-specific reserves (e.g., for pending litigation, earn-out payments, or franchise transition costs) with defined release conditions.
• General provisions:
  • All reserve accounts are Eligible Accounts (FDIC-insured or invested in permitted investments).
  • Lender has sole dominion and control.
  • Reserve funds are additional collateral for the loan.
  • Borrower bears all costs of establishing and maintaining accounts.
  • Interest earnings credited to the applicable reserve account.
  • Upon payment in full (no default), all reserve funds returned to borrower.

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9. Property Release (Portfolio Loans)

Lender's Desired Position

• No right to release individual properties.
• If release is permitted, 125%+ of allocated loan amount must be prepaid.
• Release limited to one property during the entire loan term.
• Remaining portfolio must satisfy stringent financial tests post-release (DSCR, debt yield, LTV).
• Rating agency confirmation required (if securitized).
• Full exit fee and yield maintenance payable on release prepayment.
• Release price based on lender's appraisal or underwritten value (not allocated loan amount).

Borrower's Desired Position

• Right to release up to 2–3 individual properties during the loan term.
• Release price at 110%–115% of the allocated loan amount.
• Post-release financial tests at reasonable thresholds.
• No rating agency confirmation required (or deemed confirmed if no response within 30 days).
• Exit fee and interest through end of interest period payable, but no yield maintenance after the lockout period.
• Release price paid from sale proceeds without additional equity required.
• Broad conditions: no Event of Default; SPE compliance maintained; lien releases and opinions delivered.
• Allocated loan amounts and release prices specified in a schedule.

Market Benchmark

• Number of releases: Up to two (2) individual properties during the entire loan term (including any extension terms).
• Prepayment amount: Not less than the Release Price for the applicable property (typically 105%–125% of the allocated loan amount, as specified in a schedule).
• Release conditions:
  • No Event of Default.
  • Prepayment treated as voluntary (exit fee, interest through end of interest period, and yield maintenance if within lockout period all payable).
  • Remaining loan parties continue to be SPEs.
  • If securitized: additional insolvency opinion, REMIC opinion, rating agency confirmation.
  • Post-release DSCR, debt yield, and LTV tests met for remaining portfolio.
  • Pro rata prepayment of mezzanine loan (if applicable).
  • Release documents submitted 20+ days in advance.
  • Borrower pays all recording charges, filing fees, taxes, and servicer fees.

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10. Default Provisions and Cure Periods

Lender's Desired Position

• Short cure periods: 5 days for monetary defaults, 15 days for non-monetary defaults.
• No cure period for transfer violations, bankruptcy, or SPE breaches.
• Automatic acceleration upon insolvency events.
• Broad cross-default with all other loan documents and mezzanine loan.
• Default rate: 5%+ above the applicable rate.
• Late payment charge: 5% of the delinquent amount.

Borrower's Desired Position

• Monetary defaults: 7–10 business day cure period after written notice.
• Non-monetary defaults: 30-day cure period after notice, extendable for an additional 60–90 days if diligently pursuing cure.
• Transfer violations: 10 business day cure for failure to deliver notice (not the transfer itself); notice failure alone does not constitute an Event of Default.
• SPE breaches: 30-day cure for inadvertent, non-recurring, curable breaches, plus right to deliver supplemental insolvency opinion.
• Financial statement delivery default: 10 business days after notice (not immediate default).
• Involuntary bankruptcy: 90-day dismissal period before constituting an Event of Default.
• No cross-default to mezzanine loan (mezzanine default triggers cash sweep, not mortgage default).
• Default rate: 3%–5% above the applicable rate.
• Late payment charge: 4% of the delinquent amount (lesser of 4% or maximum legal rate).

Market Benchmark

• Monetary defaults:
  • Principal/interest/maturity payments: No cure period.
  • Other monetary obligations (reserve deposits, etc.): 7 business days after written notice.
• Non-monetary defaults:
  • Transfer violations: Immediate Event of Default (but notice failure alone not an EOD if cured within 10 business days of borrower obtaining actual knowledge).
  • SPE breaches: 30-day cure for inadvertent, non-recurring, curable breaches; right to deliver supplemental insolvency opinion.
  • Representations/warranties: 30-day cure if unintentional and curable, plus additional 90 days if cure commenced and diligently pursued.
  • Negative covenants (Section 5.2): 10-day cure after actual knowledge.
  • Franchise agreement default/termination: 60-day replacement period.
  • Management agreement default: Cure period per the management agreement terms.
  • Financial statement delivery: 10 business days after written notice (triggers cash sweep immediately; Event of Default only if uncured after notice).
  • General catch-all: 10 business days (monetary) or 30 days (non- monetary) after notice, with additional 75 days if cure commenced and diligently pursued.
• Insolvency events:
  • Voluntary bankruptcy: Immediate Event of Default (also full recourse trigger).
  • Involuntary bankruptcy (not consented to): 90-day dismissal period.
  • Guarantor bankruptcy: 90-day dismissal period; lender has option whether to treat as Event of Default.
• Default rate: 5% above the applicable rate (on entire outstanding balance, calculated from due date without regard to cure periods).
• Late payment charge: Lesser of 4% or the maximum legal rate.
• Automatic acceleration: Bankruptcy/insolvency events only. All other Events of Default require lender election to accelerate.

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11. Spread Increase Event

Lender's Desired Position

• Spread increase of 50+ bps triggered by failure to meet debt yield threshold at an early test date (12–18 months post-closing).
• Spread increase permanent and non-reversible.
• Multiple step-ups at progressive dates.

Borrower's Desired Position

• Spread increase of 15–25 bps only.
• Test date at 24+ months post-closing (allows more time for stabilization).
• Debt yield threshold achievable under reasonable market conditions (7.0%–7.5%).
• Spread increase reversible if debt yield subsequently achieved.
• No spread increase if borrower makes a voluntary prepayment to cure.

Market Benchmark

• Trigger: If, as of a specified date (typically 24 months post-closing), the combined debt yield does not equal or exceed 7.5%.
• Consequence: Spread increases by 25 basis points for each payment date from the trigger date through the remainder of the loan term (including extensions).
• Non-reversible in most institutional transactions.
• Applies to both SOFR rate and alternate rate calculations.

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12. Insurance, Casualty, and Condemnation

Lender's Desired Position

• Lender controls all insurance proceeds and condemnation awards.
• Restoration only if lender determines (in its sole discretion) that restoration is feasible and economically viable.
• Net proceeds applied to debt if casualty/condemnation occurs within 12–24 months of maturity.
• Business interruption insurance for 18–24 months.
• Insurance maintained with carriers rated A/VIII or better by A.M. Best.
• Terrorism insurance (TRIA) required.
• Named storm/windstorm coverage with separate deductible cap.

Borrower's Desired Position

• Borrower controls restoration if objective conditions met (no default; adequate proceeds; restoration feasible; adequate time before maturity).
• Restoration permitted up to 6 months before maturity (not 12–24 months).
• Business interruption insurance for 12 months (lower premium).
• Carrier rating: A-/VII or better (broader pool of carriers).
• Deductible caps reasonable and consistent with market practice.
• Excess/umbrella coverage permitted to satisfy requirements.
• Casualty retainage released as restoration progresses.
• If net proceeds insufficient, borrower may deposit shortfall and proceed with restoration.

Market Benchmark

• Restoration conditions (typically objective, as of right):
  • No Event of Default.
  • Restoration can be completed at least 6–12 months before maturity.
  • Proceeds (plus borrower deposits) sufficient to cover restoration.
  • Restoration will restore the property to at least its pre-casualty condition, value, and cash flow.
  • All required permits obtainable.
  • Franchise agreement remains in effect.
• Retainage: 10% of net proceeds held until completion.
• Business interruption: 12–18 months of coverage.
• Terrorism insurance: Required (TRIA coverage).
• Named storm/windstorm: Separate coverage required for coastal properties; deductible capped (typically 3%–5% of total insurable value per occurrence).
• Carrier rating: A/VIII by A.M. Best (or equivalent).
• Casualty/condemnation prepayment: No yield maintenance; exit fee deferred (not waived) to maturity or next voluntary prepayment.

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13. Franchise and Management Agreement Protections

Lender's Desired Position

• Approved franchise agreement must remain in effect throughout the loan term; termination is an Event of Default and full recourse trigger.
• No amendment, modification, or supplement without lender's prior written consent.
• Comfort/recognition letter from franchisor acknowledging lender's rights.
• Replacement management agreement requires lender approval (sole discretion).
• Manager subordination and assignment agreements required.
• Lender right to terminate management agreement upon foreclosure.
• All franchise fees, PIP costs, and liquidated damages guaranteed by guarantor.

Borrower's Desired Position

• Termination of franchise agreement by franchisor (not by borrower) followed by replacement within 60 days should not be a default.
• Permitted franchise agreement amendments that do not materially adversely affect lender.
• Manager replacement with a "qualified manager" (defined by objective criteria) with lender's reasonable (not sole) consent.
• Franchise agreement termination by lender upon exercise of remedies: all de-identification costs, PIP costs, and re-branding costs are loss carveouts borne by guarantor (protecting borrower's non-recourse status for other obligations).
• Manager's right to manage preserved unless Event of Default continuing.

Market Benchmark

• Franchise agreement termination: Event of Default if terminated (other than by lender or by franchisor), unless replacement franchise agreement with an approved franchisor entered into within 60 days.
• Franchise agreement amendments: Prohibited without lender consent; "Prohibited Franchise Agreement Amendment" constitutes both an Event of Default and a recourse carveout.
• Name change/rebranding: Event of Default and loss carveout.
• Franchise termination costs: Guarantor fully liable for: (a) Liquidated damages payable to franchisor (full recourse trigger). (b) De-identification, re-branding, and PIP costs (loss carveout). (c) Incremental costs of new franchise agreements over existing terms.
• Management agreement:
  • Assignment to lender as additional collateral.
  • Manager subordination to loan documents.
  • Replacement with qualified manager requires lender approval.
  • Following Event of Default: no exercise of rights under management agreement without lender consent.

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14. SPE and Separateness Covenants

Lender's Desired Position

• Full SPE requirements including independent director/manager.
• SPE requirements apply retroactively to all periods prior to closing.
• SPE breach is immediate Event of Default (no cure period) and full recourse trigger.
• Annual SPE compliance certificate required.

Borrower's Desired Position

• SPE breach curable: 30-day cure period for inadvertent, non-recurring breaches, plus right to deliver supplemental insolvency opinion.
• SPE breach as full recourse trigger only if the breach is cited as a factor by a court in an actual substantive consolidation order.
• Delaware LLC with springing member structure as alternative to independent director (no principal required).
• Pre-closing SPE issues disclosed and accepted by lender at closing.

Market Benchmark

• SPE requirements:
  • Single-purpose entity; no commingling of assets; separate books and records; arm's-length dealings with affiliates; no dissolution without lender consent.
  • Delaware LLCs satisfying specified structural requirements (springing member; organizational documents with SPE provisions) may serve as borrower without requiring a separate principal/managing member.
• Cure period: 30 days for inadvertent, non-recurring, curable SPE breaches, provided borrower delivers supplemental insolvency opinion confirming no impairment.
• Loss carveout: SPE violation is a loss carveout (personal liability for actual damages), including any liabilities arising from pre-closing conduct.
• Full recourse trigger: SPE violation triggers full recourse only if cited as a factor by the applicable court in a substantive consolidation order (unless petitioned by lender).

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15. Ground Lease Provisions (If Applicable)

Lender's Desired Position

• Ground lease subordination, non-disturbance, and attornment (SNDA) or recognition agreement from ground lessor.
• Lender receives copies of all ground lease notices.
• No modification, amendment, or termination of ground lease without lender's prior written consent.
• Ground lease default is immediate Event of Default.
• Extended cure rights for lender to cure ground lease defaults.
• Ground lessor estoppel certificates required annually and in connection with securitization.

Borrower's Desired Position

• Recognition agreement from ground lessor (rather than full SNDA, which ground lessors may resist).
• Permitted amendments that do not adversely affect lender's interests (with lender's consent not unreasonably withheld).
• Ground lease estoppel obligation qualified by "commercially reasonable efforts" (ground lessor may not cooperate).
• Extended estoppel delivery period for uncooperative ground lessors (e.g., 40 days, with no breach if failure is solely due to ground lessor's non-compliance).
• Guaranty of ground lease obligations only to extent required by ground lessor (not additional lender-imposed guaranty).

Market Benchmark

• Recognition agreement: Required from ground lessor, acknowledging lender's interest and providing lender cure rights.
• Ground lease guaranty: If required by ground lessor, guaranteed by guarantor (separate guaranty).
• Amendments: No modification or amendment without lender's prior written consent. Voluntary amendment or modification is a loss carveout. Voluntary termination or bankruptcy rejection without consent is a full recourse trigger.
• Default: Ground lease default beyond applicable cure periods is an Event of Default.
• Estoppel certificates: Within 10 business days of lender's written request (no more than once per year unless Event of Default or securitization). Extended to 40 days where ground lessor is uncooperative, with no borrower breach if failure is solely due to ground lessor.
• Ground lessor notices: Lender must receive copies of all default notices under the ground lease.

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16. Securitization Cooperation

Lender's Desired Position

• Unlimited securitization cooperation obligations.
• Borrower bears all costs of securitization compliance.
• Loan may be restructured (split into A/B notes, component notes, new mezzanine loans) without any limitations.
• Rating agency requirements govern all decisions.
• Borrower required to serve as registrant or depositor.

Borrower's Desired Position

• Cooperation obligation qualified by "commercially reasonable efforts."
• Lender reimburses borrower for first $50,000+ of securitization costs.
• No restructuring that changes: (a) weighted average interest rate; (b) stated maturity; (c) aggregate principal balance; (d) aggregate amortization; (e) any other economic term; (f) any term that increases borrower's obligations or decreases borrower's rights (other than de minimis extent).
• Borrower not required to serve as depositor, issuer, or registrant.
• Borrower not required to prepare materials not customarily used in ordinary course of business.
• Guarantor financial disclosure limited to scope provided at closing.
• Review period: 5 business days for disclosure documents.
• Borrower may adjust securitization certifications to reflect current facts.
• Reasonable precautions against disclosure to competitors.
• Lender cannot assign 51%+ to a prohibited competitor (excluding securities in a securitization).

Market Benchmark

• Cooperation: Commercially reasonable efforts; borrower provides information in its possession or control.
• Cost allocation: Borrower bears costs; lender reimburses borrower for first $50,000 of out-of-pocket costs.
• Restructuring limitations: No change to weighted average interest rate, maturity, principal balance, amortization, or other economic terms. No decrease in borrower's cure periods or increase in borrower's obligations (other than de minimis).
• Borrower protections:
  • Not required to serve as depositor, issuer, or registrant.
  • Not required to prepare non-customary materials.
  • May adjust certifications for current facts.
  • Guarantor disclosure limited to closing-scope financials.
  • 5 business day review of disclosure documents.
  • Competitor protections preserved.
• Uncross provision: Lender may unilaterally sever portfolio into individual loans (allocated loan amounts per schedule), subject to same economic term protections. Lender bears borrower's costs if no Event of Default.

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17. Mezzanine Loan Coordination (If Applicable)

Lender's Desired Position

• No mezzanine debt without lender consent.
• All prepayments of mortgage loan must be accompanied by pro rata mezzanine prepayment.
• No prepayment of mezzanine loan without prior or simultaneous mortgage loan prepayment.
• Mezzanine loan default triggers cash sweep under mortgage loan.
• Acquisition of mezzanine loan by borrower affiliates is a full recourse trigger.
• Intercreditor agreement solely for benefit of senior and mezzanine lender; borrower has no third-party beneficiary rights and no right to see its terms.

Borrower's Desired Position

• Mezzanine debt permitted at closing as part of the approved capital structure.
• Mezzanine loan default triggers cash sweep only (not mortgage Event of Default).
• DSCR and debt yield tests include mezzanine loan in "combined" metrics, providing more achievable thresholds.
• Mezzanine lender cure of mezzanine default cures the cash sweep trigger.
• Cash management waterfall prioritizes mezzanine debt service after mortgage debt service (fixed position in waterfall).
• If mezzanine loan repaid, "combined" tests convert to "mortgage-only" tests with corresponding thresholds.

Market Benchmark

• Intercreditor agreement: Between senior and mezzanine lender; borrower has no third-party beneficiary rights.
• Pro rata prepayment: Voluntary mortgage prepayment must be accompanied by simultaneous pro rata mezzanine prepayment. Mezzanine loan cannot be prepaid unless mortgage is simultaneously prepaid in full.
• Cash management waterfall position: Mezzanine debt service paid sixth in priority (after mortgage debt service, other mortgage loan amounts, and FF&E reserves).
• Financial tests: Reported on both a "combined" basis (mortgage + mezzanine) and a "mortgage-only" basis (if mezzanine is repaid):
  • Combined Debt Yield Requirement: 8.5% (1st ext.) / 9.0% (2nd ext.)
  • Combined DSCR Requirement: 1.00:1 (1st ext.) / 1.05:1 (2nd ext.)
  • Combined LTV: 65% maximum.
  • Mortgage-only thresholds apply if mezzanine is no longer outstanding.
• Mezzanine default: Triggers cash sweep only (not mortgage Event of Default). Cure by mezzanine lender acceptance cures the cash sweep.
• Affiliate acquisition: Loan party or affiliate acquisition of any mezzanine loan interest is a full recourse trigger.
• Extension coordination: Mezzanine loan must be simultaneously extended as a condition to mortgage extension.

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General Analysis Framework

When reviewing any CRE loan agreement, apply the following analysis for each provision:

1. Identify the provision in the draft agreement.
2. Compare the draft language to the market benchmark above.
3. Flag deviations from market:
   • Lender-favorable: Provisions more restrictive than the benchmark.
   • Borrower-favorable: Provisions more permissive than the benchmark.
4. Assess materiality: Not all deviations require negotiation. Focus on provisions with the highest economic impact (extension conditions, recourse carveouts, cash sweep triggers, transfer restrictions).
5. Propose revisions: Draft specific language changes to move the provision toward the desired position, citing the market benchmark as support.
6. Consider deal context:
   • Loan-to-value and leverage: Higher leverage = less negotiating room.
   • Property type and quality: Trophy assets command better terms.
   • Sponsor/guarantor strength: Strong sponsors can push harder on recourse and transfer provisions.
   • Market conditions: Tight lending markets favor lenders; competitive markets favor borrowers.
   • Securitization intent: CMBS-bound loans are less negotiable on structural provisions.
   • Portfolio vs. single-asset: Portfolio loans involve additional complexity (cross-collateralization, release provisions, allocated loan amounts).