As I continue to cover the experiences I have encountered in the real estate world relating to COVID-19 and how I have counseled my clients to handle same, the next few blog posts will focus on the lending market and finance related issues. In this blog post, I cover a question that has been asked by many of my clients and real estate borrowers across the country – does my loan allow for additional financing?
This question is becoming popular in today’s unprecedented times as borrowers attempt to secure additional revenue and financing sources as their businesses and underlying collateral may be struggling. A common option has been attempting to secure a loan from the Small Business Administration (SBA) which is offering Economic Injury Disaster Loans (EIDL). However, Borrowers need to be cognizant that securing an EIDL could possibly be a default under its existing loan and mortgage.
Borrowers should first check their underlying loan documents to see if any additional financing is allowed at all. Many times, the loan documents will contain negative covenants now allowing any secondary financing outside the primary loan. If the loan documents do not contain this negative covenant, the next negative covenant to check for is whether the collateral needs to be kept free and clear of all liens, encumbrances, and/or security interests. Any standard set of commercial or residential loan documentation will almost certainly contain such a negative covenant or something related to it, thus making it a possible event of default under your loan if you took out the EIDL. This is because the EIDL usually requires a UCC security interest be placed and recorded on the personal property of the business, which is commonly a part of the collateral on your loan/mortgage.
The existence of this negative covenant does not shut the door of receiving the EIDL, but because securing the EIDL violates your loan documents on its face, the next step is to reach out to your lender and seek approval and consent. Lenders have generally been accommodating in this current market, so we usually encourage our clients to engage in conversations with their lenders to get EIDL loans approved. Be sure such approval is in writing and that Lender acknowledges it has approved the EIDL and that it is waiving any right to claim a default under the mortgage and loan documents.
The above is a basic introduction to the issue of whether your specific loan allows for additional financing. Every situation is different and demands the proper attention and handling to navigate these uncertain times. If you are a borrower or related real estate professional and want to discuss any of the above or have a similar situation and would like to discuss with an attorney, please do not hesitate to contact me.