New Fannie Mae Loan Documents

Rounding out our discussion about the new Fannie Mae Loan Documents, below are items 9 and 10 from our list of key issues:

9. Notify Lender of All Covenant Breaches. The new loan agreement requires a borrower to notify the lender of any breach (however immaterial) of any covenant set forth in the loan documents. This notification is required whether or not the borrower cures the breach. Under the previous loan documents which did not contain this default notification requirement, a borrower could remedy a breach (whether material or immaterial) before it was discovered by the lender and avoid an Event of Default under the loan documents. With this new affirmative obligation, the borrower may be put in the position of notifying the lender of a breach of a covenant that constitutes an automatic Event of Default, even if the breach could otherwise be easily remedied by the Borrower. In some instances, such a breach could also trigger personal liability to the borrower and a guarantor under the non-recourse carve out provisions of the loan documents.

10. Prohibition Against Mezzanine Financing. The new security agreement prohibits secured or unsecured “mezzanine financing” by the borrower or any owner of the borrower (arguably including indirect owners), including the pledge of the ownership interests in borrower or the cash flows of the borrower. A prohibition against “mezzanine financing” is not unusual for loan documents. However, borrowers with complex ownership structures should pay particular attention to this provision and consider its impact on upstream financing that is not typically considered “mezzanine debt”, such as preferred equity or operating lines of credit.

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