2012-03-13, 13:46

New Fannie Mae Multifamily Loan Documents

By: Chris Iavarone

As Pam indicated in her previous blog post, we thought we would (re) kickstart the Multifamily Focus blog by addressing material issues borrowers should focus on in the new Fannie Mae Multifamily Loan Documents. Here are items 3 and 4 on our list:

3. Full Personal Liability if a Mechanic’s Lien is not Removed Due to Insufficient Funds. This is not a new concept, but it has always bothered us since it strikes at the heart of the types of risks associated with an operating deficit scenario for which a borrower should not face personal liability under a non-recourse loan. As in most non-recourse loans, an unauthorized transfer of the mortgaged property triggers full personal liability for the borrower and any guarantor. However, Fannie Mae defines the term transfer broadly enough that it includes mechanic’s liens. Therefore, the borrower and any guarantor is personally liable for the full amount of the indebtedness if the borrower fails to bond off or otherwise release a mechanic’s lien filed against the mortgaged property within 60 days. This is true even if the property is not generating sufficient income to pay vendors and debt service. So, in a circumstance where the borrower has no cash on hand to pay both its vendors and the debt service on the loan, the Fannie Mae loan documents drive the borrower to pay the vendors in lieu of the debt service if it wants to avoid full personal recourse liability for the entire outstanding balance of the loan.

4. Representations and Warranties Regarding Any “Principal”. The Loan Agreement requires the borrower to make extensive representations about any person or entity owning at least a 25% direct or indirect interest in the borrower, guarantor or key principal, including, among other things, representations about litigation, bankruptcy, compliance with law, and ERISA. This could present a problem for investment funds or other large borrowers, because the term “Principal” is defined broadly enough to include passive investors, shareholders of publicly-traded companies, and entities that are not under common control with the borrower. In certain circumstances, a breach of those representations could result in full personal liability for the borrower and the guarantor.

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