Commercial loan documents rarely contain traps in the obvious sense. The most expensive provisions are usually disclosed, clearly written, and quietly ignored.
They become expensive later.
Non-Recourse Carve-Outs
Non-recourse loans are often marketed as limiting borrower liability. In reality, carve-outs can impose full or partial recourse based on specific actions or events.
Common triggers include misrepresentations, unauthorized transfers, and certain environmental matters. Poorly drafted carve-outs can convert theoretical risk into personal liability.
Cash Management and Sweeps
Cash management provisions can significantly affect liquidity. Lockboxes and sweeps may activate upon technical defaults or covenant breaches, not just missed payments.
Borrowers often underestimate how quickly operational flexibility can disappear once cash control shifts.
Financial Covenant Defaults
Debt service coverage, net worth, and liquidity covenants are often treated as secondary concerns. Breaches can trigger defaults even when payments are current.
Borrower’s counsel evaluates covenant structures, measurement mechanics, and cure rights.
Transfer and Refinance Restrictions
Restrictions on transfers, additional debt, and refinancing may seem irrelevant at closing. They matter when markets change.
Borrower’s counsel reviews these provisions with future scenarios in mind.
By Ferd E. Niemann IV, Partner at Niemann Law Group (www.NiemannLawGroup.com), a firm that specializes in representing real estate and business owners and operators with a myriad of complex transactions. In addition, Mr. Niemann’s investing experience includes: owned/operated 26 manufactured housing communities across over 1,700 sites; SFH flips, SFH buy and hold; multifamily; and experience navigating options as a limited partner in medical, multifamily, storage, restaurant, green energy, and other asset classes.
