Introduction

With its many moving parts, the loan-lending process necessitates the involvement of professional practitioners, standard and best practices, and sometimes unintentional substandard practices.  Some transactions are more complex than others and require higher service providers and more subcontract service providers, all of whom bring unique expertise.

Third-party vendors, crucial entities separate from the borrower and lender, play a vital role in facilitating the closing of a loan.  Their involvement is instrumental in the smooth progression of the lending process.

Willing buyers and willing sellers, along with the lender(s) making the “purchase money” loan, if applicable, are the catalysts that precipitate the event of a loan closing.  They play a pivotal role in the transaction.

The principals of a transaction, whether the buyer, seller, and lender, or the borrower and the lender in a refinance transaction, are the parties who provide crucial instructions to the escrow holder, thereby influencing the course of the transaction.

The agents are individuals who work for or on behalf of the buyer and seller, or the borrower and lender.  The agent is not a principal party.

Real estate agent:

The primary function of a real estate agent, or realtor, is to bring a qualified property and a qualified borrower to the table. Their professional facilitation of the transaction justifies their expectation of compensation.

Loan brokers, agents, and direct lenders:

Loan brokers, agents, and direct lenders play crucial roles in the lending process. Their function is to assist in qualifying a prospective purchaser or property owner to obtain a loan, always keeping the borrower’s best interest in mind.

Loan processors- Qualified intermediaries:

Professionals compile all the facts and third-party reports so that the lender can make an informed credit decision.

Loan underwriters:

Upon receiving a completed package, the loan underwriter is entrusted with the significant responsibility of making an objective (sometimes subjective) decision about approving the loan transaction.  Their role is pivotal, as they may have questions that require more effort and time to evaluate the merits of approving the loan transaction.

Some lenders opt to outsource their legal document preparation to a third-party service.  In such cases, a third-party legal counsel or a knowledgeable consultant is strongly recommended.  This ensures that the lender’s responsibility for state and federally required disclosure documentation is met, providing security.

Commercial lending is sometimes characterized by loaning to entities such as trusts, corporations, limited partnerships, and limited liability companies.  There is a required technical understanding of the laws relating to these entity types and the documentation differences each will need. Here is also the issue of lien priority.  Documentation complexity can be compounded when the problems of lien priority and tenancy are added to the mix.  Your borrower may own a property in a family-limited partnership, occupy the same property as an operating business or a corporation, and have other unrelated tenants.

Escrow Companies and their function:

Escrow companies play a crucial role in the lending process.  It’s essential to note that not all escrow officers are alike.  A competent, experienced, and highly technical escrow officer is a must.  Their role as an intermediary and dual agent between the principal parties ensures that instructions and agreements are carried out correctly, providing reassurance in the process.

Title Insurance Companies and their function:

Credit reports and credit reporting agencies:

Credit reporting agencies do not need to be mentioned.  They all use the same databases to accumulate a borrower’s historical credit background.

Real Estate Brokers who make or arrange loan transactions in California are subject to sections 10232.3 and 10232.5 of the Business and Professions Code, which outline a list of disclosures and requirements for investors who may purchase a portion or all of a trust deed investment.  Section 10232.5 subsection (4) states that the Real Estate Broker must provide the “identity, occupation, employment, income, and credit data about the prospective borrower or borrowers as represented to the broker by the prospective borrower or borrowers.” This is easy to comply with when the borrower is either an individual or a seasoned entity with a long-standing financial history and established credit.  A standard credit report should provide all the information you need.. However, lending to a newly formed entity to purchase or hold a property creates an additional question. Do you need to run a credit report on the entity, knowing nothing will happen? The answer is “yes” as an abundance of caution.

Appraiser(s)

You are responsible for identifying a well-qualified, licensed, and insured appraiser who is familiar with the geographic location and property type, and who follows the Uniform Standards of Professional Appraisal Practice (USPAP) requirements.  USPAP provides the body of knowledge and performance standards for the appraisal process as authorized by the US Congress (this was part of FIRREA in the early 1990s and arose from the Bernard Amendment).  This legislation establishes standards for all appraisal services encompassing real and personal property, as well as business enterprises.  It is revised and updated yearly.

The Real Estate or Mortgage Loan Broker must establish that the appraiser is qualified by license or specific certification to accept the assignment for the intended security property.  The Bureau of Real Estate Appraisers’ mandate is required under Business and Professions Code Section 10232.6.

The first document you will use is an “order form,” which will document the type of appraisal, by whom, , a nd when the assessment will be paid for the job, and w ho may rely on the appraisal.” If you, as a mortgage broker, act as an agent for private investors/lenders who intend to fund the loan, or if you plan to sell or assign the loan following investing the loan with our capital.  In that case, the appraiser must be informed that the private investors/lenders will rely on the appraisal report.  In addition to appraising the property, it may be necessary for the appraiser to do a rent survey, a lease-up or absorption study, a personal property appraisal, or an ongoing concern business valuation for an operating business.

"Assumptions and Limiting Conditions” are sometimes thought of as the “legalese” or “boilerplate” of appraisal reports.  The “assumptions” relate to the scope of work identified in the appraisal process.  In writing, the appraiser will outline assumptions, such as the correct legal description, that the zoning is suitable for the property’s use, and that the information provided is true and accurate.  A “limiting condition” limits the use of the appraisal, primarily by specifying the use and intended users of the appraisal report.  That is, who may rely on the information’s contents?  However, each assumption or condition must be reasonable and supportable in the appraisal content and not conflict with the “Extraordinary Assumptions or Hypothetical Conditions.”

Also, it is essential to review the appraisal section, “Extraordinary Assumptions and Hypothetical Conditions.” This means the appraiser has taken some action or used a method that departs from USPAP standards.  The appraiser may have made assumptions that could render the appraisal little or no value. You may encounter this issue when the property is zoned incorrectly for the neighborhood or the property’s intended use, or when comparable properties are challenging to locate.  Some examples of extraordinary assumptions may be assuming that all entitlements are complete for a construction project, considering that there is adequate absorption for lease-up, if the building conforms to zoning and usage ordinances, assuming that the property construction will be completed on time and on budget, and considering that there are no environmental concerns.

As a final comment, I’d like you to please read the entire appraisal.  There are issues like the number of area vacancies, the appropriate capitalization rate, and a discussion about verifying city permits that you may want to verify personally.  These are not always clear in the first reading. For example, the area vacancy and applying a capitalization approach may differ in Riverside, CA. Then, in Newport Beach, CA.

Property Insurance brokers, insurance companies, and insurance agents:

Insurance brokers and agents represent insurance providers that employ them to help sell insurance policies to the public. Captive agents are used by an insurance company, not by the policyholder, and are typically employed by the company itself. A captive is a fiduciary of the insurance company.  An independent insurance broker or agent represents multiple insurance providers and compares policies to determine the best coverage solution for the property owner.  The solution will include a property insurance policy and numerous endorsements to cover types of contingent liabilities.  The independent insurance broker or agent is a dual agent.

Environmental Engineers and property surveyors:

As a lender, you have the option of conducting a quick public records search to identify any properties in the vicinity of the subject that may have been contaminated, which could affect the property or draw attention to the need for further investigation.  An example of such a database in California is the State Water Resources Control Board’s “Geotracker.” The lender also has the option for a limited Phase I or complete Phase I environmental site assessment to determine whether the property contains or has ever contained identifiable contaminants.  The ecological engineer will report that information and comment on how it may affect the desirability and salability of the property.  For properties built before 1978, the issue of asbestos becomes a concern.

Additionally, lead-based paint was commonly used in construction before pbefore1978.  Today, the standard approach is to do nothing about asbestos or lead-based paint if they appear contained or sealed.   Detailed findings by the environmental engineer may necessitate soil borings and a Phase II or III ecological site assessment.

Property Inspections/Property Condition Assessments:

Some lenders may require a property inspection by a third-party professional trained in that field.  The Property Condition Report (PCR) is used by purchasers and lenders who take back the property in foreclosure to assess its value for resale and limit liability on resale.  These reports tend to be very detailed and may require several specialists to evaluate the various components of the property, both real and personal. The process can be expensive, costing from $20,000 to $100,00. This form of third-party assessment is rarely used in private money loan transactions because of the nature and purpose of the loan request.  Limited condition assessments may be available for a significantly lower expense.

There are many risks associated with commercial real estate lending, many of which will be discussed in subsequent articles.  None, however, quite rises to the level of the need to use highly competent and highly skilled third-party vendors.  You are the one who has the option to search for and hire the most professional vendors.  If substandard vendors are used, you, your company, and your investors will be left with the consequences.

Municipal or city-required pre-sale inspection reports:

Many cities have specific requirements to close an escrow.  Of course, the city inspections require an application, a fee, and taxes. Many towns now allow real estate sales contracts to be signed without inspection.

In Laguna Beach, California, obtaining a Property Report (PRP) is necessary before selling or exchanging real property.  This requirement is established in Chapter 14.76 of the municipal code.  The fee for obtaining the report is $400 for residential properties and $545 for commercial properties. It takes about 30 days to receive the report. The compliance requirements are detailed in 14.76.040 applications.  The property owner must make affirmative representations regarding zoning, construction, electrical, plumbing, heating, permits, conformity to zoning and usage ordinances, and other relevant matters. Penalties for violating these provisions are severe. An inspector will physically inspect the property to ensure compliance with the regulations.

Other cities have similar requirements, including Los Angeles, Beverly Hills, Burbank, Long Beach, Newport Beach, Palos Verdes Estates, Pasadena, and San Diego, among others. As cities realize there are fees and taxes to collect, the list can be expected to expand dramatically.

Commercial and residential real estate broker(s):

In metropolitan areas, finding a real estate professional with the background, knowledge, and experience relevant to the product type and geographic location is often a matter of a good referral or inquiry.  If the subject property is in a submarket or rural market, time should be taken to locate a broker at the front end while the loan transaction is being processed.  Brokers in these areas tend to be generalists who list and sell a wide range of real estate, including whatever is available.

Independent foreclosure trustees (agents):

A foreclosure trustee assumes the role of an agent acting on behalf of the creditors (beneficiaries) of trust deeds and mortgages to complete foreclosure proceedings.  Suppose property payments are reinstated and the loan is brought up to date. In that case, the trustee will be paid a fee for services by the foreclosing creditor or the defaulting borrowers. States have different statutory foreclosure procedures and methods.  The distinction lies between the judicial process and the non-judicial foreclosure process.

When a borrower defaults on their mortgage or trust deed, a foreclosure trustee is appointed to handle the legal proceedings on behalf of the creditors or beneficiaries. The foreclosing creditor or the defaulting borrower compensates the trustee if the loan payments are reinstated and brought up to date. It is essential to note that different states employ varying foreclosure procedures and methods, with some utilizing a judicial process and others using a non-judicial process.

If the collateral is personal rather than real property, the security instrument will likely be a UCC-1 filing with the Secretary of State.  The trustee may concurrently foreclose on real and personal property through two rules.  Personal property foreclosures are much faster. An honest property lawyer and a good foreclosure trustee must chart the proper course for the creditors to regain title and control of the collateral property.

Building trades workers:

Support trades, including gardeners, trash haulers, painters, roofers, roof inspectors, electricians, plumbers, contractors, and high-quality handypersons.  Each must be well-vetted and on-call to resolve and solve building problems. The essence of timing is always an issue due to the shorter escrow closing period.

The system is complex, rational to some degree, and irrational to the extent that there is government intervention. It always demands a fee or tax for the privilege of transaction business.

The current system has, to some degree, worked for the last 100 years.  Still, it is changing due to technology improvements, government intervention, erosion of property ownership rights, and foreseen and unforeseen ownership liabilities.

Artificial intelligence will impact future lending, but the development of applicable platforms is still in its early stages.