Experienced borrowers know that the most important factor a lender looks at in underwriting a loan is the borrower’s ability to repay. Certainly, the value of the collateral is important. However, lenders aren’t in the business of owning and operating real estate or other assets. So, while loan to value (LTV) is important, it is never the sole factor in loan underwriting. Lenders want to be repaid.

The borrower’s and guarantor’s net worth, as shown on their financial statements, becomes very important. Does the buyer have the financial strength to repay the loan? Do the guarantors? Again, this is an important consideration, but it is not taken in a vacuum. Loan payments are made monthly. Borrows don’t borrow money with the intent of repaying it with their assets. Equity is generally funded up front. Loan payments are supposed to be made through the cash flow of the property or the business. Therefore, lenders must be certain that the property or business can generate enough revenue to cover all of its expenses and repay the loan. Accordingly, most loan commitments will contain a Debt Service Coverage Ratio (DSCR) requirement and a DSCR covenant will be added to the loan agreement.

DSCR is a simple calculation. Lenders generally use one of two formulas expressed as follows:

  1. EBITDA / (Current Maturities of Long Term Debt + Interest)
  2. NOI / (Current Maturities of Long Term Debt + Interest)


Depending on the type of business or property, lenders will require that the DSCR be maintained ranging from 1.2 to 1.5 or higher. If the targeted DSCR is 1.2, the property or business creates 20% more income than it needs to make its loan payments.

What should a borrower be concerned about when seeking a loan as it pertains to DSCR? How a lender reviews DSCR could affect whether a loan is in good standing. If the target is not met, a lender may have the right to declare a loan default or have the right to require that borrower make principal reductions to bring the loan into compliance. Be aware that distributions to partners or shareholders, even salaries paid to owners could affect DSCR unless permitted under the loan agreement or specifically excluded in the NOI calculation.

Borrowers should make sure that the lender does not have the right to review DSCR more often than annually. Cash flow in certain businesses or types of properties ebbs and flows, such as hotel. Frequent DSCR reviews could cause default because of a poor cash flow time period even though the annual test would show the borrower meets the target.

It is a good idea to negotiate the DSCR target as close to 1.0 as possible. This needs to be done at the commitment stage as it is an underwriting issue and a key basis for making the loan.

As a remedy for missing a DSCR Target, rather than default or principal pay down, offer to escrow cash as additional collateral until the next review. Another solution would be to request a new appraisal of the property. If the appraisal exceeds x% of the mortgage, the DSCR covenant would not apply. These solutions are particularly important early in the loan term as the underwriting is usually based on pro-formas that have been prepared by the borrower and adjusted by the underwriter. Sometimes, the business or property needs more seasoning.

Technical loan defaults are the hardest to cure. The DSCR covenant is among the easiest to breach and the hardest to cure. Borrowers need to plan for DSCR prior to making a loan application. The planning should to include strong, but realistic pro-formas and a strategy for negotiating with the lender for a fair DSCR loan covenant. This planning can help to avoid default problems during the loan term.

Florida’s recording statute gives priority to the real property lienholder who is first to record in the public records of the county where the property is located. There are certain limited exceptions to this general rule. One of the exceptions that most mortgage lenders doing business in the state of Florida are familiar with is the exception for the first lien priority created by Florida statutes for ad valorem or real estate taxes assessed by the property appraiser against real property.

Previously, mortgage lenders could accurately quantify the amount of the potential prior lien for unpaid real estate taxes that could prime their lien by examining county tax records. However, under the very recent case of Miami-Dade County vs. Landowne Mortgage, LLC, 2017 Fla. App. Lexis 14751 (3rd DCA), this analysis may no longer be accurate when refinancing an existing homeowner. In the case, Miami-Dade County filed a 2014 tax lien against the property on which Landowne had previously secured its first mortgage in 2007. The 2014 Miami-Dade tax lien imposed against the property was for up to 10 years worth of improper homestead exemptions previously received by the present owner of the property during his prior years of ownership. Florida Statutes, Section 196.161 allows property appraisers a look back period of 10 years to recoup the amount of any homestead exemptions improperly received, plus a 50% penalty and 15% interest. However, prior to this most recent ruling, it was not clear that a tax lien filed against a property for improperly received homestead exemptions would have a retroactive effect, which would prime the prior recorded lien of a mortgage granted by a lender who had no knowledge of the existing property owner’s improper claim of a homestead exemption.

This problem does not arise in connection with loans to homeowners who are buying a home and obtaining purchase money financing (as opposed to refinancing an existing loan) because the tax lien for improperly received homestead exemptions will only attach to the property owned by the non-exempt owner at the time the tax lien is filed. Prior to the filing of a tax lien of this nature, any purchaser for value of the property on which the improper homestead exemption was claimed will take free and clear of this retroactive tax lien.

Cash strapped local governments aided by ever improving data gathering techniques and the Miami-Dade County vs. Landowne Mortgage, LLC decision may  increasingly turn to real estate tax revenues presented by improperly claimed homestead exemptions. Accordingly, residential mortgage lenders who are refinancing loans for existing homeowners should seek advice from loan counsel who can effectively address this new landscape.

Loan Negotiation (00164323)

Commercial Loan Documents continue to get thicker and become a tedious read not only for borrowers and their attorneys, but for lenders and their attorneys as well. The “standardization” of loan documents (and the corresponding shrinking of font size) has made it easy for many borrowers to simply shrug off the pile of documents and sign whatever is put in front of them. Of course, no one should sign any document without carefully reading and considering its effect. And, despite lenders’ best efforts and hopes to standardize, many provisions are ripe for negotiation. Lenders understand expect certain comments to the standard boilerplate comment paragraphs. I’ll write about some of these provisions from time to time. Today’s installment: use and control of casualty proceeds.

Borrowers and lenders have opposite interests following a casualty. Lenders’ immediate focus is repayment of the loan. Upon the total or partial destruction of the security for a loan, the lender’s source of repayment is gone or at best, compromised. Therefore, the loan documents generally provide that lender has the right to settle insurance claims and insurance proceeds will be paid to lender and applied to repayment of the loan or restoration of the property at lender’s sole discretion. On the other hand, borrower’s concern is the continuation of its business, including its obligations to tenants and investors, not to mention protection of borrower’s own investment and income stream. Therefore, borrower will want access to insurance proceeds to rebuild/restore as quickly as possible.

If the borrower/lender relationship is good and long term, or if the project is strong (and that is not to say that lesser relationships or projects can’t  and don’t negotiate), it is easy for the parties to come to a mutual understanding as to the use of insurance proceeds. The lender will often agree to allow the borrower to participate in the settlement of the insurance claim if not lead negotiations (while lender retains approval over final settlement). In addition, the parties may agree that, although insurance proceeds will be paid to lender, lender will make the proceeds available for restoration if 1) borrower is not otherwise in default under the loan, 2) the loan is more than X months from maturity, 3) a certain percentage of tenants (or perhaps the anchor tenants) agree to continue their leases, and 4) borrower agrees to fund any costs of restoration, including deductibles, in excess of available insurance proceeds (in many cases borrower would be required to deposit all or a portion of such funds with lender). Sometimes, borrower and lender will negotiate a cost or percentage loss threshold where lender would be obligated to make the proceeds available to borrower for restoration of the property.

Where lender retains the insurance proceeds and allows borrower to use them for restoration, it is important for borrower to negotiate a construction draw provision. That is, the insurance proceeds (and any borrower funds required to complete restoration) should be held and disbursed by lender in the same manner as a construction loan. Lender should disburse such funds as work progresses and should not withhold funds until work is completed. Retainage provisions should be considered but should be flexible enough to allow borrower to negotiate with contractors in the future. In other words, retainage provisions should not be mandatory nor should retainage amounts be set in stone.

Other considerations for both parties should include wither leases require restoration and the effect of any prepayment provisions in the loan documents. Borrower should be certain that there should not be a prepayment penalty or yield maintenance premium due to the application of insurance proceeds to the outstanding balance.

Most lenders expect borrowers to make some variation of these comments to the use of insurance proceeds provisions of so-called standard documents. Lenders and their attorneys are generally prepared to respond to these requests and the back and forth should not be extensive meaning that in this case, standardized documents should be negotiable.


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    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.


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