We asked our resident loan expert some hard hitting questions about commercial real estate loan documents and she had a lot of insight to offer the hardworking real estate teams out there trying to organize their data. Hear what she has to say about the questions you should be asking.
Should you abstract your loans?
What good do abstracts do for you when you know you have the loan docs? High level answer: abstracting your loans increases organization and makes critical terms more easily accessible. These abstracts can then be centralized and made available for all employees to utilize simultaneously. And, of course, if someone is particularly handy with Excel, you can drop in a Forward Curve.
Feel free to access a Forward Curve here.
So, you can get to your critical information in seconds and an editable abstract gives you the foundation to run some calculations. Downside? It's time consuming and expensive. And the actual information that makes up an abstract is static as opposed to dynamic, so you'll have to put in additional effort to manually get your projections and calculations.
That said, if you seek the benefits that come with abstracting, the best thing you can do is have it done right after closing - this way the documents are towards the top of your inbox.
At the end of the day, it's like something we always say: don't waste your time digging up details when you can spend your time chasing new deals.
What are the options if you want to abstract your loans?
So abstracts are valuable to have, but how can you get them? Maybe one day an AI blows away all the current options, but for today these are your choices:
- Hire an attorney, in-house or contracted.
- Outsource to loan experts.
What are the pros and cons of having an attorney do your abstracts?
You can use your attorney, but the most important thing about making this decision is awareness of the consequences. Let's walk through the pros and cons.
- Attorneys have a great understanding of that convoluted language it seems only they can speak. They are trained at separating out the meanings of definitions and can give you a great idea of the foundational contract you've signed.
- Outsourcing the work of abstracting frees up your team so they can focus their efforts on other projects.
- Internal teams offer the advantage of proximity. Plus, in-house teams have the flexibility to adjust to the needs of the company and can accommodate last minute requests more readily than outside counsel could.
- Attorneys - whether in-house or contracted - are wildly expensive. You may not have enough loans to necessitate the cost of an in-house team and contracted counsel may take a very long time to complete a single abstract.
- You might be surprised how little time it actually takes to complete and validate an abstract, and the turnaround time for attorneys is over 400 times longer than the actual time for a complete and accurate abstract.
- Attorneys are not necessarily experts when it comes to the numbers. Sure, they can comprehend that lawyer-language, but they may not catch some of the critical information around your calculations and metrics. It is more common than you may think for lenders to make mistakes in their own loan agreements, and those mistakes could make a big impact.
Can you do the abstracts yourself?
You can abstract loans yourself. We'd note that the time to abstract your whole portfolio (if it's not been done) might be a task, though the end output is something organized, comprehensive, and accessible.
What would you need?
1. Know which documents to request from your lender.
Download our comprehensive checklist here for all the docs you should have on file.
2. Recognize where to search in the documents for information as well as the order in which it will likely be presented.
- Begin with the Note as it will either have the bulk of the information on it or no information at all.
- Next, take a look at the Loan Agreement which will include information about interest rates. Keep in mind that floating rate loans will be more complex for a multitude of reasons such as lookback, daycount, floors, etc.
3. Know where you're going to put the information. Our team uses templates appropriately setup for the type of loan at hand, and it's a time saver, especially since the Freddie and Fannie sheets have all the template language typical to those loans already input.
Download the abstract templates our loan experts use here.
Straightforward enough, and the resources are there, but we know the next question... How much time is this going to take?
How long does it actually take to abstract a loan?
We separate loan types into three categories, in ascending order of difficulty: Agency, Stabilized, and Construction. The time required to abstract your loan will vary depending on which of these categories it falls into.
1. Agency - Fannie and Freddie loans are template from page 1 down to the riders and modifications, and they also contain the least amount of documents. To abstract one of these takes approximately 30 minutes, plus another 10-15 minutes to look back over the critical details.
2. Stabilized - These are much less template and have more documents attached to them. They likely include a Cash Management Agreement, Deposit Account Agreement, Controls Agreement, Cash Collateral Agreement, and so on. To get through these will take a bit longer than an Agency loan, but according to our team of experts, it should take no longer than 2 hours to abstract.
3. Construction - By far the most complex, the addition of draws, reserves, advances, and Completion Guarantees can make this type of loan a bit of a doozy to abstract. You may even see multiple Completion Guarantees - a different one for each guarantor. These are also entirely non-template, and we have seen these documents get up into 200-300+ pages. However, though the length and complexity can seem intimidating and may be a selling point for an attorney, finding and abstracting the critical details should only take about 3 hours.
And, of course, if you are having trouble deciphering the language in your loan documents - and if you don't want to spend $2,000 and 2 months on an attorney - feel free to contact us. Our team knows what to look for and they love seeing new additions to documents.
Check out How Loan Docs Have Changed Due to COVID-19 to see what our loan specialists have found since March 2020.
How can you ensure accuracy of your loan abstract?
There is currently a person or a team in your company that is constantly dealing with the numbers (DSCR, Debt Yield, Prepayment Penalties, etc). This is likely whoever is inputting the numbers in Yardi, ARGUS, RealPage, RedIQ, or whichever platform(s) your team is using. We recommend utilizing that person or team as a final round of QA to see if your abstract is accurate, since they can look at the data run off of the abstract details and instantly know if it looks off.
Why do you need software?
Regardless of the methodology used to get your loans abstracted, having them in a software will revolutionize the way you conduct business - portfolio management has never been easier.
Software can provide a centralized platform for all of your deals that is accessible to your entire team. Trust us, centralization of your data is important.
The right software should even let you make use of this otherwise static data and transform it into something more dynamic. Imagine real time projections and calculations of cashflows, prepayment penalties, DSCR, etc. As you're probably already aware, these types of metrics take days to work through. The right software should only take the click of a button.
Don't forget your free abstract template!