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Key Provisions of Loan Documents

Michael Yazdan

April 7, 2023


When drafting or negotiating a set of loan documents, attorneys should be familiar with a number of important provisions. The below is not comprehensive, but is meant to cover the main provisions that borrowers and lenders review and negotiate during the term sheet and loan document preparation phase. Let's jump into some of the key provisions of real estate loan documents.


Loan amount: This provision specifies the amount of money being lent by lender to the borrower. Best practice is to specify, in both words and numbers, the dollar amount of the loan.


Use of loan proceeds: This provision specifies the intended use of the loan proceeds and may restrict the borrower's ability to use the funds for other purposes. Some common uses for loan proceeds include:

  1. Purchasing real estate: One of the most common uses for loan proceeds is to purchase a property. The loan funds can be used to cover the purchase price of the property or to make a down payment on the property.

  2. Refinancing existing debt: Another use for loan proceeds is to refinance existing debt. Borrowers may use the loan funds to pay off their existing mortgage or other outstanding debts, potentially lowering their overall interest rate or monthly payments.

  3. Renovating or improving real estate: Loan proceeds can also be used to make renovations or improvements to real estate. These improvements may include upgrades to the property's infrastructure, such as installing new plumbing or electrical systems, or cosmetic upgrades, such as repainting or installing new flooring.

  4. Acquiring additional real estate: Loan proceeds can be used to acquire additional real estate, such as purchasing a second property for investment purposes.

  5. Working capital: In some cases, loan proceeds may be used for working capital purposes, such as covering operating expenses, payroll, or inventory.


Interest rate and payment terms: This provision is commonly found in the promissory note; it specifies the interest rate on the loan and the payment terms, including the frequency of payments, the due date, and any late fees or penalties. These provisions may include:

  1. Interest rate: This provision specifies the interest rate on the loan, which may be fixed or variable. If the interest rate is variable, the loan agreement may include a formula or index used to calculate the rate, as well as any caps or adjustments.

  2. Payment frequency: This provision outlines the frequency of loan payments, which may be monthly, quarterly, or another schedule agreed upon by the parties.

  3. Payment due date: This provision specifies the due date for loan payments, which may be the same day each month or a specific day agreed upon by the parties.

  4. Late payment fees: This provision outlines the penalties or fees that the borrower will incur if they fail to make a loan payment on time. These fees may be a fixed amount or a percentage of the outstanding balance.

  5. Prepayment penalty: This provision may specify whether the borrower will be charged a penalty for prepaying the loan or paying it off early.

  6. Amortization schedule: This provision outlines the schedule for paying off the loan, including the amount of each payment that goes towards the principal and interest.

  7. Balloon payment: In some cases, the loan agreement may include a balloon payment, which is a large payment due at the end of the loan term.


Collateral: This provision specifies the property or other assets that the borrower is offering as collateral to secure the loan. The lender is given a security interest in the collateral, which may include the real estate or other assets pledged as collateral. Lenders and borrowers typically negotiate the collateral during the term sheet phase.


Default and remedies: These provisions outline the actions that the lender can take in the event that the borrower fails to meet their obligations under the loan agreement. Some common provisions that deal with default and remedies in a loan agreement include:

  1. Default: This provision specifies the events that will trigger a default, such as failure to make timely payments, breach of representations and warranties, or violation of covenants.

  2. Notice of default: This provision requires the lender to provide the borrower with notice of the default, including the specific reasons for the default and any required cure period. Many borrowers are required by lenders to waive this notice.

  3. Cure period: This provision allows the borrower a specified period of time to cure the default before the lender can exercise their remedies.

  4. Remedies: This provision outlines the lender's remedies in the event of a default, which may include acceleration of the loan, foreclosure on the collateral, or pursuit of other legal action.

  5. Right to cure: This provision may allow the borrower to cure a default even after the cure period has expired, provided that the borrower pays all outstanding amounts owed plus any additional costs or fees incurred by the lender.

  6. Waiver: This provision specifies that the lender's failure to exercise their remedies or enforce their rights under the loan agreement does not constitute a waiver of those remedies or rights.

  7. Costs and expenses: This provision requires the borrower to pay any costs and expenses incurred by the lender in connection with enforcing their remedies, including legal fees, court costs, and other expenses.


Representations and warranties: This provision requires the borrower to make certain representations and warranties, such as that they have clear title to the property, that they have not committed fraud or misrepresentation, and that they are not in default on any other loans. These provisions help to protect the lender's interests by ensuring that the borrower is providing accurate and truthful information about the property and their ability to repay the loan. Here are some common provisions:

  1. Property Condition: The borrower may represent and warrant that the property is in good condition and free from any defects or problems that could negatively affect its value. The borrower may also be required to provide an inspection report to the lender to verify the property's condition.

  2. Title: The borrower may represent and warrant that they have good and marketable title to the property, free and clear of any liens, claims, or encumbrances. The borrower may be required to provide a title insurance policy to the lender as evidence of good title.

  3. Financial Information: The borrower may represent and warrant that the financial information provided to the lender is accurate and complete, including information about their income, expenses, and debts. The borrower may also be required to provide documentation to support their financial information, such as tax returns, bank statements, and credit reports.

  4. Insurance: The borrower may represent and warrant that they have obtained adequate insurance coverage for the property, including hazard insurance, liability insurance, and any other required insurance.

  5. Legal Compliance: The borrower may represent and warrant that they are in compliance with all applicable laws, regulations, and permits related to the property, including zoning, building codes, and environmental laws.

  6. No Default: The borrower may represent and warrant that they are not in default on any other loans or obligations, and that they have not filed for bankruptcy or been subject to any other legal proceedings.


Conditions precedent: This provision outlines any conditions that must be met before the loan is funded, such as the borrower providing proof of insurance or title. These provisions help to protect the lender's interests by ensuring that certain conditions are met before the borrower receives the loan proceeds. Here are some common provisions:

  1. Title Search: The loan agreement may require the borrower to provide a title search report to the lender, showing that the borrower has good and marketable title to the property, free and clear of any liens, claims, or encumbrances. The lender may require that any title issues be resolved before the loan can be funded.

  2. Appraisal: The loan agreement may require an appraisal of the property to be conducted by a qualified appraiser. The appraisal report must demonstrate that the property has sufficient value to secure the loan.

  3. Insurance: The loan agreement may require the borrower to obtain insurance coverage for the property, including hazard insurance, liability insurance, and any other required insurance. The borrower must provide evidence of the insurance coverage to the lender before the loan can be funded.

  4. Legal Compliance: The loan agreement may require the borrower to demonstrate that they are in compliance with all applicable laws, regulations, and permits related to the property, including zoning, building codes, and environmental laws. Any legal compliance issues must be resolved before the loan can be funded.

  5. Due Diligence: The loan agreement may require the lender to conduct due diligence on the borrower and the property, including a review of the borrower's financial information, credit reports, and other relevant information. The lender must be satisfied with the results of the due diligence before the loan can be funded.

  6. Other Conditions: The loan agreement may include other conditions precedent, such as the execution of additional documents, the receipt of third-party approvals, or the completion of specific repairs or improvements to the property.


Prepayment: This provision specifies whether the borrower can prepay the loan and, if so, any fees or penalties associated with prepayment. Prepayment refers to the borrower's ability to repay the loan before the maturity date. These provisions help to protect the lender's interests by setting out the terms and conditions under which the borrower may prepay the loan. Here are some common provisions:

  1. Prepayment Penalty: The loan agreement may require the borrower to pay a prepayment penalty if the loan is repaid before the maturity date. The prepayment penalty is typically a percentage of the outstanding balance of the loan and is intended to compensate the lender for the loss of interest income and other costs associated with the loan.

  2. Lockout Period: The loan agreement may include a lockout period during which the borrower is not permitted to prepay the loan. The lockout period is typically a specified number of years after the loan is funded, during which the borrower must pay the interest and principal according to the schedule set out in the loan agreement.

  3. Yield Maintenance: The loan agreement may require the borrower to pay a yield maintenance fee if the loan is prepaid before the maturity date. Yield maintenance is a method of calculating the prepayment penalty that is designed to compensate the lender for the loss of income resulting from the prepayment. The yield maintenance fee is calculated as the difference between the interest rate on the loan and the current market interest rate, multiplied by the remaining balance of the loan.

  4. Open Prepayment: The loan agreement may allow the borrower to prepay the loan at any time without penalty. This is known as an open prepayment provision and is less common in real estate loan agreements.

  5. Partial Prepayment: The loan agreement may allow the borrower to make partial prepayments on the loan without penalty. The partial prepayment amount is typically limited to a percentage of the outstanding balance of the loan, and any prepayment must be made in accordance with the terms and conditions set out in the loan agreement.

Governing law: This provision specifies the governing law and jurisdiction for any disputes that may arise under the loan agreement.


Fees and expenses: This provision specifies any fees and expenses associated with the loan, such as closing costs, appraisal fees, and legal fees.




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