FAQ: Navigating Loan Assumptions in Real Estate Acquisitions

Q: What is a loan assumption in real estate?

A: A loan assumption is a complex real estate transaction where a buyer takes over an existing loan made from a lender to a seller, requiring careful negotiation and lender approval. This process involves specific legal and financial considerations that protect the buyer, the seller, and the original lender.

Q: What should buyers insist on in the purchase and sale agreement?

A: Buyers must comprehensively review and request a detailed schedule of existing loan documents and reserve amounts. They should require sellers to provide explicit representations about the loan’s status, including accuracy of documentation, current reserve levels, and confirmation of no existing defaults. Finally, the buyer should also reserve the right to terminate the purchase and sale agreement if the lender does not consent to the buyer’s permitted transfers or modifies the economic or material terms of the existing loan.

Q: What key approvals are needed from the lender?

A: Lender approval involves a multifaceted consent process that includes agreeing to the transfer of the property from seller to buyer, maintaining existing loan terms, and releasing the original seller and guarantor from future liabilities. The lender must also approve the buyer’s permitted transfers and ensure there have been no substantial modifications to the original loan structure.

Q: What costs are typically associated with loan assumptions?

A: The financial burden of a loan assumption falls primarily on the buyer, who becomes responsible for various fees including loan assumption charges, lender-mandated expenses, third-party report costs, diligence expenses, and legal fees associated with the transaction.

Q: What diligence steps should a buyer take?

A: Buyers must conduct thorough due diligence by carefully understanding existing borrower covenants, reviewing net worth and liquidity requirements, examining non-recourse carveout provisions, and strategically requesting potential future permitted transfer and loan assumption rights to protect their long-term interests.

Q: What timeframe applies to loan assumptions?

A: Loan assumptions typically operate within a 90 to 120-day window for securing lender approval. During this period, buyers have the contractual right to terminate the agreement or request an extension if full lender approval is not obtained, providing a structured approach to managing the transaction’s complexity.

Have additional questions? Contact Courtney B. Nussbaum, Blake E. Schulman, or another member of LP’s Real Estate team.