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Why Do Commercial Mortgage-Backed Securities Loans require that the Borrower be a Delaware LLC?

By IncNow | Published October 13, 2014

storage facilityWhen financing real estate projects over $3,000,000 from across the country, often the best rates are available when Commercial Mortgage-Backed Securities (CMBS) loans are used instead of traditional bank financing. We have seen these requests made for a variety of business properties such as storage facilities, student housing, multi-family housing, retail centers and commercial office buildings. The physical locations of the properties are all over the country, from New York to Texas to California to Illinois. We often incorporate these borrower Delaware LLCs. Additionally, The Williams Law Firm, P.A. (www.trustwilliams.com) can serve as Delaware Counsel for opinions, due formation, bankruptcy remoteness, and good standing. The Williams Law Firm has provided Delaware entity opinions since 2006 on transactions. Thus far in 2014, the firm has advised in 10 closings for projects with a total of $149 million in financing. The opinion letters also provide due authorization with regard to executing certain loan documents and LLC documents. These opinions are required because the lender requires the borrower to be formed as a Delaware LLC.

What are Commercial Mortgage-Backed Securities? A CMBS is a mortgage that is bundled with other loans and sold on stock markets with other like-kind loans. CMBS loans are typically multi-million dollar loans that provide the lender and investors greater liquidity than a traditional commercial mortgage loan. For quality control of the loan portfolio, lenders require opinions from local counsel where the property is located and also counsel in the state of incorporation.

The organizational jurisdiction opinion letter is a letter from the borrower’s attorney to the Lender to ensure the borrower is organized correctly and that the loan documents will bind the borrower as the Lender intends. It confirms that a company is organized as a Delaware entity and has the authority to do the business contemplated under the Delaware LLC Act and the organizational documents. The opining lawyer will review the organizational documents of the borrowing entity and the loan documents for the transaction and verify that the entity was formed in Delaware, they have the authority to approve the real estate transaction, and the entity and the property are separate from other entities, assets and liabilities that may cause unnecessary risk and encumber the mortgage transaction and operations of the business.

Because the Delaware LLC Act allows for freedom of contract, lenders and investment companies require that the internal affairs of the borrowing entity are governed by Delaware law and will be held accountable to the contacts into which it enters. Some other state law entities have less flexible statutes or courts which do not interpret the law as predictably as the Delaware Court of Chancery. These opinions are not given as a guarantee of legal outcomes and court decisions, but are a representation from a Delaware attorney used only to meet lender requirements.

Agents and Corporations, Inc. can form borrower LLCs and operating agreements with the assistance of the Williams Law Firm. We welcome the opportunity to assist local counsel and lender’s counsel to facilitate these transactions. John Williams, Esq. serves as Vice-Chair of the American Bar Association’s Real Property Law Section, Special Investors and Investment Structure Group of the Partnerships and Limited Liability Companies Committee.

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When deciding where to form your company, consider that Delaware has advantages over your home state that may benefit you. Go