In CMBS conduit lending, all lenders require sponsors and their borrowing entities to complete a disclosure form. Typical questions include whether the sponsor has ever defaulted on a commercial loan, been involved in litigation, filed for bankruptcy, or been convicted of a crime. Some sponsors believe that not disclosing these matters, particularly those that occurred many years ago, is a better course of action, thinking they are not likely to be discovered. Some sponsors think that providing full disclosure and an appropriate explanation is a burden that puts the loan at risk of being declined.
“Well, I can unequivocally state that answering any of the questions incorrectly on the disclosure form is a huge mistake and jeopardizes the closing of the loan on subsequent discovery. The risk of the loan not closing on discovery is well in excess of the risk of disclosing up front and working through an adequate explanation of what happened,” commented Michael D. Sneden, Executive Vice President at ValueXpress.
“Many borrowers do not appreciate a few things,” commented Jim Brett, head of underwriting at ValueXpress. “First, searches today are unbelievably thorough. One of the questions is whether the sponsor has been convicted of a misdemeanor. In three instances, the sponsor marked no. Subsequently, a DUI, which is indeed a misdemeanor, showed up in searches, one of which was from 34 years ago. This did not derail the deal, but proves the point on the intensity of searches today. Rest assured, any non-disclosed item will be found!”
Second, borrowers fail to understand that, within reason, credit blemishes that either were (1) not related to the subject property, (2) one in which a lender default did not cause a loss, or (3) litigation that was subsequently settled, for example, are generally acceptable in a CMBS transaction. In addition, disclosure allows the borrower to put its best foot forward when it comes to an explanation; with two sides to every story, disclosing up front provides an opportunity to provide a supporting opinion versus a defensive position when a non-disclosed event surfaces and the borrower has to back-pedal.
The moral of the story is to tell the truth up front, and explain in detail what and why it happened.