Being a real estate lawyer means spending long hours drafting and scrutinizing documents that are not exactly light reading. But some documents are easier to work with than others. For example, commercial leases, while they can be long, tend to have less legal “boilerplate” and more practical, substantive terms. On the other end of the spectrum are commercial mortgage loan documents, which are especially tedious and full of terms that even lawyers have trouble deciphering.

A senior colleague once told me, “Boredom is a powerful weapon.” That idea has stuck with me—it’s hard to push back on one-sided provisions when it’s a struggle to simply understand what the other side is saying. However, I don’t think lenders’ attorneys try to make their drafts boring on purpose (as much as I am sometimes tempted to think that). The length and monotony of mortgage loan documents are driven by other factors:

1. Lenders are very risk-averse. Compared to other sources of capital for real estate,[1] mortgage lenders are willing to take a relatively modest return on the money they lend. As a result, they have a very low tolerance for risk and expect the borrower to shield them as much as possible. This means that the lender will require the borrower to reimburse it for all manner of expenses, including the lender’s legal costs to draft and negotiate the loan documents, third-party expenses to monitor the loan and property, and even increased costs that result from regulatory changes, all to minimize the lender’s variable costs. This also leads to loan documents where the borrower affirms at great length and in great detail that they are not doing and will not do anything risky or that could possibly jeopardize the lender’s security, even if such restrictions are not feasible or defy typical property management practices. Loan document forms also typically include extensive remedies for the lender if the borrower defaults. Beyond the typical remedies of foreclosure, loan acceleration, and reimbursement of fees, lenders also want the ability to step in and operate the property and redirect rent payments to themselves. And separately from substantive terms to protect themselves, lenders often have underwriting and closing procedures that are time-consuming, costly, and burdensome. For example, lenders typically require borrowers to sign all loan documents with wet ink and send original signature pages, instead of allowing electronic signatures, which is customary in almost all other real estate transactions.
2. Many lenders are large institutions. While real estate ownership is fairly fragmented, and even the largest institutional owners have a relatively small share of the total market, commercial mortgage lending has a smaller group of very large players. These lenders have the resources to develop and update extremely detailed loan document forms and processes for making sure that the final documents do not stray too far from the forms. Due to their market strength, they also have the ability to dictate loan terms and, more or less, set what is “market.”
3. Mortgage loans often involve many documents. A typical commercial mortgage loan will involve a loan agreement, a promissory note, a deed of trust, an environmental indemnity, one or more guaranties, and collateral assignments of various contracts (such as property management agreements and construction documents), in addition to various other certificates and documents. Each of these documents will have its own long set of boilerplate terms—waivers, indemnities, attorneys’ fees provisions, and so on. That further exacerbates the length and tedium of the collective loan documents.

Fortunately, most terms of most loan documents are acceptable, or at least low risk to the borrower. But hidden in the hundreds of pages of loan documents are terms that could cause major problems down the road. It’s like searching for a dozen needles in ten haystacks—it’s a lot of work, but if you miss one, it could hurt you in the future. This is especially true in the case of guarantees, where people and entities with deeper pockets (compared to the single-purpose LLC that usually owns the property) can be on the hook if things go sideways. As a result, it is important to spend time combing through mortgage loan documents, even if the process is painful and the end result is a modest number of changes.

[1] See my Unified Theory of Real Estate Contracts.