|
|
Tri-Party Agreements
The "tri-party agreement" is an agreement in which the permanent (mortgage) lender promises the construction lender that, upon the satisfaction of various conditions, the permanent lender will pay off or even purchase the construction loan. The tri-party agreement generally obligates the construction lender to assure to the permanent lender that the project is completed in a manner that complies with pre-agreed completion conditions. These completion conditions most often include:
- "Substantial completion" in accordance with the approved construction documents (plans and specifications).
- Adhering to agreed-upon procedures for approving substitutions from the contract documents.
- Obtaining a satisfactory "certificate of occupancy."
- Leasing the property to pre-agreed occupancy levels.
At the same time, the permanent lender is usually obligated to:
- Pre-approve due diligence items completed and available at the time of the execution of the tri-party agreement. This often will include construction documents, design and construction contracts, soils reports, title insurance policies, environmental site assessments, evidence of compliance with zoning and other laws, and the wording of both construction loan and mortgage loan documents.
- Notify the construction lender whenever the permanent lender becomes aware of a fact or condition that may allow the permanent lender not to fund the loan.
- Agree to remedies should one of the parties default on the terms of the agreement.
Prior to committing to the loan, the physical due diligence performed by the construction lender involves verifying:
- That the project is structured for success (i.e., that the project is investment grade – or that a forward commitment has been secured – and that appropriate supervision by the designers-of-record is to be provided during construction).
- That the project is buildable (i.e., the contract documents are satisfactory to complete the project as intended and the construction budget and schedule are adequate).
- That the security for the loan is unencumbered (zoning, title and construction permits).
A permanent lender should recognize the importance of conducting physical due diligence thoroughly when they intend to make a forward commitment. With an executed tri-party agreement, the construction lender is relieved of many due diligence concerns. The construction lender’s commitment and concern is limited to a relatively short period of time. They are not concerned with the same durability issues that should be of concern to a permanent lender. Once the construction lender has verified the three due diligence items above, and the permanent lender has approved the construction documents and agreed to the terms of the tri-party agreement, the construction lender has completed his or her pre-closing physical due diligence.
In performing physical due diligence for a forward commitment, there is no property to inspect prior to commitment, only construction documents which represent the work to be performed. Technical representatives of a permanent lender must provide a thorough review of the construction documents prior to the execution of the tri-party agreement. They must verify that the completed project will result in an investment grade property. They must be savvy enough regarding construction detailing and the construction process to recognize items requiring further clarification. They must raise concerns regarding details of construction that are not shown on the plans or that are vaguely specified. These must be defined in sufficient detail prior to commitment, or the technical representative must be involved (by the terms of the tri-party agreement) during construction in the review of submittals and substitutions for items of concern. Should the project be completed in accordance with the contract documents and the construction details result in major items of questionable durability, the terms of the tri-party agreement will likely require funding by the permanent lender.
|
