I am looking at some loan docs for a deal, there is a "Loan Agreement" and a "Note". The Loan agreement terms reference the note (like interest rate, loan amounts, etc.)....Why even have a separate Note and not just include everything in the agreement? I've tried google and it's a bunch of law firm blogs with various answers (many of which contradict eachother). Is one more enforceable than the other? If so, why?
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When I underwrote and closed in Transportation/Treasury Dept, the Loan Agreement was the full package, while the Note was the actual interest and rate locking agreement, becoming a schedule within the Loan Agreement. The LA could be modified and changed, but the Note couldn't once it was finalized. They Loan agreement had the UW narrative, Schedules, comps, buy backs, warrants, etc....
I really think one is just a agreement to be put into another agreement. Locking one while some aspects might change the interest rate and overall rate might not. Within RE I'm not on that side anymore so not as sure.
I'm curious as to what others have seen.
The Note is the instrument that evidences the borrower’s promise to pay the debt. In the real estate context, suing “on the note” is one way to recover the debt (or you can foreclose on the property under the mortgage).
The Loan Agreement is essentially a contract between the borrower and lender. It will have more detailed provisions re: the loan terms, default provisions, reps and warranties, covenants, SPE provisions for the borrower entity, assignment rights, notices, etc. It is the overarching document that generally “governs” the entire transaction - all of the ancillary loan documents will be drafted to conform with the Loan Agreement.
Remember, the typical suite of loan documents (obviously can vary with the property type) will include not just the Note and LA, but also the mortgage, assignment of leases and rents, guaranties, environmental indemnity, assignment of management agreement, interest rate cap agreement, etc. The loan agreement will govern how all of those documents are effectuated.
Why not just use the Loan Agreement as the instrument to evidence the promise to pay the debt? Why have a separate note?
One thing I’ll add, just to keep things confusing.
A borrower can file chapter 7 bankruptcy and discharge the loan agreement and any liability to pay the loan.
But the property is still encumbered by the note / mortgage, and you foreclose the mortgage.
They can also file chapter 7 on the loan agreement, and then file chapter 13 on the note/mortgage and force you to accept payments again.
Confuse the monkeys even more, now tell them about the difference between a mortgage and a deed of trust!
There are two separate documents because each one has a different set of covenants, remedies, reps and warranties. Two additional documents would be the assignment of leases and rents and a guaranty.
Lenders can sue for money under the note and foreclose on the property via the mortgage.
In NY for example, there is a statute called the "election of remedies", where if the borrower is in default on the note or mortgage, the lender can sue the borrower for money under the note, or they can sue the borrower for breach of the mortgage and foreclose, but can't do both at the same time. Most of the time, lenders will choose to foreclose because single purpose entities or LLCs typically don't have the cash or other assets to satisfy the lender's entire claim.
What does it mean to sue for money under the note? Is the lender suing for full repayment?
It means you’re suing the debtor “personally” to recover the outstanding balance of the loan. Contrast this with electing to foreclose, where the lender would take title and (most likely) sell the asset at a foreclosure sale, and then use the proceeds of the sale to satisfy the outstanding debt owed to them.
The only problem is that the borrower is almost certainly going to be structured as a single/special purpose entity (SPE) which generally means that its only asset is the underlying property. So when you sue the borrower “personally” you’re actually just suing an LLC and generally can’t get to the assets of the principals or upper-tier entities.
This is where guaranties come in. They have different structures, but the gist is that you have a parent entity or high net worth individual in the borrower’s ownership structure guaranty the borrower’s obligations. So theoretically the lender could also recover from a guarantor, but market standard is that the B/G is only personally liable if they commit a “bad” act - filing bankruptcy to stay a foreclosure, siphoning rent that should be going toward debt services, other fraud-type stuff.
TLDR; suing the debtor “personally” on the note does not mean you’re going to get to the personal assets of the principals, and foreclosure + disposition of the property is likely the best option (unless the borrower or guarantor has committed bad boy acts that will lead to personal liability).
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