What is a Delaware Opinion Letter and When Do You Need One?

You have been shopping around for the best terms on financing commercial real estate.  Your broker has told you that conventional bank financing will not be as favorable as a newer form of securitized financing.  Your broker recommends a Commercial Mortgage Backed Securities (CMBS) loan to finance the purchase of the property.  CMBS loans are typically for tens of millions of dollars and are used to finance commercial real estate purchases.  A bank will create a CMBS by “bundling” multiple mortgage loans and selling them in securitized form as bonds.  CMBS loans, like traditional Real Estate Investment Trusts (REITs), enable banks to loan more money out and allow wealthy investors to invest in high-yield real estate.  You like the idea and learn the lender is requiring you form a single-purpose Delaware LLC.  You have been told that the entity is to have a single equity member and a second non-equity special member to reduce the likelihood of the property going into bankruptcy.  This reduces the risk to the lender, allowing it to offer lower rates.  The catch is you will need to hire Delaware counsel to give an opinion letter.

What is an Opinion Letter?

The licensed Delaware attorney will review your organizational documents and loan documents and provide an opinion on these documents before the lender will fund the loan. This is drafted to meet the requirements of the lender and to make sure the entity has the power and authority to close on the deal and perform its obligations.

When to Obtain an Opinion Letter

A Delaware Opinion Letter should not be overlooked until the last minute. It may take 20 hours of legal services to do all the work required to render the opinion. In the opinion letter, the Delaware attorney will state assumptions, qualifications, and limitations regarding the legal existence of the LLC, whether it was properly formed, whether it is currently in good standing with the Delaware Secretary of State, and whether its governing documents were executed. We also often provide suggestions to revise and restate the borrower LLC’s Operating Agreement to be consistent with the loan agreement’s restrictions on the borrower.

Why is an Opinion Letter Needed?

The main reason a lender will require the opinion letter at closing is because they want reassurance that the LLC operating agreement will be enforced should the borrower default on the loan. Lenders are more comfortable knowing that provisions in an operating agreement designed to protect the lender are more likely to be enforced in Delaware compared to any other state. Most lenders require the borrower to be a Delaware single-purpose entity (SPE) LLC because the Delaware LLC Act and Delaware’s case law favor what the parties agree to in the written contract, and Delaware will be the governing body of law should the borrow and lender go to court.

We at The Williams Law Firm receive calls from lead counsel and principals of borrower entities in states across the country. We represent these types of clients who need us to help in this specific capacity. Our nimble practice allows us to turn around drafts of opinions prior to closing day for a comparatively favorable fee paid at closing. We would welcome the opportunity to assist you.

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