Borrower Affiliated

Definition of Borrower Affiliated

In the context of commercial mortgages, the term "Borrower Affiliated" refers to any individual, legal entity, or group that maintains a direct or indirect relationship with the primary borrowing entity. This relationship is typically defined by control, ownership, or management influence. An affiliate is generally considered to be any party that controls the borrower, is controlled by the borrower, or is under common control with the borrower by a third party.

Detailed Description

When a lender evaluates a commercial real estate loan, they look beyond the specific entity holding the title to the property. Understanding who is Borrower Affiliated allows the lender to assess the full scope of the credit risk and the "warmth of the globe" surrounding the transaction. This designation is critical for compliance, risk management, and the enforcement of loan covenants.

Common examples of Borrower Affiliated parties include:

• Key Principals: Individuals who own a significant percentage (often 20% or more) of the borrowing entity or who have the power to direct its management and policies.
• Guarantors: Persons or entities that provide a payment or performance guarantee for the mortgage.
• Parent Companies and Subsidiaries: Larger corporate structures that own the borrower, or smaller companies owned by the borrower.
• Sister Companies: Separate entities that are owned or controlled by the same parent company or principal as the borrower.
• Special Purpose Vehicles (SPVs): Entities created specifically for the project that may share management with the primary borrower.

Lenders track affiliated parties for several specific reasons in a commercial mortgage agreement:

1. Conflict of Interest and Arm's-Length Transactions: Lenders often include clauses requiring that any contracts (such as property management or construction) be conducted at arm's length. If a borrower hires a Borrower Affiliated management company, the lender must ensure the fees are at market rate and not a way to siphon cash flow out of the collateralized property.

2. Debt Limitations: Many commercial loan agreements prohibit the borrower or its affiliates from taking on additional debt that could jeopardize the primary lender's position or the property's financial health.

3. Know Your Customer (KYC) and AML Compliance: Federal regulations require lenders to identify the Beneficial Owners of an entity. Identifying Borrower Affiliated parties is a legal requirement to prevent money laundering and ensure the individuals involved are not on restricted watchlists.

4. Bankruptcy and Recourse: In the event of a default, the legal connection between the borrower and its affiliates determines which assets can be reached by the lender. Bad Boy Carve-outs often trigger personal liability for affiliates if they engage in "bad acts" such as filing for a collusive bankruptcy.

5. Transfer Restrictions: Commercial mortgages often contain "Due on Sale" or "Due on Encumbrance" clauses. These prevent the borrower from transferring interests to an affiliate without the lender’s prior written consent, as a change in the Borrower Affiliated structure could change the underlying risk profile of the loan.