Are Your Commercial Mortgage Documents “as Old as Dirt”?
Beware of the Tech Wreck
Keith H. Mullen 1
For commercial mortgage lawyers with an interest or experience in technology,
this question is the elephant in the room: are we understanding the new roles of
technology in the physical attributes, use and operations of commercial real estate? If
new uses of technology in fact are integrated into the collateral (or in the future could be
integrated into either the collateral or into the servicing of the loan), then our due
diligence checklists and loan documents must address issues associated with the
technology. Until we come to terms with this, commercial mortgage lawyers truly
remain “as old as dirt” – with the improvements built on top of the dirt heading toward a
legal tech wreck. 2
Before we dismiss, deflect or marginalize this question as irrelevant, let’s do two
things.
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Step one: take a quick glance at the commercial property in your part of
town
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Step two: catch up to some very significant events in residential mortgage
lending (gasp)
Step One: Commercial Real Estate and Technology
Investigating the impact of technology upon commercial real estate is as easy as
sitting in your car, or sitting on the train. On your way home tonight, limit your inquiry
just to the signs on the buildings. The signs. The ones you see as you sit.
Signs tipped me off on this technology topic. Several years ago I saw this yard
sign, which asked the apartment tenants to “join” the apartment community’s Facebook
page.
Magically, and almost overnight (it seemed), retail and office landlords were
doing the same sign thing:
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These signs prompted this litany of alarming questions:
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Why are owners spending time and money on this?
What other uses of technology am I missing?
What happens to this tech stuff during and after foreclosure?
During a default or even after foreclosure, how could the dead-beat key
principal continue to benefit from this tech stuff to the detriment of the lender?
In the spring of 2011, I wrote a piece in Mortgage Technology magazine covering
the new uses of technology by building owners. The pace of change since 2011 makes
that piece “old” school. 3
Since then, I regularly curate a short list of technology markers for commercial
real estate. “Check” the box on topics that you currently cover in your checklists and
mortgage loan documents ☐Green Buildings: Enough said – this topic is an old friend. 4
☐Communications: Cable and telecommunications – again, an old friend. 5
☐Building Systems and Operations: Formed pursuant to the Housing and
Community Development Act of 1974, the National Institute of Building Sciences
focuses on incorporating advances in technology into the nation’s real estate stock.
The mission is to serve the public interest “by supporting advances in building sciences
and technologies for the purpose of improving the performance of our nation's buildings
while reducing waste and conserving energy and resources” (emphasis added). Within
the NIBS, the Council on Finance, Insurance and Real Estate “examines the
intersection of finance, insurance, investment and design, construction and ownership
to encourage the development and assist in the affordability of high-performance
buildings” (emphasis added). Clearly, this is a tech topic focused on the most basic
aspect of mortgage lending: the systems and operation of the collateral.
☐Leasing: Owners are using eSign tools to document lease amendments. 6
☐Apartments: Apartment owners use on-line tools to optimize rentals based
upon market rents and occupancy (with services such as YieldStar; and Rainmaker
LRO). Owners are offering electric connections in parking areas for use by tenants with
electric cars; and for use by third party vendors who offer car-sharing services such as
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ZipCar. For more examples of the technology invasion of the apartment sector, take a
look at a brochure for the National Multifamily Housing Council's operations and
technology conference, and then browse the NMHC's “white paper” library on
technology tools. 7
☐Websites: Websites of retail centers and apartments are more than on-line
shopping catalogues and information bulletin boards; many now have other functions,
such as accepting payment of specific services or fees, appointment calendaring, online chatting, photo sharing, etc. Websites have matured into tools for and a place of
conducting business. They are legitimate assets of the company; perhaps they should
be included as a part of the collateral - or not?
☐Social Media: Retail centers, apartments and senior living projects now utilize
Facebook, LinkedIn and other social media tools as a means of communicating with
tenants and their extended families, marketing the community, and building
relationships between the tenants; and, like websites, as a platform to conduct
business. 8 Apartment owners have been using social media tools for some time (read
this old 2010 article from the Dallas Morning News). And, yes, social media is a topic
covered by the NMHC. 9
☐The Cloud: Frankly, this is a topic that I’m still investigating. The focus here is
“where” does the Borrower store either information or documentation relating to the
collateral, and/or “how” the systems at the property operate (for example, systems might
be operated, controlled and/or monitored remotely, or by tools that are portable). Here
is an easy word picture of my concern: in the “old” days, it was difficult for a Borrower to
jerk out the fuse box or the switch box that controlled the building’s HVAC or elevators.
Today, unplugging a server box or a PC (that handles the same functions) is very easy
to do. While we value “mobility” in our personal lives, commercial mortgage lenders
work from the perspective that the collateral stays in one place – if not as old as dirt, it
must remain with the dirt.
Step 2: The Feds and Cousin (Eddie) Resi 10
The techno dagger for commercial mortgage lenders (like myself) comes from a
sector that traditionally is the object of . . . if not disrespect, then perhaps . . . the object
of purposeful distance (based on our pride in handling the BIG $$$ COMMERCIAL
mortgage deals).
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The dagger is residential mortgage lending. It is our Cousin (Eddie) Resi. 11
In the summer of 2013, I warned everyone that the shadow of the Consumer
Financial Protection Bureau (“CFPB”) deserves our attention. My warning was that the
commercial side of the legal practice should not be surprised when the consumer side
begins to impact AND EVEN LEAD our commercial mortgage practice in some very
significant innovations.
The resi-innovation invasion is on the beach. Cousin (Eddie) Resi is a lead
(perhaps “the” lead?) innovatorsof mortgage finance (whether residential, commercial,
capital markets, or whatever). Take a look out the door at this RV (see footnote 20):
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January 16, 2014: CFPB’s eMortgage video appears on YouTube 12
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April 23, 2014: CFPB publishes guidelines for eMortgage closing pilot
program
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August 21, 2014: CFPB announces participants in the eMortgage closing
pilot program
The CFPB has picked 4 vendors in the pilot program for an electronic home loan
mortgage.
No way will the CFPB fail. 13
We need to welcome Cousin (Eddie) Resi to his rightful place at the head table of
mortgage finance.
Changing Your Commercial Mortgage Forms
With the real estate industry already using technology, and the Federal
Government pushing for it in the consumer sector, technology clearly is here to stay. It
is time for commercial finance lawyers to start the work of addressing technology issues
in the due diligence process and in loan documentation.
Here is my working list of topics and issues:
o Third party (or “cloud”) documents storage (use; dangers; mitigation; etc.)
o Lender consent needed for use of electronic (eSign) documents with
tenants and vendors (related issues include: storage location; access;
vendor; turnover; etc.)
o Use or surrender of internet or social media tools (such as email accounts,
websites, Facebook, etc.)
o Turnover of hardware and data used in the operation of the property
o Due diligence (check list items) on technology contracts used in the
operations, marketing or leasing of the property
o Continuation of these contracts following foreclosure (or deed in lieu)
o New defaults and remedies?
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o Annual listing of technology contracts, access rights, and third-party
services (recognition agreement; if not, then what?)
o Using e-mail as a permitted method of giving “notice”
o Borrower cooperation if/when lender implements new technology tools
(servicing; document execution; etc.)
o Description of the collateral
o Granting of security interests (including IP rights)
o New carve-out liability for breach of tech provisions
Of course, this is not an exhaustive list. Indeed, the list seems to grow as I learn
more.
Technology creeps into everything. Even in tasks that seem “as old as dirt.”14
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Keith Mullen is a shareholder at the Higier Allen & Lautin law firm, and cofounder of CounselData LLC. Keith
comments on legal technology and commercial real estate finance at Lenders360blog, and can be reached at
[email protected] and at [email protected].
2
If you are a TE lawyer reading this column, please note the May 2012 Lenders360blog entry where (fortunately for
me) I explicitly stipulate that TE lawyers are way, way, way ahead of RP lawyers on the techno adoption curve:
“Clearly, the trust & estate lawyers (in their care for the dead) are way ahead of the real estate finance lawyers (in
their care for the [living] lenders).”
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Glance at my blog entries covering the impact of technology on commercial real estate.
4
This probably was the first “technology” topic that we ventured into as commercial mortgage lawyers. However, as
we get older and our office space seemingly maturing into darker shades of “greener,” it also means that we bring
desk lamps into the office to help us read (footnotes like this one) in our green but dark offices.
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For many of us, this is the second (and most recent) technology topic.
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DocMagic, RealPage and other companies offer electronic lease services
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Look at the “technology and telecommunications” portion of the NMHC’s knowledge bank.
Read about how companies use social media in the technology column in last month’s eReport.
Search “social media” on the NMHC’s website
10
Cousin Eddie is one of my favorite members of the extended Griswold family. (Christmas Vacation [1989])
(Admit it: you have’em in your family, too.)
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From Christmas Vacation (1989), showing that Cousin Eddie knows his real estate Clark: “So, when did you get the tenament on wheels?”
Eddie: “Oh, that uh, that there's an RV. Yeah, yeah, I borrowed it off a buddy of mine. He took my house, I
took the RV. It's a good looking vehicle, ain't it?”
12
Wow: the Federal Government publishes a YouTube piece. So who is ahead of who in the use of technology?
Commercial? Resi? This is a shout out to Katheryne L. Zelenock and Jim Cooke, two fine lawyers who worked
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with me on the Technology Committee (CREF) within the Mortgage Bankers Association. All that (free) work in
the ‘90s and ‘00s is about to become relevant. Kudos to you both – and in particular to Jim for his on-going
leadership.
13
Some of you know this already: consumer eMortgages already exist and the four pilot vendors selected by the
CFPB are experienced in it. The CFPB simply will push this product to the finish line. Of the four pilot
participants, I view one as a sure-bet favorite.
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As an aside and maybe as a follow up column: What about changes to an ethics rule that were directed at the use
and understanding of relevant technology? Also, should your engagement letter cover electronic communication?
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