Loan 1361 – Refinance with Cash-Out – Tennessee
Borrowers: Yasmine & Ohad | Lender: #2488
The Situation: Smooth Sailing, Until the Closing Table
Yasmine and Ohad had completed nearly every part of their refinance process for their property in Tennessee. Everything was on track:
- Appraisal: ✅
- Insurance: ✅
- Documents Signed: ✅
But just as they were nearing the closing table, they encountered an unexpected hurdle the lender required a Collateral Assignment of Property Management Agreement (PMA).
This document would give the lender the right to collect rent from the property in case of borrower default. No big deal, right? Well, not exactly…
The Problem: Property Manager Refuses to Sign
The property manager, Ashley from Advantage Property Management, flat-out refused to sign the Collateral Assignment of PMA.
Ashley had managed over 2,000 units and had never seen such a requirement before. After consulting her attorney, she felt strongly that:
- The agreement would override their existing property management contract.
- It would obligate her to report to the lender in case of default, which was outside the scope of her duties.
- She was unwilling to enter into this legal relationship with the lender.
The Borrowers’ Dilemma
Yasmine and Ohad were stuck. Their options were limited:
- Switching Property Managers: Changing PMs mid-process was out of the question. They had a solid relationship with Ashley and no time to bring a new PM up to speed.
- Self-Managing: This was also not a feasible option under the foreign national loan guidelines, which prohibited self-management.
- Lender’s Timeline: The lender had already been working on their loan for weeks. Switching property managers or delaying now would reset everything, and they would have to start over, potentially derailing months of hard work.
What Can Be Done in These Cases?
It’s not uncommon for a lender to request a Collateral Assignment of PMA, especially when dealing with foreign nationals or corporate LLCs. The lender’s rationale is simple: they need a security interest in the property’s cash flow in case of default. But how do you handle a situation where your property manager refuses to sign? Here are a few strategies:
✅ 1. Negotiate the Language
- Most lenders are flexible when it comes to the language of these agreements. You can propose that certain clauses be removed or reworded so they are less invasive to the property manager’s role.
- In some cases, lenders may agree to limit the scope of the collateral assignment to protect their cash flow rights without creating burdensome obligations for the property manager.
✅ 2. Use a Temporary Property Manager
- If the lender absolutely insists on the Collateral Assignment of PMA, one option is to hire a temporary property manager just for the closing. This manager would be responsible for signing the agreement, and you could revert to your regular property manager afterward.
- While this solution may seem like a temporary workaround, it can be helpful in closing the deal while maintaining your preferred management setup.
✅ 3. Request an Exception
- Ohad, being a U.S. resident, may have an advantage here. He could ask the lender to waive the property manager requirement for his portion of the ownership. Lenders are sometimes willing to make exceptions for U.S. residents, especially if the borrower can demonstrate solid management and reliable cash flow from their property.
✅ 4. Escalate the Issue with Rationale
- If the property manager is professional and well-established, you can escalate the issue to the lender, explaining that the PM’s refusal to sign isn’t about mismanagement but rather a matter of existing legal relationships.
- You could demonstrate that the current property management setup is solid and doesn’t require any additional oversight. Lenders may reconsider their stance if they feel confident about the existing cash flow management.
Is This Standard in DSCR Loans?
Yes, requiring a Collateral Assignment of PMA is fairly standard practice for DSCR loans, especially when dealing with foreign nationals or corporate LLCs. These loans tend to focus on securing cash flow rights to mitigate the risk of default, as the property income is typically the primary source of repayment.
Not all lenders require this, but many do. If you’re working with a lender who requests it, make sure to ask upfront if the property manager will need to sign a collateral agreement. This will give you time to find an alternative solution before the closing table.
Outcome Pending
At the time of writing, Yasmine and Ohad are still negotiating with their lender to get an exception. They’ve put forth their case, showing how the existing property manager handles the funds professionally and is not managing conditionally on the collateral agreement.
If the lender denies their request, they may have to walk away from the deal a tough decision after months of work.
Takeaway: Always Ask About Collateral Agreements Early in the Process
For anyone working with a property manager on a refinance or new loan, always ask upfront if the property manager will be required to sign a collateral assignment.
This could be the difference between a successful refinance or a deal-breaking roadblock right at the finish line.
Need a team that anticipates these issues before they become deal-breakers?
👉 NadlanCapitalGroup.com