Every local government financing can benefit from the active participation of the city, county or town attorney. Sometimes the attorneys, however, don’t know how best to carry out their role. Here are our notes about how you, as a local government attorney, can contribute to the client’s financing process.
You may not be an expert in local government finance, but you are the expert on your client. Usually no one else will have your breadth of knowledge of your local procedures, the concerns of your elected officials, and what else is going on locally that might make a difference. This local knowledge will range from minor issues (agenda deadlines, deadlines for getting time-sensitive notices in the paper) to the more substantive (the presence of future interests or troubling environment conditions on property intended as collateral, or the presence of public or board opposition to a project). Get involved early as the transaction takes shape to help others understand any special considerations.
Help your clients work through the financing documents. Even if your bond counsel is preparing the bulk of the documents, that doesn’t mean there’s a consistency between what the documents say and what your lead staffers think they say. When documents are offered by the lender or a vendor, the chance for discrepancy escalates because they know even less about local conditions. Most importantly — If you don’t understand something, chances are your client doesn’t, either. If something strikes you as unclear or unusual, that’s enough of a reason to ask about it.
Here are some questions to inform your reading and your discussions with your client:
What is your client committing to exactly? Has the finance officer looked at the final payment schedule to be sure it is what he or she expects it to be? Do the financing documents require insurance coverages that you don’t have? Will the lender want to be listed as an obligee on the contractors’ bonds and if so, when and how will you facilitate that? These are just examples of issues that might arise and need your attention and intervention early on.
What limitations do you face in the future? What are the prepayment terms? Are there restrictions on future borrowings or releasing parts of the collateral from a deed of trust? What happens if any borrowed money is left over after the project is finished? If the rec center you are building burns down, what are the limitations on how you can use insurance proceeds?
What are your on-going obligations? Are there reports to be made annually to the lender (such as copies of the audit or confirmations of insurance coverages)? Who is going to be responsible for monitoring those requirements and making sure they get done?
Are there other problematic provisions? We all have our hot buttons. What law applies? Are there limitations on venue? Many lenders are trying to insert arbitration provisions – are those objectionable to you? North Carolina law generally prohibits non-substitution clauses, but we still see those occasionally in vendor contracts. As local government counsel, you may spot these issues when others gloss over them.
You can help with the schedule and the logistics. You shouldn’t be responsible for making the schedule or shepherding the loan closing process, but you can help make sure the schedule and closing process work for your client. If you have your own bond counsel involved, those lawyers will likely take the lead on working through these issues, but even then they’ll need your input. And when you don’t have an outside bond counsel, it’s easy for these issues to get lost in the shuffle.
To start with, when do we need the money? From there you can figure out when you will need LGC approval, and back up from there in terms of required board actions and other steps. Given a required date for board action, when will you need documents for the agenda? Given a date for a hearing, when does the notice need to be in the paper – and then, when do you need to get it to the paper, and in what kind of format?
How are we handling real estate matters? If there’s title work involved, who’s going to do it? When do we need a title insurance commitment? Will the lender require a new survey, or a third-party environmental report – and if so, is your client willing to get those? Are there any subdivision or other land use approvals needed – and how does that affect the schedule?
Who is going to be needed for the loan closing – and will they be around? Is the manager away on Spring Break? If there’s a window for recording documents, is your closing attorney available? Similarly, don’t allow your clients to sign naked signature pages or documents with blanks – even a small loan deserves more care except in extreme circumstances.
There are two other issues occasionally overlooked by finance staff that can complicate a financing plan if not considered from the beginning. If you can be aware of them, you can help make sure your client doesn’t start a process that will have a problem at the end.
Reimbursement. Local governments can borrow money at relatively low tax-exempt interest rates if they comply with the applicable federal tax rules. Among these rules are the “reimbursement rules” – the rules about when you can spend money in advance of the loan closing, and then reimburse yourself later from loan proceeds. Your elected officials need to take specific action to preserve the right to make a reimbursement, and there’s no way to correct it if you don’t do it in a timely fashion. Here’s a post on the reimbursement rules that includes a sample form of a qualifying resolution.
The LGC “blackout” period. The LGC has a policy that you can’t borrow money for a project in October, or later, until your audit for the year ended the previous June 30 is completed (so for example, no borrowing in November 2017 until the audit is completed for the year ended June 30, 2017). That timing can cause a problem if you’re working around a schedule that calls for construction bids in October. This isn’t strictly speaking a legal issue, but it’s a limitation that’s often unknown or overlooked.
As the borrower’s attorney, it’s also likely that someone is going to want from you some type of certification or legal opinion at the closing. We’ll have a separate post on closing opinion practice in the next few weeks.