Identify Issues In Counterparty Loan Agreement

Skill: Identify Issues in Counterparty Construction Loan Agreement — Issue Memorandum

2. Failure modes the skill is correcting

• Reviews the draft loan documents in isolation and misses departures from the agreed business deal, especially where drafting makes economics or control tighter than the commitment materials.
• Splits the loan agreement, guaranty, and related project documents into separate silos and misses how a broader default, remedy, or consent path in one document expands risk in the others.
• Misses mismatches between project economics and loan mechanics, such as draw conditions, reserve funding, maturity timing, leverage tests, or extension gating that do not fit the construction budget and schedule.
• Treats entity-covenant language as boilerplate and fails to test it against the borrower’s organizational structure and operative governance documents.
• Flags environmental indemnity language in the abstract without tying it to actual diligence findings, resulting in issues that are too generic to be actionable.
• Identifies problems descriptively but stops short of ranking severity, cross-document impact, and borrower consequence.
• Produces a memo that lists concerns but does not end with concrete next steps, responsible parties, and timing.

3. Legal frameworks / domain conventions that apply

• The agreed term sheet or commitment letter is the baseline for borrower-side review; any draft provision that is more restrictive, broader, or economically worse than that baseline is an issue.
• Construction loan documentation should be checked as an integrated package under standard credit-agreement and guaranty conventions; default definitions, remedy triggers, carveouts, and conditions precedent must be read together.
• Loan economics must be compared against the project budget, draw schedule, appraisal, and stabilization assumptions; the relevant issue is not abstract inconsistency, but whether the draft actually fits the project’s capital stack and timing.
• Entity-restrictive covenants are commonly evaluated against the borrower’s organizational documents and SPE-style governance requirements, including restrictions on commingling, separate books, independent management, and voluntary insolvency actions where applicable.
• Guaranty scope is measured against the bargain reflected in the deal materials and the loan agreement’s default package; broader bad-acts, completion, carveout, or payment guarantees can materially shift recourse risk.
• Environmental indemnity should track the diligence record and should not silently absorb pre-existing or disclosed conditions unless that is clearly the negotiated allocation.
• The analysis should rely on controlling contract language and, where legal propositions are invoked, the governing authority or standard principle for the proposition.
• Severity should be stated using a consistent ordinal scale defined once at the outset and applied uniformly.

4. Analytical scaffolds

• Start by identifying the complete set of governing source documents and confirming whether the task involves one loan package or multiple related documents; if multiple, analyze each separately before synthesizing the interaction points.
• Extract the deal economics and control terms from the term sheet or commitment materials, then compare them clause-by-clause to the draft loan agreement and guaranty.
• For each issue, identify: the source provision, the baseline term, the deviation, the amount or operational scale implicated by the deviation, the cross-reference to another document or clause, and the borrower-side consequence.
• Use the project budget, draw schedule, reserve assumptions, and appraisal to test whether the loan structure is operationally workable rather than merely internally consistent.
• Use the borrower’s organizational materials to test whether entity-covenant language is satisfiable as drafted, including governance mechanics that may be hard to implement at closing or over the life of the loan.
• Read the guaranty with the loan agreement, not after it; any broader default, remedy, or affirmative obligation in the loan agreement may expand guaranty exposure even if the guaranty text itself appears unchanged.
• When an issue turns on a legal proposition, state the controlling authority or standard that supports the proposition instead of relying on conclusory labels.
• Assign each issue a severity level from the stated ordinal scale, and explain the level in one line by reference to deal deviation, exposure, and closability.
• End each issue with a borrower consequence and a concrete fix direction, such as conforming to the term sheet, narrowing triggers, adding a carveout, adjusting timing, or revising a condition precedent.
• Keep the memo issue-oriented: each entry should be self-contained, decision-useful, and prioritized.

5. Vertical / structural / temporal relationships

• Read loan agreement provisions together with guaranty provisions whenever a default, remedy, consent right, or accrual trigger appears in either document; a change in one can enlarge exposure in the other.
• Compare draw conditions to the construction sequence and funding cadence; a condition that is technically satisfiable but practically delayed can stall the project.
• Test reserve funding and maturity timing against the expected pace of construction and stabilization; if the timeline slips, reserve adequacy and extension feasibility should be re-evaluated together.
• Read appraisal-based leverage or value tests in the same frame as the budget and funding request; if the valuation basis differs from the deal assumption, the loan may be oversecured on paper but underaligned in practice.
• Treat entity-covenant language as temporally sensitive: requirements that are manageable at closing may become problematic upon transfers, reorganizations, amendments, or insolvency-related events.
• Read environmental indemnity provisions against both present diligence findings and future remediation exposure; a provision that ignores disclosed conditions can shift known risk to the borrower.

6. Output structure conventions

• Produce a borrower-side issue memorandum, not a summary of the documents.
• Define a clear ordinal severity scale at the beginning and apply it to every issue consistently.
• Organize the memo by severity tier first, then by document section or topic within each tier.
• For each issue, include: source document and section reference, baseline term from the deal materials if applicable, description of the deviation, the scale or amount affected, the interacting clause or document, the borrower-side consequence, severity, and recommended resolution.
• Include an executive summary up front that identifies the highest-risk items and the main negotiation themes.
• Include a final Recommended Actions section with imperative action items, the responsible internal or external role, and a timing anchor tied to the signing, funding, or closing process.
• Use industry-conventional headings rather than a rubric-shaped checklist.
• Deliver the memorandum as issue-memorandum.docx.