Buy-Sell Agreements

Vol. 1, No. 4

James P. McAndrews was formerly a partner with a partner with the law firm of Benesch, Friedlander, Coplan & Aronoff. He currently resides in Fairfax, Virginia.


  • Learn about the characteristics and concerns of the different parties involved in buy-sell agreements.

From Commercial Real Estate Practice Manual With Forms, Second Edition


This article sets forth the main provisions of a buy-sell agreement, the considerations that must be given to a buy-sell agreement by each party, and some problems that might arise. The buy-sell agreement is referred to sometimes as a “take-out agreement,” a “tri-party agreement,” a “tri-partite agreement,” a “coordinated mortgage funding agreement,” or a “mortgage take-out agreement” (MOTO). For the purposes of this article, the buy-sell agreement shall be referred to as the Agreement.


The Agreement is a three-party agreement among the developer (or property owner) seeking financing for construction, the construction lender that will advance the funds during construction, and the permanent lender that has agreed to provide the long-term financing after the construction is complete and a certificate of occupancy has been issued. The Agreement gives the construction lender some assurance that it will receive full payment after the construction is completed. It also gives the permanent lender an assurance that it will be able to make the long-term investment after the completion of the construction. The developer knows that, with the Agreement, it will be able to obtain the construction funds. When interest rates are fluctuating, it is difficult to have a permanent lender commit for an extended period. When interest rates are steady or may decline, the permanent lender may agree to buy the loan from the construction lender for as long as 18 months after the construction loan has closed. If interest rates are low or may increase, the permanent lender may not be willing to commit to purchase the loan from the construction lender for more than six months.




The parties and their respective concerns are set forth below.


Construction Lender


The construction lender commits to advance funds during the course of the

construction. The repayment of these funds are secured by the first mortgage on the project and the personal liability of the borrower or other guarantors. The construction lender is not concerned with any assignment of leases or rents, or of personal property that might be used for the operation of the property. The construction lender is in the picture only during the construction and before the property is operating or the tenants are in occupancy. For this reason, the construction lender requires the personal liability of the borrower (i.e., the developer) to loan the funds. The construction lender is motivated to make the loan primarily for the up-front fees, inspection fees, and the construction period interest, which is usually higher than the interest rate for the permanent loan. The construction lender is looking for a quick payoff after the construction is complete so that it can make other construction loans. It wants to be certain that it will be “taken out” (or paid) at its maturity date. The construction lender is very willing to enter into the Agreement, because the Agreement is further assurance that it will be paid promptly upon completion of the construction. The Agreement is the construction lender’s way of keeping the permanent lender in the picture.


In the Agreement, the construction lender will attempt to have the permanent lender approve, in advance, as many documents as possible—for example, the survey, leases, title commitment, plans and specifications, and mortgage documents. The permanent lender’s advance approval reduces the chances of the permanent lender refusing to fund when the construction is complete.


Permanent Lender


The permanent lender looks for a long-term investment. The Agreement is especially important to a permanent lender if, after the permanent loan commitment is issued, the market rates for permanent loans drop. For example, assume the commitment is issued with a 10% interest rate for the loan, and, at the time of take-out, a developer can obtain a loan at an 8% interest rate. If it weren’t for the Agreement, the developer might be inclined to seek financing elsewhere, and the developer might even attempt to get out of the permanent lender’s commitment. By being in a position to purchase the loan without requiring any action by the developer, the permanent lender is in a secure position to obtain the loan. The Agreement also protects the construction lender and the developer, however, to the extent that a permanent lender might try to avoid making the loan if the interest rates increased during that period. In that situation, the two parties could force the permanent lender to take the loan by assignment.


Unlike the construction lender, the permanent lender will require an assignment of rents to protect the cash flow and to ensure that there will be regular payments on the loan. It often will agree to an exculpation or a “without recourse” provision, which releases the developer from personal liability for any deficiency.


To be certain the loan documents will be available for assignment, the permanent lender usually wants the documents in a form acceptable to it at the time the loan closes. It will also want an agreement that the construction lender will not lend more funds than the permanent lender is obligated to disburse initially, as evidenced by the documents. The permanent lender will further require both the construction lender and the developer to agree to execute an agreement modifying the mortgage documents, if needed, and to refuse to make or permit any prepayments on the loan.




The developer is interested in the construction of the project and in obtaining the funds required to do it. The developer will acknowledge in the Agreement that the Agreement is made primarily for its benefit; that it will not pay off the construction loan; that it will not transfer ownership of the property; that it will execute all documents reasonably necessary, including amendments and modifications of the loan documents, to permit the permanent lender to take the construction loan by assignment; and that it diligently will pursue the construction and will not default on the construction loan. The developer will usually agree to be personally liable to the construction lender if the construction lender is not taken out and the permanent lender is unable to consummate its investment.




When the loan is of a substantial amount and the construction lender must rely upon other lenders who are participating in the loan for the various advances, the permanent lender will want the participants, or at least the major participants, to join in the Agreement. This protection is needed to be certain that the participants do not accept prepayment of their investments in the construction loan, thereby reducing the balance owed far below the commitment amount of the permanent lender.



Click here to purchase Commercial Real Estate Practice Manual With Forms, 2d Edition


Did you find this article helpful? Do you think more information like this would help you? More information is available. This material  is excerpted from Commercial Real Estate Practice Manual With Forms, 2d Edition, 2009, by James P. McAndrews, published by the American Bar Association General Practice, Solo and Small Firm Division. Copyright © 2009 by the American Bar Association. Reprinted with permission. All rights reserved. This information or any or portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. GP/Solo members can purchase this book at a discount.


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