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Document Automation Can Improve Commercial Real Estate Transactions

By: Katheryne L. Zelenock, Dickinson Wright PLLC

Residential real estate practice, particularly residential mortgage lending, has long made use of document automation to assure quick, accurate preparation of transaction documents, but commercial real estate practice has been slow to adopt similar solutions.  

In part, the difference arises from the assumption that commercial real estate transactions are too complicated to benefit from technology-based drafting.

While almost all residential mortgage lenders use the same Fannie Mae and Freddie Mac forms, for example, commercial mortgage lenders frequently develop their own unique loan documents.  

Similarly, while residential leases typically contain only a few variables, commercial leases involve more complicated terms, and a great deal more negotiation — making automation of documents seem unlikely, if not impossible.  

The Cut and Paste Problem

Unfortunately, the persistent use of “cut and paste” drafting of commercial real estate transaction documents may be causing drafting delays and costly increases in turnaround time, as well as inadvertent errors in documentation.   

“Cut and paste” — the traditional method of marking up a form document, having an administrative assistant make changes, then reviewing those changes — is slower, less accurate, and extremely dependent upon personnel familiar with the intricacies of the form documents.  

When many different form documents are maintained, with a large number of inserts or standard and non-standard modifications available, the odds of correctly handcrafting the documents is low — particularly if the instructions for assembly are misunderstood by an administrative assistant or associate who is pinch-hitting for the paralegal familiar with the form or the absent senior attorney who better understands the interaction between various document provisions.  

Even in the hands of experienced users, cut-and-paste assembly of form loan documents can take hours of work and review by two or three team members — an inefficient (and costly) process.

In an industry that measures the cost of a day’s delay in tenant occupancy due to ongoing lease negotiations, or impatiently awaits “locking in” an interest rate until the loan documents have been fully negotiated, the passage of time literally “is” money.

Automation Can Improve the Process

Good document automation systems, whether developed internally, or by deploying a number of solid technological solutions in the market, can speed the process, making drafts and the preparation of the final transaction documents more accurate, and eliminating delays associated with the unavailability of key personnel.  

Document automation also speeds preparation of supporting correspondence, checklists, and other documentation, as well as transaction summaries and other reports, carrying the transaction forward at a brisker pace, and decreasing the amount of time that must be spent post-closing to summarize the transaction.

Intelligent document automation is not limited to merely filling in blanks, or even the substitution of entire paragraphs or completion of “if-then-else” statements.  Good document automation should fully automate sentence structure word-by-word, taking into account all potential variables, including logic-driven interaction among multiple variables as needed to permit “first-time-final” drafting.  With today’s technology, all of this and more can be at your fingertips.

Really effective document automation works through multiple rounds of negotiation, automating not only the first draft, but subsequent “punches and counterpunches” as the transaction progresses.  

The borrower wants more expansive rights to transfer ownership of the borrowing entity, and the lender’s form “playbook” has provisions for that, but those changes affect two different parts of the document?  It can — and should be — automated. Do those changes require an adjustment to the paragraph numbering? That should be automated, too.
Effectively, good document automation integrates all of a property owner’s, lender’s, or landlord’s standard templates and routine document modifications so that virtually anyone can assemble the documents when they have the right background information or data.  

That’s not to say that review of the draft documents is never necessary — but that the review is much more efficient, and concentrates on unique situations that cannot be efficiently automated and, therefore, really warrant review.

If your team is still handcrafting custom language and performing laborious word-by-word reviews for your documents — or automating only the “fill-in-the-blank” provisions and handcrafting changes from there — you’re coming up short!  

Most commercial real estate transactions can be automated to a much greater extent than you initially realize.

It Can Work for Complicated, Highly-Negotiated Transactions

You may be thinking “but our transactions are extremely complicated or highly-negotiated … surely document automation cannot work for those transactions — or will only work for a good first draft, and no further.”  

Everyone likes to think that their work is so challenging that only highly-qualified professionals can perform it — that it could not possibly be done by a machine.  

But by committing your business rules and documents to an automated process, you’re actually assuring that your best language appears in your documents without exception, rather than hoping you can avoid the inevitable human error.

Admittedly, document automation at first is only as good as your standard playbook of templates and document modifications.  If you don’t have tightly crafted templates and a well-organized catalog of “gives,” it may take some time to fully automate your documents so that they can be assembled automatically through several rounds of negotiation.  But taking the first step to automate the easy stuff will naturally lead to automated drafting of the more challenging items. It’s an iterative process — second and third-round negotiated comments are automated once basic provisions are integrated into the system.

It may be true that your initial efforts at document automation are most useful for more straightforward form documents, but with the proper tools, you will quickly advance to much more complicated documents.

Once you start relying on automation, you’ll never want to draft the same solution more than once.  When you create a new document provision, it will be automated for each future instance in which similar circumstances arise. Imagine receiving pages of comments to the draft loan documents — and being able to provide an extensive redlined draft that responds to those comments (integrating all of your best practices) the same afternoon, without hours of custom drafting!

Roadmap to Automated Documents

Virtually every document automation system — even very rudimentary ones — recognize that simple fields such as the parties’ names, property address and other property attributes, and basic financial terms (loan amount, monthly lease payment, etc.) should be automated.  

At a more advanced level, you might automate those initial provisions so that unknown information is handled by delivering appropriate placeholders to the document (e.g., blanks, a “to be determined” message, or an error message indicating that a draft should not go out until certain information is added), and add provisions related to a particular state or property use (for example, adding your “Texas Inserts” and “Specialty Use Inserts”).  

In a more advanced program, document automation enables users to easily take into account any combination of facts, circumstances and/or rules, such as specialized language for particular property types or transaction sizes, state-specific rules, drafting related to a particular customer or property, or any combination of those.

Ideally, deeply embedded logical dependencies can be quickly created, managed and audited by users, for any data element or combination of elements. For example, precisely correct language might be tailored to reflect required or negotiated conditions (e.g., identified repair or build-out needs, special co-tenancy, termination or assignment provisions, or limitations on recourse).  

Similarly, documents should be easily automated to recognize any type or combinations of borrower or guarantor entities (corporation vs. LLC vs. other entity types), special provisions for a particular borrower, or thousands of other unique fact patterns, legal requirements and business rules. They also can automatically perform necessary calculations (the date of a specified period before the maturity date), flag areas of concern based on a combination of factors (an insurance requirement that is inappropriate in a particular shopping center), highlight provisions outside of expected results or rules, and warn against error (creating an error message in the document when a loan term does not match current loan program parameters).

Another advantage of a centralized document system is that changes to standard loan document forms can be instantaneously applied to every active transaction, if desired, and your standard forms are infallibly used for every transaction — no one mistakenly uses an out-of-date form or an improvised solution when a better standard answer is available.

Given the uncertainties associated with an ever-changing business environment and the practical realities of most negotiations, a good system also must permit “continuing automation” to address changes to transaction information after documents are first drafted, but before they are finalized. For example, since many terms are further negotiated after initial drafts are circulated, those fields in the documents must remain connected to the database through successive drafts of the documents, so the documents can be updated as additional information becomes available.  

It is also important for the automation to be “portable” in the sense that it allows the user to create and send automated word processing documents or spreadsheets to third parties for mark-up or completion. Upon return, it should be possible to “re-attach” those documents to the automation database for further update and modification, rather than having to laboriously translate each comment received into an existing template.  

Return on Investment

Building a strong document automation system for commercial real estate transactions requires an up-front investment of time by your most thoughtful professionals, as well as technological resources, but the return on investment can be tremendous. Transaction documents drafted using a well-designed automation system are not only more accurate, but less expensive and more timely than documents assembled by the cut-and-paste method.  

As an added benefit, changes made to documents that are automated using a database-driven system can be easily reported for later analysis.  Loan summaries can be prepared as automatically as the loan documents themselves — no need for staff to waste time culling through the paper file to create a summary.  

Need to know how many loans had modifications to recourse provisions?  How many times you permitted specialized transfer provisions across your portfolio or during a particular time period? Want to model the lease terms at a particular office building, or across several buildings in a single state? If your documents are automated, you can easily pull that information and provide it to managers or investors who need it.

Residential mortgage lenders and property managers have used document automation for years in various aspects of property acquisition/disposition, financing and leasing. The time has come for sophisticated document automation in commercial real estate transactions.  

Katheryne L. Zelenock is a Member of the Real Estate practice of Dickinson Wright, PLLC. She represents commercial mortgage lenders and property owners on a national basis, making use of innovative transaction management and document automation software that she co-developed as a founder and President of e-Cognita Technologies, Inc., a software development company that created software for the commercial mortgage lending industry. Ms. Zelenock has been recognized as a leading real estate practitioner by Chambers USA, Best Lawyers in America, Michigan Super Lawyers and DBusiness (a Southeastern Michigan business publication).  

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