An Opinon Letter is like an estoppel certificate issued by the borrower’s attorney regarding the borrowing entity and the loan documents. Borrowers may have an opportunity at the loan application stage to negotiate the reduction or elimination of an opinion letter and thereby reduce legal fees. Understanding opinion letters and the fees associated with them may help a borrower reduce legal fees associated with a loan. An opinion letter facilitates the lender’s due diligence and is required by all conduit lenders and by some banks and some insurance company lenders depending upon the size of the loan. There are four types of opinion letters:
- Due Organization. Its opinions address the borrowing entity’s organization, good standing, power and authority and the power and authority of the signatory, and whether entering into the loan would violate certain agreements or laws. Due organization opinions are the easiest to give and the least expensive. Depending on the size of the loan and number of entities involved, fees for a due organization opinion letter customarily range between $2,000 and $5,000.
- Enforceability. Its opinions include everything in a due organization opinion plus cover the validity and binding nature of the loan documents. Enforceability opinions are more complicated, more time-consuming and more expensive. Depending on the size of the loan and the level of negotiation between borrower’s and lender’s counsel regarding limitations, qualifications and assumptions, fees for an enforceability opinion letter customarily range between $3,000 and $8,000.
- Bankruptcy-Remote. This type of opinion is generally only required in larger conduit loans where bankruptcy-remote provisions are required in the borrowing entity’s formation documents, such as formation in Delaware, springing members and independent directors. Its opinions cover the enforceability and effectiveness of these bankruptcy-remote provisions. Unless borrower’s counsel is licensed to practice in Delaware, this opinion may require a separate opinion letter from a Delaware attorney. Fees for a bankruptcy-remote opinion generally range around $5,000.
- Non-consolidation. This type of opinion is generally only required with large conduit loans, usually more than $24,000,000. It is basically an opinion that if any equity owner with more than a 49% equity ownership were to become insolvent, the assets and liabilities of the owned entity would not be substantively consolidated with those of the equity owners. This opinion may be required as to multiple entities in multiple levels of entity ownership. A non-consolidation opinion is fact-intensive and usually very complicated and time-consuming. Fees for a non-consolidation opinion vary greatly (such as $5,000 to $35,000) depending upon the size of the loan, number of involved entities and layers of ownership.
Bottom line, at the loan application stage, it is beneficial to attempt to reduce or eliminate required opinions. Line up legal counsel early, ask for a fee estimate so as not to be surprised and push legal counsel to issue a draft opinion letter to lender’s counsel several weeks before the scheduled closing date to give sufficient time for review and negotiation.