Partial Release Clause: Everything You Need to Know
A partial release clause entails an addendum to a mortgage or note that states that lenders will release a parcel when a mortgage balance is paid down to a certain amount. 3 min read
Partial Release Clause
A partial release clause entails an addendum to a mortgage or note that states that lenders will release a parcel when a mortgage balance is paid down to a certain amount. The following is an example of a partial release clause:
- Completed lots or individual houses that can be sold and released on an individual basis based on payment of a partial release fee equivalent to 1.5 percent of an amount prepaid, and the paying down of the principal higher than 87 percent of a sales price or 125 percent of the value of the loan designated to each unit, home, parcel, or lot.
How much would the borrower need to pay down to get the unit or property released? First, a lender will designate a loan value to all units, homes, and properties.
- Unit A: $42,000
- Unit B: $26,000
- Unit C: $84,000
Let’s say that an owner discovers a buyer for unit A and is willing to pay $63,000. The lender has given a loan value to unit A in the amount of $42,000. If the lender has a 125 percent release stipulation, this would mean that the borrower must pay down the loan by 125 percent of the $42,000, or $52,500. Various lenders will also have differing partial release methods.
For instance, a lender may only have a 115-percent partial release mandate. This would mean that the owner of unit A would have to pay down the loan by 115 percent of the $42,000 or $48,300 if he or she wishes to sell off the property.
Why do commercial lenders require such a formula? You may also ask why not simply prorate the loan among various units and release each unit for a paydown that’s relative to the loan’s value attached to a unit (ex. unit A for a paydown of $42,000)?
The answer is that an appraiser assigning the loan value to all units are not perceived well by the marketplace. Units D and E do not have an ocean view, and Units F and G are next to a landfill.
Conservative Partial Release Formula
Without a sound partial release system, Units A, B, and C may each sell for $200,000 and would be released quickly.
This may leave a lender with $200,000 in remaining loan balances that blanket all four units that value $140,000 together. Conservative partial methods permit the lender to make a profit every time the unit gets sold. In addition, the blanket loan gets paid down in a disproportionate manner every time a unit is sold, which leaves a lender with more security.
Partial Release Example
- A commercial banking lender issues a $2 million loan to a group of developers located on a residential subdivision. The developers use the funds to get a subdivision map, commence improvements (curbs, gutters, water, power, etc.) and to advertise the 100 homes. When the developers are finished, they can sell off the first lot at $40,000. However, the buyer of the lot will not pay $40,000 unless the developers would give the lot free and clear of a mortgage. The bank took out a $2 million loan, including the remaining 99 lots. How could we dispel the $2 million loan with only the benefits of a $40,000 sale? The sale would be achieved using a partial release provision found with the loan agreements.
The partial release clause entails an agreement between the borrower and commercial lender in the respect that the mortgage that covers two or more parcels would be released from a certain parcel when the commercial lender is paid on the sum of an agreed-upon sum. For instance, a commercial lender agreed to release the mortgage against lot 17 upon the payment of $20,000.
The bank receives $20,000 from the proceeds of the sale form lot 17 (which is a cul de sac lot), and the developers can pocket that remaining $20,000 in the form of profit. However, what if the new subdivision has 15 cul de sac lots and 10 suitable lots with nice views and the rest are low-quality? If the developer could sell all 25 nice lots for $40,000 each and give the bank half of all proceeds, that would mean $500K for the developer and $500,000 for the bank. After, the bank is owed $1.5 million, and the loan is assured by the remaining 75 lots.
To learn more about a partial release clause, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will give you a helping hand in all matters pertaining to contract law and your rights as a buyer or seller. Moreover, they will read over any contracts on your behalf before another party compels you to sign the paperwork.