Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

This is a series of blog entries in which we provide some quick answers to frequently asked questions (FAQ).

After seeing very little of it from the early '90s until now, we're seeing a growing number of bankruptcy filings by owners of commercial property.  And it doesn't seem to be letting up.

Since CMBS loans typically (almost always) make the loan fully recourse to a key principal of the borrower upon a bankruptcy of the borrower, we are not seeing bankruptcies involving CMBS loans.  Instead, most of these bankruptcy filings involve bridge or portfolio loans, with banks or life insurance companies as the lenders - and with loan terms where the bankruptcy filing does not trigger recourse against a key principal.

One key concept in bankruptcy is the phrase "fraudulent transfer."  It is important to understand this basic bankruptcy term.

FAQ #44 - What is “fraudulent transfer” under the Bankruptcy Code and how does it affect me?

• The Bankruptcy Code provides for two kinds of fraudulent transfers. The first kind is a transfer made by the debtor with the actual intent to hinder, delay, or defraud a creditor.
• The second kind of fraudulent transfer is a transfer made without actual fraudulent intent, but in making the transfer, the debtor gave away an asset and did not receive fair value in return for that asset. The amount of value transferred that was not given in return constitutes a fraudulent transfer.
• A trustee, debtor, or creditors committee may either seek to recover the property transferred, or the value of the property. The transfer must generally occur within 2 years before the bankruptcy and while the debtor was insolvent.

And if you missed this earlier posting, here is a posting where I give you a glossary of bankruptcy and other terms.  It was an extremely popular posting.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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Recently the IRS corrected a mistake inadvertently created by it in September 2009, when it made changes to the REMIC rules governing changes to CMBS loans.  One result of the 2009 change was that partial releases, expressly contemplated in the CMBS loan document, must pass the “principally secured by real estate” test for qualified mortgages at the time of the partial release (see Section 860G(a)(3)(A) of the Internal Revenue Code and Section 1.860G-2(a)(8) of the Income Tax Regulations).

Failing this test could result in the CMBS pool losing its status as a REMIC, which would have horrible consequences to the tax-free status of the CMBS trust.

Thus, the loan servicer was placed in a no-win situation: the borrower had a right to a partial lien release under the loan documents; yet doing so would violate REMIC rules and the servicer's agreement (in the servicing agreement) to comply with REMIC rules.  (Loss of tax-free status for the trust = heads roll at the loan servicer).

The borrower, of course, was not interested in the loan servicer's problem; it simply wanted the benefit of the bargain (see CMBS gripes of borrowers).  (Sounds like a personal problem of the loan servicer.)

The IRS' new Revenue Procedure 2010-30 gives guidance on this problem and details how the IRS will provide relief for loan modifications of CMBS loans that are “grandfathered qualified mortgages” and “qualified pay-down transactions.”

The Revenue Procedure provides that a partial lien release will be a "grandfathered modification" if:

• it occurs by operation of the terms of the debt instrument, and
• the terms providing for the lien release are contained in a contract that was executed no later than December 6, 2010.

The Revenue Procedure defines a "qualified pay-down transaction" as a transaction in which a lien is released on an interest in real property and which includes a payment by the borrower resulting in a reduction in the adjusted issue price of the loan by a qualified amount.

So, if the CMBS loan expressly permits a partial release of a portion of the property upon the payment of a partial release price (all as expressly specified in the loan documents), then the CMBS loan servicer may go forward with the partial release.

This is good news.

Nice to have good news.

It is interesting that the IRS does not address this request: dropping the requirement for a  retesting of collateral released when a loan is in default.  This request was made by industry organizations in order to give CMBS special servicers additional flexibility as they deal with defaulted CMBS loans.

If you have a war story on this topic, or simply want to comment, please post it below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Although I can NOT quantify this statement, we're seeing more and more commercial real estate go into bankruptcy.  Of course, these typically do NOT involve CMBS loans; probably because those loans typically have a "non-recourse carveout" that brings personal liability to the individual sponsor, key principal or owner of the borrower, if the borrower files for bankruptcy.  So, unless that person's financial condition is independently insolvent, the individual owners "behind" commercial property (that is financed with a CMBS loan) generally strive to avoid bankruptcy. 

But then, during the '04 to '07 "hot" production years, there seemed to have been a tendency to even NOT require an individual to be personally liable for this topic.  Instead, the non-recourse carveout party was an entity (such as the operating company).  So, these types of CMBS loans will be like bank loans to entities, or any loan that doesn't have an individual with liability upon a bankruptcy filing: bankruptcy is a viable option.   (I know, I know:  . . . then there is the General Growth Properties bankruptcy filing - but that case is a topic beyond the scope of this posting.)

In any event, we're seeing an up-tick in bankruptcy filings involving commercial real estate owners. So, our FAQ series will focus on some common bankruptcy questions.

FAQ #42 -  What happens if the borrower files bankruptcy?

• Upon a borrower's filing of bankruptcy, an automatic “stay” immediately takes effect. The automatic stay prohibits all actions that may be taken against a borrower or its assets. This effect increases the costs and fees and dramatically delays a lender from foreclosing on the loan's collateral.
• Here is a glossary of helpful terms used in bankruptcy.

FAQ #43 - How can Lender (servicer) proceed in spite of the “automatic stay”?

• The lender as a secured creditor, may file a request with the court for relief from the prohibition of the automatic “stay”.
• In a Chapter 7 case (look at the glossary [above] for a definition), a secured creditor will likely want to file a lift stay motion as early case as possible in order to obtain stay relief as quickly as possible.  A stay relief motion may require at least twelve to thirty days' notice.  Therefore, if a secured creditor wants to obtain stay relief to pursue repossession or foreclosure, it is important that it file a motion for stay relief as early as possible to avoid any further delay.
• Occasionally, a secured creditor is able to negotiate with the Chapter 7 Trustee to reach an agreement whereby the Trustee will administer the secured creditors' collateral in exchange for a portion of the proceeds of such collateral to be distributed to unsecured creditors. 

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, war stories, suggestions or questions on this topic, please post a comment below.
 

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Dealing with distressed debt takes a special skill set (see our FAQ series) and demeanor - and almost a new vocabulary.

To give you a jump start in it, or maybe simply a helpful resource, here is a short list or glossary of common workout, remedies, bankruptcy and securtization terms.

If you know of a term that is missing from the list, please comment on it below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Two of my favorite little "sayings" about distressed commercial real estate are these:

• It's all about the lease (think money)
• Is there any collateral that is NOT real property?  Does the collateral include any personal property?

Before you foreclosure, it is crucial that you understand (i) how a foreclosure will effect existing commercial leases and (ii) what is the proper way to foreclosure upon the collateral that is personal property.

FAQ #40 - What does a real property foreclosure do to the commercial tenant leases?  Do they continue after the real property foreclosure?

• In some states (but not all states), if the mortgage or deed of trust was recorded PRIOR to the date of the lease, then the foreclosure will terminate the commercial lease.  (Yes, the end of the lease!)  On the other hand, if the date of the lease is PRIOR to the mortgage or deed of trust, then the foreclosure will not terminate the lease.
• If the property has performing leases that are dated AFTER the recording date of the mortgage or deed of trust, a lender might be able to foreclose “subject to” the existing leases which are providing cash flow to the property.  This approach will NOT terminate these leases.
• All of this changes if the lender and the tenant have entered into an agreement covering the continuation of the lease (or the continuation of tenant's right to remain in the leased premises) following a foreclosure.  Some times this agreement is contained in the lease itself, or it might be a separate agreement called a "subordination, non-disturbance and attornment agreement."  Do NOT overlook these agreements - review the lease and tear the file apart to determine if this agreement exists.
• WARNING: this topic should be reviewed and addressed by a lawyer since the laws on this topic vary (depending upon the state) and since the facts of each situation play an important role in answering this question.

FAQ #41 - How do I foreclose on the part of the collateral that is not land?

• Generally, foreclosing on collateral that is not land or “real property” is accomplished under the state’s requirements for a foreclosure sale of personal property under the state's version of the Uniform Commercial Code (UCC).  However, there are exceptions to this statement.
• The procedures, notices, and rules regarding a UCC sale differ from those used for a foreclosure sale of land
• One challenge in a UCC sale is that the sale itself must be undertaken pursuant to a standard of “commercial reasonableness” - which opens the door to litigation by the borrower that the sale was not correctly conducted.
• However, the UCC in many states allows for a concurrent sale of both personal property AND real property (so that the personal property can be foreclosed upon as part of the foreclosure of the real property).  This concurrent approach avoids the pitfalls inherent in a UCC sale.
• WARNING: this topic should be reviewed and addressed by a lawyer since the laws on this topic vary (depending upon the state) and since the facts of each situation play an important role in answering this question.
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Borrower's failure to pay property tax liens often is a good indicator that the loan, and the collateral, are in trouble; and that soon, Borrower will fail to pay the scheduled installments on the loan.

So, a lender or a loan servicer should add these topics to the task list: (i) monitor state tax due dates, and then (ii) dealing with property taxes (if they are not paid).

This topic is very state-specific in that each state seems to have its own rules on this topic.  Even with that important qualification, these general statements will get you started on this important topic -

FAQ #38 - Should Lender pay off state property taxes before foreclosure?

• If the loan documents permit the Lender to pay these taxes (and this should be permitted under the loan documents - but read the loan documents to confirm this), then Lender should pay unpaid property taxes prior to foreclosure in order to include such advances in the loan, and thereby increase the amount of any deficiency.

FAQ #39 - What happens to State tax liens after a foreclosure; do they "survive" a foreclosure or does the foreclosure extinguish the state tax liens (wipe them out)?

• Ad valorem taxes encumber the property with unique powers.  So, in Texas they are "super liens" and have priority over prior mortgage liens.  This means that they are not extinguished by the foreclosure (meaning that they do not "go away").  Thus the importance for you to consider #38 above.

To read the entire Tough Times "FAQ" series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

I'm working on several deed in lieu of foreclosure agreements right now.  So, I'm putting to use the thoughts and suggestions offered up to you here (and in prior postings) on this topic.

Here are a couple more frequently asked questions about a deed in lieu of foreclosure:

FAQ #36 - What other factors should I consider?

• Bankruptcy issues
• Fraud/Duress
• Lockbox (once again, focus on the cash [rents] generated by the collateral; "trap" rents in a lockbox and perfect your lien on the cash)
• Clogging of Redemption (take steps to avoid future assertions by the borrower that the structure prevented borrower from paying off the loan and obtaining a release of your lien)

FAQ #37- What are the major provisions (or topics to be addressed) in the deed in lieu agreement?

• Deed Form (General Warranty Deed if possible)
• No merger (you don't want your lien being extinguished because you have obtained "full" title to the collateral pursuant to the deed - the "greater" title evidenced by the deed will extinguish the "lesser" title evidenced by the lien instrument, unless the agreement clearly negates the is general principal [as in all things, check your local law on issues])
• Unconditional and absolute transfer
• Acknowledgment of Indebtedness
• Agreement to Convey Property
• Future Claims
• Representations/Warranties
• Remedies for Default
• Confidentiality

Thanks to Courntey Bristow for her insight, expertise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

The following questions cover deeds in lieu of foreclosure, which is a situation where borrower literally gives ownership of the commercial real estate to Lender by transferring title to Lender.  

FAQ #34 - In doing a deed in lieu (of foreclosure) transaction, should Lender require a legal opinion covering the deed in lieu transaction, and if "yes," then what should it cover?

• Yes, require a legal opinion from Borrower's legal counsel: treat the deed in lieu transaction more like entering into a new loan than simply a purchase of an asset.  Why? Because the lien will NOT be extinguished and the DIL agreement covers many important matters to the lender (such as the items listed here)
• Due authorization and execution
• Validity and enforceability of documents
• Non-merger (of the Lender's lien [which is NOT released] and the deed given to the Lender
• Releases of any claims against Lender

FAQ #35 - What due diligence items should Lender consider obtaining?

• Taxes: property taxes; transfer taxes
• Environmental Report
• Appraisal/Broker's Opinion of Value
• Physical Needs Assessment Report
• Junior Liens (notice per any intercreditor agreement)
• Green Building/Operating Systems
• Insurance Claims
• Title Certificate or Title Commitment
• List of Payables and Operating Statements
• Current Financial Statement
• Tenant Security Deposits

Thanks to Courntey Bristow for her insight, expertise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

We've addressed deeds in lieu of foreclosure in the past (link).  Here is some more information on it.

FAQ #32 - When should a lender (or servicer) seek/accept a deed in lieu agreement?

• State's foreclosure process is lengthy
• Immediate threat to the property (is a receiver a better option?)
• Borrower & Lender = common good
• Unable to sell/refinance the property
• Voluntary (on the part of Borrower)
• Unencumbered by multiple loans (and NO mechanics' liens)
• Avoid foreclosure taint
• The property is valued LESS than the loan (if this is not true, then other creditors will be motivated to attack the transfer)

FAQ #33 - What title insurance issues should be considered?

• Do NOT release borrower from warranties of title (in loan documents) as it will void title coverage
• Confirm: loan policy "converts" to or continues as an owner's policy
• SPE (owned by lender) vs. taking title in name of lender
• Creditor's Rights Issues: ALTA 21 not available
• Important: non-merger provision
• Decision: buy new owner's policy or merely obtain binder?

Thanks to Courntey Bristow for her insight, experise and help in putting this FAQ together.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Mechanics' liens and Federal Tax Liens are two common challenges with distressed commercial mortgage loans.  Blindly charging through the foreclosure process is a mistake - even if you believe that your lien is first in line (i.e., has a "first lien" priority status).  These two topics will come back to haunt you.

FAQ #30 -  If all mechanics’ liens are junior to the Lender’s lien, can I force the claimants of such liens to file releases after the foreclosure is concluded?

• Lien claimants may not cooperate with a request for a lien release, and it may be necessary to file suit to compel them to execute a “release."
• Alternatively, consider hiring a third party company to negotiate with the junior (or subordinate) lien claimant.  The fee of this company and the amount required by the lien claimant to release the subordinate (or junior) lien could be less than the attorney fees charged in a suit to compel the release, and it could be resolved quicker than filing suit (and dealing with a slow court process).

FAQ #31 -  What happens with a Federal Tax Lien ; Why is it still on my title?

• General Rule: Junior liens are extinguished by the foreclosure sale but the foreclosure purchaser takes the property subject to senior liens.
• Federal tax liens for which the IRS is not provided notice of the foreclosure sale survive the sale and the federal government can redeem the property within 120 days.  This shows the importance of having a title company verify the status of all record title before you foreclose.
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

The need for title reports and "how" to deal with mechanic's liens are two very, very common questions.

FAQ #28 -  Do I need a current title report?

A current title report provides useful information as to the current additional liens claimed against the property.

Let's stop and think about this one for a minute: would you buy a car without knowing whether it came with wheels? Foreclosing on real property, or taking title by a deed in lieu, without checking on the status of title is like buying a car without walking around the car to confirm that it has 4 tires.

FAQ #29 - What happens to mechanics liens or other problems with title?

• Liens which are junior to the Lender’s lien will be extinguished by the foreclosure sale.
• Not all liens will be junior however, and while the method of establishing priority varies from state to state, priority of mechanics’s liens can depend upon the date work commenced on the property.
• Once you understand "legal" priority surrounding mechanics liens and other title matters, then reality sets in: even if the foreclosure sale "wipes out" (or legally extinguishes) the lien or title matter, you still might need to have it (literally) removed from the title record.  This can be an expensive process.  So, one practical approach is this: while you may have won the "legal" battle of "who" has priority, the hard reality of cleaning up the record probably will force you to negotiate with the mechanics lien claimant in order to obtain a written (and recordable) release of the lien.  And "yes" - there are companies that will do this clean up for you.  It'll might be cheaper than hiring lawyers and going to court to obtain these releases.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

FAQ # 26 - What are some of the most immediate steps after the foreclosure sale?

• Post-sale procedures vary from state to state
• Notice should be given to the IRS that the sale has occurred
• In some states, a redemption period exists, under which the borrower can redeem the property for a specified period of time upon making certain payments to the Lender (here's the link to my earlier posting, which contains a chart summarizing state foreclosure laws and redemption periods; please contact a lawyer before you act upon this information, since this topic is very fluid right now)
• Once all redemption periods (if any) expire, the trustee’s deed or sheriff’s deed is delivered to the purchaser from the foreclosure sale

FAQ #27 - Do I need a current appraisal in order to foreclose?

• The requirement for a current appraisal depends upon applicable state law
• In some states the “fairness” of the amount of the Lender’s bid (i.e., purchase price at the foreclosure sale) can come into play in the event the foreclosure sale is subsequently challenged by the borrower.  In those situations, a current appraisal is beneficial to substantiate the fairness of the amount of the sale, particularly where the Lender purchases the property with a credit bid
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

The following questions focus on two issues of great importance to the commercial borrower: (i) Lender's ability to sue the guarantor during the foreclosure process; and (ii) borrower's ability to contest the foreclosure sale.  (Note: my focus is NOT on consumer lending and consumers.)

FAQ #24 -  May the Lender sue the Guarantors at the same time as it forecloses?

• It depends on whether you are proceeding by non-judicial or judicial foreclosure, and varies from state to state - so it is best that you contact a lawyer
• The process differs in every state, but in many states you do not need to wait until a non-judicial foreclosure is concluded before you sue a guarantor on the note; however, going forward with both a non-judicial foreclosure sale and a separate suit against the guarantor has some unique challenges.  For example, there will be a point in the law suit where the actual occurrence of the non-judicial sale will effect the amount of damages sought from the guarantor in the law suit (i.e., the foreclosure price will be credited against the debt and a "deficiency" will be established).  Also, this two-pronged approach is NOT available in states where a “one-action rule” exists, which generally requires bringing all claims at one time (essentially a waiver of any claims not brought in the first action), thus necessitating a judicial foreclosure if you desire to preserve claims against the guarantors (California is a good example of a "one-action rule" or "security first" state).

FAQ #25 - What happens if you have problems during the foreclosure sale?

• The sale is performed by either the trustee under a non-judicial foreclosure or perhaps a sheriff under a judicial foreclosure
• Procedures and the effect of any irregularity during the sale vary from state to state. In some states, the sale can be suspended, and postponed until the defects in process are cured
• A defect in the foreclosure sale process could give the borrower means by which to challenge and possibly overturn the sale

The lessons for the lender are simple:

• follow the terms of your loan documents
• follow the applicable law
• use lawyers experienced in those laws
• dot each "i" and cross each "t."

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind.  First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

In any workout of distressed commercial real estate, ultimately the focus narrows in on the process and timing of foreclosure.  The answer varies state to state.   Here are two questions, answers and a very brief resource that might guide you in this process.

FAQ #22 - When and where do I proceed with foreclosure?

• The process differs in every state, but generally a non-judicial foreclosure begins with sending the borrower a formal “notice” of default, typically followed by posting notices of sale by newspaper and other means over a specified period of time.
• A judicial foreclosure may also have required notices, and involves filing a lawsuit to initiate the process. If the borrower and the lender are located in different states, it might be possible that federal diversity jurisdiction is present, and you may file suit in federal court, rather than local state courts to avoid possible "hometown" bias in favor of the borrower.

FAQ #23 - How long will the foreclosure process take?

• It depends on whether you are proceeding by non-judicial or judicial foreclosure, and varies from state to state.
• Generally, non-judicial foreclosure can be accomplished within a matter of a few weeks to a few months.
• Judicial foreclosure typically has all of the delays to be expected in other types of lawsuits, from initial service of process to discovery, to delays inherent in court calendars.
   

DANGER:  Here is a very, very brief overview of the foreclosure process in all 50 states.  PLEASE contact a lawyer BEFORE you actually rely upon this chart.  In these "changing" times, is it imperative that you only pursue foreclosure following counsel and advice of local counsel.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

Strangely enough, I associate diversion of rent with lender liability  -  because both are common liability claims based upon "bad acts" of either a borrower or a lender.

FAQ #20 - What if I think the borrower might be diverting rents or other income?

• Consider seeking a restraining order or receiver (link to prior blog on these topics)
• Consider pursuing the borrower and/or its principals for fraudulent transfer or as a recourse event under the loan (link to prior blog posting)
• Exercise remedies under the Assignment of Rents  (blog #1 posting) (blog #2 posting)

FAQ#21 - What lender liability issues should I be concerned with after a borrower defaults?

• Lender Control
  • Avoid involvement in the day to day managerial operations of the borrow
  • Avoid involvement in borrower's management
  • Avoid having actual or apparent control over the borrower's payroll payments or
       withholding payments
  • Avoid requiring joint checks to contractors and the borrower in construction loans
       UNLESS the loan documents clearly allow this
  • Avoid causing the borrower to make a decision that results in business activities solely for the lender's benefit 
• The other "Golden Rule": Be truthful and take no actions that breach agreements or commitments
• Communicating with other lenders (on unrelated loans)
• Here's our listing of current cases handled by us, where the borrower asserts similar claims of lender wrong-doing (link)

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ). 

FAQ #18 - Can I participate in negotiating a third party short sale prior to the deed-in-lieu or foreclosure, or as I exercise other remedies (where the sales proceeds are less than the loan balance or the loan's partial release price thresholds [a "short sale"])?

• Yes; but be sure to get an agreement from the borrower (and any guarantor) that by accepting the short sale, you are NOT accepting the partial payment as a full payment (and satisfaction) of the entire debt; and that you have no obligation to do this in the future (in other words, try to avoid a "course of dealing" that forces you to do this in the future)
• Obtain written approval from borrower to confirm the short sale with third party, preferably with the borrower participating (and at a minimum, with borrower expressly [in writing] consenting to those discussions) - this will include determining if the third party really is a third party
• The lender should not be involved in the terms of sale, other than having a right to disapprove short sale based on amount
• If negotiating a deed-in-lieu of foreclosure, the lender should review any proposed contracts of sale, and should only agree to assume such contracts if the lender is not bound by representations or warranties of the borrower (this is particularly important when the collateral is residential property, such as houses or condominium units)

FAQ #19 - Can I accept partial payments (with a partial release of the collateral or even simply a partial payment on the loan) following a declaration of default or acceleration of loan maturity?

• Yes, preferably with a written agreement that recognizes the payment as a partial payment, disclaims any requirement for further advances and states that no other waivers are made nor implied (again, avoid a course of dealing)
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind.  First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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With more banks and CMBS loan servicers taking title to CRE (via foreclosure and deed in lieu of foreclosure), the amount of REO (or real estate owned) has grown - and will continue to grow and grow as CRE defaults escalate. Most REO sellers have regulatory or contractual limitations on the time periods that they can continue to hold or own the properties – meaning they are motivated to sell the property.

This is no “ordinary” purchase and sale agreement (or a contract of sale) because the seller (as the former lender) did NOT develop or operate the project, nor own it on a “for profit” basis. Instead, the seller acquired it under circumstances where it was under performing and perhaps not well maintained. Consequently, the seller of REO has a very different agenda, approach and attitude toward the terms and provisions of the sales contract.

This different perspective is reflected in the following provisions of the REO sales contract:

• Sales Price: The seller wants to maximize its price, but with the recognition that it does not have sufficient knowledge about, nor experience in operating, the property. A key factor here also is that the “basis” of the seller’s investment in the property is the loan balance at the time the seller took title. Thus, if the loan balance is less than the market value of the property, the seller might consider selling at a sales price below market value.  In other words, the seller wants to recover its debt investment, and typically is not looking to make a profit.
• Regulatory and Contractual Limitations: The seller’s approach to the sales price will be governed by the overlay of applicable contractual limitation and any regulatory restrictions. So, “yes” the buyer can get a “deal” in buying REO; but the basis for the deal will depend upon seller’s unique regulatory circumstances and contractual obligations.
• Quick to Close: Most REO sellers will require the buyer to quickly go “firm” on the contract, and then to quickly close. Consequently, some sellers furnish the form sales contract to bidders on a “take the form unchanged, or don’t bother to bid” basis, and even tell all bidders that the bidder with fewest comments to the form will be given “preferential” consideration when the seller evaluates all of the purchase offers. Also, some REO sellers make due diligence materials (title, survey, environmental reports, rent rolls, etc.) available to prospective buyers in advance of signing a sales contract.
• Limited Buyer Remedies: The sales contract will limit the type of remedies for Seller’s default under the contract. The buyer remedies will not include damages (since its business plan is not that of an investor in real estate) and will be limited to these two remedies; buyer may terminate the contract or sue for specific performance. The seller will NOT be liable for any damages.
• AS-IS: Seller will minimize the amount of responsibilities on its part in the sales agreement. For example, the sale will be “AS IS, WITH ALL FAULTS” with respect to the property condition. And it can only turn over the operating information in its possession; thus, historical operating information might not be available.
• Confidentiality: the seller should insist upon confidentiality, both at the pre-contract stage, during the due diligence period and after the closing of the contract. Thus, confidentiality will survive the closing.
• Qualifying the Buyer: Many REO sellers require that the prospective buyer furnish information, or access to information, in support of the buyer’s ability to actually close the purchase.   For example, the prospective buyer must authorize credit and background check, and also furnish current financial information.
• Expenses: Simply because many REO sellers to NOT have a ready source of funds, the sales contract will require the buyer to pay all closing costs. Thus, the sales price will take this into account.

If you have additional items to add to this list, please comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  While I've covered this subject before [link], here's another overview of the advantages and disadvantages of taking title (to real property collateral) back from a borrower "in lieu of" doing a foreclosure.

FAQ# 16 - What are the advantages of a Deed in lieu of foreclosure (DIL)?

• A DIL should be used if it can be accomplished quickly (i.e., without extensive negotiation).  It allows the lender to obtain ownership of the property without the cost and time delay associated with judicial or non-judicial foreclosure.  This is very important in states where the foreclosure process is very lengthy (such as Florida [up to 2 years] and Ohio)
• Since a DIL is voluntary, the parties can agree upon the amount and related terms of any deficiency (and thereby avoid a dispute as to valuation), together with a release of any claims against the lender
• Since a DIL is voluntary, the lender can condition its acceptance of the DIL agreement upon receipt of such things as complete and accurate copies of the borrower's financial statements, tax records, leases, service contracts, construction plans, sale contracts, vendor payables, etc., which may result in a better "turn over" of the property to the lender (although a "friendly" non-judicial foreclosure can achieve the same result if the borrower cooperates with the lender and furnishes the information)
• The lender can condition its acceptance of the DIL agreement upon not being placed in a worse position than if it foreclosed (i.e., there is no reason to relinquish lender's rights to surviving indemnities under the loan documents, involving things such as keeping a continuing right to indemnity for environmental conditions or prior misrepresentations, and/or collections costs as set forth within the loan documents); and a DIL does NOT include the concept of a "right of redemption" (which is a right in some states giving the borrower the ability to pay the debt and "redeem" or get back title to the property after foreclosure) (In Texas, there is no right of redemption after a foreclosure - but this rule of law varies state to state)
• A DIL is a private transaction and avoids adverse publicity for the borrower (i.e., there is no publication or court filings like in a foreclosure), which may also minimize the impact upon property valuation
• A DIL avoids the problems with the foreclosure process, including the possibility of post-foreclosure attacks on the sale as a 'wrongful foreclosure'
• A DIL does not automatically release the lender's lien or space leases—these can be preserved by expressly making the deed in lieu subject to those interests, and permit the lender to foreclosure at a later date if necessary to extinguish a subordinate mechanic's lien

FAQ# - 17 What are the disadvantages of a DIL?

• The transferee takes the property subject to all existing liens (unlike a foreclosure sale which extinguishes junior or subordinate liens)
• Neither a deficiency amount nor property value is established unless expressly set forth in the DIL agreement (unlike a foreclosure sale which establishes any deficiency as the difference between the foreclosure sale price and balance due on the loan)
   

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).

FAQ # 14 -  What are the advantages of a real property foreclosure?

• Biggest advantage is that foreclosure extinguishes all liens that are subordinate or inferior to the lender's lien.  However, not all liens will be inferior.  State law differs and the facts surrounding the creation of each lien will differ.  For example, in some states, mechanics liens are NOT extinguished by a foreclosure; and property taxes typically are NOT extinguished.
• Sometimes the cost may be less than a deed in lieu transaction (which can involved title insurance premiums, and significant legal fees if negotiated)

FAQ #15 -  What are the disadvantages of a real property foreclosure?

• Receipt of a foreclosure notice by a borrower could encourage the borrower to file for bankruptcy—which will halt the foreclosure and impact the lender's chance of being fully repaid
• In a non-judicial foreclosure, the lender must strictly comply with all statutory legal requirements, or else the foreclosure can be overturned and the lender may be liable to the borrower for damages for wrongful foreclosure
• Depending on the law of the state where the property is located, non-judicial foreclosure may take more time than the lender is willing to accept.  So, in those states, taking the property back via a deed in lieu is a common strategy.
• While this probably shouldn't be called a "disadvantage," it is a practical problem: even though a foreclosure might legally extinguish a mechanics lien, the lender's motivation to quickly sell the property (after the foreclosure) might cause the lender to negotiate a settlement of the mechanics lien.  Sure, legally the lender could go to court for an order "removing" the lien from the real property records, or the lender could pursue a claim under the loan title policy, but both take time (and going to court results in legal fees).

To read the entire Tough Times FAQ series, please click here

Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a series of blog entries in which we provide some quick answers to frequently asked questions (FAQ). Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers

FAQ # 12 - What can I say to third parties?

• Risk of Improper Disclosure: Tortious interference with business relationships—do not speak with third parties without the borrower's written consent and preferably the borrower should be participate in the discussion
• Consider requiring the 3rd party to sign a confidentiality agreement

FAQ #13 - Should we negotiate a forbearance or deed in lieu of foreclosure?

• Consider foreclosure ease/difficulty state by state (i.e., a few states, including Texas and California, have a non-judicial foreclosure process with little or no court involvement).  Typically this is contractual and must be found in the loan documents
• Possible dual track—negotiate while proceeding with non-judicial foreclosure
• Deed in Lieu Agreement (DIL): An alternative to foreclosure is the voluntary conveyance of the mortgaged property  by the borrower to the lender

To read the entire Tough Times FAQ series, please click here

If you have thoughts, suggestions or questions on these topics, please post a comment below.

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Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Is Landlord required to exercise its remedies and/or mitigate damages immediately once a default is declared under a commercial lease?

• No, Landlord is not required to immediately exercise its remedies under a commercial lease.

Assuming the original demand letter protected Landlord's rights with respect to exercise of remedies, Landlord is entitled to the immediate exercise of all available remedies or, at its election, to delay the exercise of some or all remedies until a later, more suitable date.

In rough economic times, Landlords may have concerns that compete with the traditional process of repossession or termination of the lease (or terminating the Tenant's right of possession without terminating the lease itself).
 

• For instance, where a mixed-use or retail development is still within its initial lease-up phase, it might be prudent for Landlord to allow a Tenant occupying a prominent location within the development to remain in operation, particularly through a holiday or other critical period, notwithstanding the existence of an event of default.  (Note the discussion of a forbearance agreement below.)
• Even in an office context, where "dark space" is less of an immediate concern, a Landlord might still be inclined to delay termination of a lease in favor of repossession or even to delay taking any action in order to avoid negative press coverage surrounding the exercise of remedies.

For a commercial lease in Texas, under applicable Texas law and absent an express agreement to the contrary, a declaration of a default does not give rise to an obligation for Landlord to mitigate damages.  A duty to mitigate arises (in Texas) only when Tenant has abandoned the premises and ceased the timely payment of rent or the Lease provides otherwise.

As such, Landlord is not triggering any additional burdens by completing the process for establishing an event of default and Landlord may, within reason, delay further action pending resolution of competing factors.

Even if termination or repossession are delayed, Landlord should make prompt inspection of the premises and address any immediate repair or maintenance concerns. Application can also be made of the security deposit to cover current deficiencies or Landlord expenses, subject to the specific terms of the lease.

Also, if the the relationship with the defaulting Tenant permits this approach and in the appropriate circumstances, the Landlord should consider entering into a forbearance agreement with the Tenant.  This agreement will expressly recognize the default, it will set forth the Landlord's agreement to NOT exercise remedies for a specified time, and it will confirm the Tenant's agreement to perform (on a going-forward basis) the terms of the lease - again, for a specified time.  After the time period ends, then the Landlord may exercise its remedies.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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Guest Writer, Laura P. Sims, Winstead PC

(CAVEAT: if this blog seems familiar, it probably is because after we posted it last week, it  "mysteriously" dropped off our site - after I messed up on the posting of March 7.  And I apologize.   So, here it is again!)

This is a series of blog entries [link] in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What are the risks involved in delaying the exercise of remedies?

A period of delay between declaration of default and exercise of remedies increases the chance that some action or omission by Landlord or its representatives will be claimed by Tenant as evidence that:

• Landlord has waived the default or
• Tenant reasonably believed (and relied on its belief) that Landlord did not intend to strictly enforce the Lease.

Either one is a bad, bad result.

So, what should you do during any time period when landlord remedies are being deferred (or not exercised)?

Here are some tips:

• avoid sending e-mail correspondence involving discussions of modification of the Lease
• avoid in-person meetings involving discussions of modification of the Lease
• don't accept partial or late cure
• don't promise to forgo exercise of remedies (in other words, don't say "we won't exercise remedies")

Ideally, if rent failure is the issue, then monthly notices of failure to timely pay and demand for payment in full can and should continue during the period of delay - in order to combat any suggestion that Landlord will not strictly enforce its rights.

One final word of warning: at some point, the Landlord will need to get off the stump and act - or waive the default.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What kinds of default will support termination of the Lease or repossession of the premises?

Most Texas courts (and courts in other states as well) are reluctant to enforce a Landlord's right to terminate a lease or repossess a Tenant's premises in the absence of a specifically negotiated or egregious non-monetary default, if the Tenant is otherwise in compliance with the lease.

By contrast, even a relatively small monetary delinquency will be enforced per the plain language of the lease.

Accordingly, where the lease provides Landlord the right to cure non-monetary defaults and obtain reimbursement of such costs from Tenant as additional rent, it may be expedient for Landlord to exercise such right to cure, so that if and when Tenant fails to reimburse such costs, Landlord can proceed on a claim of monetary default.

However, at least in Texas, non-monetary defaults such as abandonment, voluntary bankruptcy, failure to pay utilities to third parties, and allowing the attachment of liens have provided a basis for exercise of Landlord's more aggressive remedies.

Furthermore, if the lease sets forth termination or repossession as the specific remedy for a given non-monetary failure (such that Landlord is not relying on "catch-all" non-monetary default language), a court is more likely to enforce the parties' negotiated remedy.

• For instance, where Landlord and Tenant have negotiated an obligation for Tenant to open for business by a certain, critical date, with a clearly stated and unique right of termination for failure to perform by such date, the declaration of default and exercise of such termination right should be enforced.
• Conversely, even where a lease requires Tenant to take occupancy or open for business by a date certain, if no specific remedy is stated for that failure, it is unlikely that a Texas court would allow Landlord to terminate the Tenant's lease for such failure, particularly if Tenant occupies the premises or opens for business within a short period following the originally required date.

As a general rule for evaluating the strength of non-monetary defaults as a basis for termination or repossession consider:

1. Whether the breach affects the negotiated bargain between the parties
2. Whether the harm to Landlord is commensurate with the loss a termination or repossession would cause the Tenant
3. And further consider obtaining the opinion of an experienced litigator or real estate attorney before making a final decision about pursuit of remedies

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases.  Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ - Is Landlord required to give notice of all defaults at the same time?

No.

Where multiple defaults exist, some discretion may be used in listing the individual failures, with clear emphasis on monetary defaults and material non-monetary defaults.

A default and demand letter that identifies

• defaults of a . . .
• nature and materiality that would support termination of the lease, or the exercise of rights of repossession if not cured, should suffice . . .
• so long as suitable language (which has been either developed or reviewed by counsel) is also included in the letter to reserve any and all Landlord rights with respect to other defaults, known or unknown, and to disclaim any intent to waive any such defaults.

The third bullet point is very, very important.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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Guest Writer, Laura P. Sims, Winstead PC
This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property - and this series is pointed to the simple goal of helping you protect the basic value builidng block of your collateral - which are the leases.  Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ - What lease provisions are most important when determining the existence of a default and/or providing notice of a default?

In addition to the specific provision(s) which is the basis for the default, a thorough review should be made of provisions regarding events of default, remedies and notices, as well as all correspondence for purposes of determining if waiver or modification allegations may exist or if notice requirements or addresses have changed. 

Be aware that certain operational defaults may be addressed in provisions of the lease other than the default and remedies section, such as continuous operation clauses and surrender obligations, and the remedies for breach may appear with the operative language rather than being mentioned by name in the list of events of default. 

In order to avoid any alleged defense against claims for payment or performance, and to give the guarantor an opportunity to cure the default, copies of all default correspondence should be delivered to any lease guarantor (even if not required under the terms of the guaranty or the Lease notice provision). 

Also, requirements to provide notice to lenders and other third parties may appear in ancillary documents, such as Subordination, Non-Disturbance and Attornment Agreements, and thus a review of the entire Lease file is strongly recommended.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #11 – What can I say to the Borrower?

Oral Communication Tips (Best Practices):

• Attitude – Be calm, cool and factual
• Truth – Stick to the truth, keep your statements fair and in good faith
• Loan Documents – Know your loan and do not contradict
• Notes – Take written notes, but be careful since they might be read in court
• Power of Two – All conversations should include at least 2 lender personnel
• Disclaimers – At the beginning of a conversation, state clearly that you have no authority to bind the lender and the call is merely to collect information
• No Threats – Never threaten a criminal complaint or civil suit
• No Oral Agreements – Make clear that all agreements must be in writing and you will follow up with a written agreement for their review
• Stick to Your Business – Only make statements within the scope of the lender's business – never suggest ways for the borrower to run or improve its business, i.e., avoid statements such as "you'd make more money if …"
• One-Sided Deals – Avoid suggesting structures that solely benefit you.  A decision that solely benefits the lender may come back to haunt you
• Do NOT record conversations

To read the entire Tough Times FAQ series, please click here

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #9 – How Do I Deal With The Borrower?

Analyze the borrower's perspective:

• What is the borrower's legal position?
• What are the lender's weaknesses?
• Can the borrower avoid personal liability?
• Who are the guarantors and what is their position?
• What is the borrower's tax position?
• Is the borrower concerned about forgiveness of debt (as income)?
• Does the borrower want to keep cash flow and therefore avoid bankruptcy?
• Is the borrower likely to file bankruptcy?

FAQ #10 – What Are the Risks for Lender Liability?

• Waiver
• Misrepresentation
• Good faith, fair dealing (breach of)
• Risk of improper disclosure (tortuous interference with business relationships)

To read the entire Tough Times FAQ series, please click here:

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ). Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #7 - Should I pay the property taxes prior to foreclosure?
Taxes and Escrows: Escrows may be in your possession and available for tax payments.  Taxes should typically be paid prior to foreclosure in order to add them to the loan deficiency amount--unless it is your plan to sell at the close, subject to taxes to a third party.

FAQ #8 - What other legal issues or hurdles should I consider in proceeding with foreclosure
Each state's law governs when and how a lender proceeds with foreclosure.  The following questions should be considered:

• Is there an anti-deficiency statute or single cause of action rule?
• What are the mechanics lien filing periods?
• What are the content and timing requirements for sending notice of default and acceleration?
• How does my course of dealing affect the existence of the default?

To read the entire Tough Times FAQ series, please click here.
 

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Guest Writer: Brenda Brown, Winstead PC

More from ourTough Times FAQs series:

FAQ #4 -  Do I need to reduce the commitment amount after sending a Notice of Default?

• Typically, no – once the loan is declared to be in default, or once the maturity of the loan is accelerated, the lender has no on-going funding obligation – but confirm this in the documents.
• The lender typically is not required to fund current loan allocations or grant new loan allocations.
• Communicate clearly in writing to the Borrower that the lender has no further obligation to the fund and negotiations, inspections, administrations and even making future draws during a draw period (whether under a construction loan or a partial disbursed loan) do not amount to waivers of pre-existing defaults or can be considered obligations for future fundings.

FAQ #5 -  After a Default Notice, should I send statements showing Regular Monthly Interest or statements showing interest at the Default Rate?

• Statements to the borrower should reflect the Default Rate of interest (rather than the prior regular interest rate), late fees, and any other fees due the lender (such as legal fees) – all of which usually do not appear in the "standard" statement.
• So, typically it is best to STOP sending the regular monthly statements.

FAQ #6 -  What else should I put in writing?

• Agreements Regarding Interim or Protective Advances
• Forbearance Agreement

All of these first six questions underscore the fact that the status of the property and the loan must be looked at with current and fresh eyes so that the opportunities for solutions are enhanced, and the risks of encountering questions of waiver are avoided.

To read the entire Tough Times FAQ series, please click here.

Please post comments or questions below.
 

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Guest Writer: Brenda Brown, Winstead PC

This is a special series of blog entries in which we provide some quick answers tolenders' frequently asked questions (FAQ).  Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Without further ado:

FAQ #1 -  The Borrower is how far behind – now what?

• Analyze the entire situation: the collateral, the loan documents, the file, any co-lender or intercreditor agreements, financials on the parties, the market - in other words, the entire picture. Act like you're about to own it.
• Consider restructuring – But send a "Discussion Letter" – to help avoid waiver of lender's rights under the loan documents
• Determine whether a default – as defined in the loan documents – has occurred. If so, consider sending Notice of Default and Notice of Acceleration.
• Generally Borrower has "terminal euphoria" and no reason to change unless it is in default.

FAQ #2 -  What if the default was not a monetary default?

• "Default" vs. "Event of Default" – check defined terms in the loan documents.
• Look for Grace / Cure Periods to see if expired.

FAQ #3 -  What can I do besides calling a default?

• Alternatives to calling a default include à Restructure (i.e., amend the loan documents so the borrower is no longer in default – if the borrower's financial deterioration is not too great)
• Simple Notice of Default à Just to create a written record that it exists and is continuing.

To read the entire Tough Times FAQ series, please click here.

Please post comments or questions below.
 

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