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

Negotiation agreements or discussion agreements are a fundamental building block, or (for some lenders) the starting line, for dealing with distressed debt and investments.  Typically, when a loan is in imminent default or actually in default, a workout, restructure or settlement of a loan will not get off the ground until this agreement is signed by the borrower, any guarantor and the lender.

In two prior postings, I've covered the "why" and the "when" questions: why are they needed? when are they used?

Now we get down to the nitty, gritty details of content: what terms can they contain?

Of course, different lenders and loan servicers take very, very different approaches on the content of a negotiation agreement.  This is where a simple concept ("let's agree to not use anything we say or furnish against each other") can become much, much more complicated in that some lenders view this agreement as the opportunity to confirm or agree upon a lengthy list items.  Other lenders want to keep this letter agreement short - so that they can quickly start discussions.  And, of course, the content of the agreement may vary depending upon the particular situation.

So, these items can be few in number, or they can be large in number - with some items significant enough such that this agreement itself becomes the "pre-workout" of the actual workout.

With that landscape in place, here is a list of topics (in no priority order) sometimes covered in negotiation agreements.  Again, whether an item is used in a negotiation letter turns on the approach taken by the lender (or loan servicer), and the surrounding circumstances.

• Basic statement: confidential and inadmissible (this is covered by me in the earlier posting)
• Status of the loan documents: agree they are enforceable; agree on a list of them (in other words: "Here is the list of the loan documents and don't tell me that we've agreed on something else in some other document, e-mail or cocktail napkin")
• Outstanding balance of the loan
• Admission of default (or no admission of default)
• Acknowledge receipt of notice letters
• Non-wavier of rights and remedies (all rights and remedies reserved)
• Forbearance or delay in exercising rights or remedies
• Acceptance of partial payments not a waiver of full payment
• No party bound until a formal, written agreement (in other words: "don't hold me to what I just said; we don't have an agreement until we've dotted every 'i' and crossed every 't.') Warning: the execution of a negotiation agreement is no excuse for not being careful and smart in your oral communication (see my postings on oral communication)
• Termination of discussions & any forbearance (at any time, by any party, for any or no reason)
• No transfer or pledge of any assets (in other words: "don't use this time to empty out your financial cupboard by giving your good stuff to your other creditors")
• Limited waiver of claims (each party waives any claims relating to the negotiations or discussions; but the waive does not extend to obligations under the loan)
• Other loans not covered by these discussions
• No one can nor should rely upon any statement or action undertaken during the discussion period
• Borrower and Guarantor agree to use reasonable efforts to furnish requested information
• Borrower and Guarantor to pay all of Lender's expenses (including legal counsel)
• Borrower and Guarantor acknowledge they are represented by counsel
• Waiver of jury trial as to any claim arising out of the negotiation agreement
• Authority of each party to enter into the negotiation agreement.

This is a long list; and the list could be longer.

I personally favor the use of a short negotiation letter - so that the parties can quickly enter into discussions.

If you have items to add to this list, or if you want to comment on your approach, or if you want to give us your "war story" on this topic, then please post your comment below..

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This is the second posting on this topic.  The first posting covered the topic of "why" a negotiation agreement is used.  And it generated some interesting comments on LinkedIn (see below).  Now, let's get to the question of -

• When should a negotiation letter or agreement be used?

The answer to this question runs the entire spectrum:

• Before a default;
• After a default;
• Right be before remedies are first used
• After the delivery of current financial and operating statements
• As a requirement of any discussion or communication between the parties

In almost every defaulted loan or investment, there comes a point when frank discussions are needed between the parties (beyond discussions between the lawyers) in order to possibly settle the dispute, and often this can only occur if the content of the discussions will NOT be used "against" any party.

• Where do I see lenders and servicers lined across this spectrum?

All across the board: perhaps because this is a topic where the content of the agreement can control the use of the agreement.  In other words, the negotiation agreement itself can be so onerous, so detailed, so long . . . that no one (in their right mind or with the advice of legal counsel) should sign it . . . unless they have no choice.

Yes, a simple concept can be made complicated by addressing too wide a range of topics.

And yes, some lenders keep it simple; and other lenders want to address the wider range of topics - at any cost and at any consequence.

These comments (from a discussion of this topic on LinkedIn) focus on this "problem" with negotiation agreements:

• "A sophisticated borrower will never sign one unless his lawyer emasculates it. However, I have found it useful with less sophisticated borrowers, where there are lender liability issues lurking in the credit file or loan documents or in email messages."
• "I hate those pre-negotiation letters, and I've never used one. First, the terms and conditions of the letter are like throwing down the gauntlet even before you've started negotiating. Without having even started out of the gate negotiating a deal there's already negative energy and posturing. Its absurd to me to negotiate how the parties are going to negotiate. The borrower knows he's already backed into a corner, so how much further into the corner do you suppose you can push?"

In my next posting on this topic, I'll cover provisions in negotiation agreements - some of which are no-brainers and others that can be problematic.

If you have a comments or a war story, please post it below.

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I'm often asked "do I really need to get a 'negotiation' agreement before we start discussions with the other side about the distressed or defaulted loan [or investment]?"

The answer is simple: Yes.

The challenge to the question, and in my crafting of the answer, is this word: simple.

This posting will be the first in a short series on negotiation agreements.  This posting will cover "why" they should be used.  Future postings will cover "when" to use a negotiation agreement, and the topics that could or should be included in the agreement.

Judging simply by the length of some of these agreements, this topic can be turned into a larger than life experience (and made more complicated than it needs to be).  I'll try to keep it simple.

Why the need for a negotiation agreement?

Before we step into the nitty gritty details of the topics that could be covered by this agreement, we need to step back and ask "why?" should we even have it.  This agreement is all about these basic or key concepts - and they are the most common reasons or answers to the "why do I need it" question:

• Pre-Workout Agreement: If the borrower and lender can't agree on the topics in this agreement, then chances are slim that they will agree on any thing substantive about the distressed loan or investment.  In other words, if they can't quickly come to terms on the ground rules of the discussions, then there is no reason to talk about a possible workout or negotiated settlement - so get on with the war.
   
• Confidential & Inadmissible:  The key element or concept in this agreement is this - the parties agree that whatever is said, read or discovered will not be used against the other party.  This agreement often has these elements in it:
  • the discussions constitute settlement discussions and are privileged in the same manner as a settlement offer in litigation.  However, some use this agreement for broader purposes beyond the restrictions on admissibility contained in Rule 408 of the Federal Rules of Evidence or in similar rules of evidence used by state courts - so they add the following elements to the agreement . . . 
  • information from the discussions shall be inadmissible for any purpose whatsoever in any judicial or similar proceeding or in any litigation or other proceeding involving any of the parties (including for the purpose of evidencing culpability, weakness of position, admission of liability or otherwise evidencing any admission of obligations due and owing to or from any party)
  • information from the discussions shall not be disclosed (except for reasonably necessary disclosures to principals, investors, shareholders, limited partners, members, representatives, attorneys, accountants, advisers, consultants, prospective purchasers of and/or participants in the loan and their respective representatives, attorneys and advisers and as required by law, including pursuant to a judicial administrative procedure)
  • information from the discussions shall not be used, admissible or disclosed by any party as a defense or counterclaim in any action or proceeding

• Careful, Careful: But let's not be too naive - this topic comes up in the context of a real dispute between adults, which means the information exchanged or obtained under the "protection" of a negotiation agreement will effect behavior; and perhaps even motivate each side to source or locate the same information from other sources.  So be careful what you disclose, and what you say (see postings on oral communication).

If you have any thing to add, or a war story (with names changed, of course), 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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(Blogging from the MBA Servicing & Technology Conference . . . .) (Day One blog)

In the midst of the loan defaults, maturity defaults and imminent  (coming soon) defaults, lenders and loan servicers are discovering (or uncovering) ways that the loan documents properly (or improperly) address the problems and challenges of the latest recession (or market "down turn").

The question is simple: "how should loan documents be revised to close "loop holes" or to address new problems (or issues)?"

Triggers are important not only at the origination of a loan, but also at the restructuring of a loan.  Yes, this is an important topic for loan workouts.  (A "trigger" works like this: upon the occurrence of X, Y or Z events [i.e., the "trigger"], then A, B or C shall occur as the consequence or outcome flowing from the trigger.) 

A workout is an opportunity to close "holes" in the documents, and to bolster them by adding trigger events.

On this second day of the MBA Servicing & Technology Conference, one session covered implementing and monitoring loan documents requirements based on specific "trigger" events.

• what are some of these trigger events?
• what are some of the best practices for managing these events?

The use of trigger events should be considered in every workout.  The following list of trigger events, as presented by the panel, is a "check list" for consideration in a CRE workout:

• use of lock boxes and cash management (with blocking of Borrower's access to the account upon the trigger event) (Problem: "springing" lock boxes are worthless - do you really expect a Borrower to freely implement a lock box and cash management AFTER the lender declares a default?)
• new reserves for tenant improvements and leasing commissions (and\or lock boxes and cash management) when key leases are within 12-24 months of expiration (with the reserve utilized for the replacement lease)  (Problem: implementing new reserves  is problematic [read: not realistic] if the value of the property falls to below the debt amount, at which point the borrower might be motivated to stop paying the debt and then deed the property to the lender or servicer.
• new reserve if the guarantor's net worth falls below certain levels (Problem: same problem if the property value falls to below the debt amount)
• rating downgrades and the requirement of a "new" counter party
• events allowing presentment of a letter of credit (for payment by the issuing bank)
• interest rate and\or principal payment changes (tied to a date or event)
• trigger events tied to loan to value determinations, debt service coverage and\or net operating income (based on approved budgets), and then tied to consequences such as lock boxes and cash management,  principal pay downs, etc.

QUESTION: Where do triggers appear in the loan documents?

ANSWER: in any provision and in any document.  Read all documents.  If adding a trigger, I suggest creating a "special" (and conspicuous) provision at the end of the principal or main loan document.

Monitoring and managing triggers is a challenging task.  Here are some suggestions for implementing and then managing a loan containing triggers:

• track the trigger date
• set up an "action date" well in advance of the actual trigger date
• set up a "reminder" date, with e-mail notifications to the proper servicing position or employee
• date triggers could include a set of typical types of triggers: letter of credit expiration (or notice of non-renewal); credit rating change; cash flow; lock box account blocking (denying borrower access to the account); new reserves
• use of fields to note if a trigger event has been resolved PRIOR to implementing the outcome or consequence (with a description of the resolution); and a different field to show that the trigger remains unresolved
• use of a spread sheet or a simple data base to monitor triggers will NOT be a viable solution

If you have other favorite or unique triggers and\or outcomes, please post a comment below.

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Recently Laura Sims and I (ok, 99% Laura and 1% me) co-presented a seminar on distressed commercial leases with an in-house counsel at a very, very large life insurance company (and pension advisor).  This question came up during the presentation:

• do you have any tips on e-mail and oral communication with the tenant, as the lender (now owner) discusses with the tenant the request for rent and other lease concessions?

My answer was, well, as you deal with distressed leases, use the same approach taken when you dealt with the borrower before you acquired title to the property.

In other words, there is no reason to abandon careful communication once you take off your special asset or workout hat and replace it with the landlord\owner hat (or the REO hat).

To find our entries on e-mail and oral communication, use the "search" function and the search term "oral communication."

If after reading those suggestions, you have suggestions, comments or questions, please add a comment below.

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One trend in the market at this moment: borrowers that want to utilize a mezzanine loan (as part of the debt structure) are having difficulty in obtaining the approval of their first lien (mortgage) lender to the mezzanine loan.

What is a mezzanine loan?

Here is a definition used by Standard and Poors:  a mezzanine loan is a loan "to equity holders of the borrower (including situations where the equity is pledged to secure reimbursement obligations under letters of credit or other contingent obligations). Frequently these loans are secured by a pledge of equity interests in the senior mortgage debt borrower."

Let’s explore an example of how it can play out when the project is in distress, the borrower fails to make a payment on the first lien loan, and a mezzanine loan is in place.

Let’s assume that the following:

• borrower fails to make a monthly payment on the first lien loan (this loan encumbers improved commercial real estate)
• the loan documents do NOT require the first lien lender to give borrower notice of the failure
• the loan documents state that such failure shall constitute a default (or an event of default) under the first lien loan
• a mezzanine loan is in place, secured NOT by the improved commercial real estate but by a pledge of ownership interests in the borrower 

Step One: review the first lien loan documents for the basis for a default, and the notices required to be given to the borrower.

Step Two: review any agreements between the first lien lender and the mezzanine lender, looking for any notice and cure rights on the part of the mezzanine lender relating to a borrower default under the first lien loan.  (This agreement typically is called an "intercreditor agreement.")

In the absence of a mezzanine loan, the first lien lender would take step #1 and go forward with exercising its rights under the loan documents.

However, the existence of the mezzanine loan requires the first lien lender to take step #2, which means that:

• prior to giving any notice or taking any action under the first lien loan, the first lien lender (or the servicer) should review the intercreditor agreement between the first lien lender and the mezzanine lender
• the intercreditor agreement typically will give notice and cure rights to the mezzanine lender for certain events, and on the exercise of certain rights and remedies of the first lien lender

A close reading of the intercreditor agreement might show the following (the following is fairly typical – but you’ll need to closely read your documents):

• before the first lien lender can take an “Enforcement Action” against the borrower, the first lien lender must give the mezzanine lender notice and opportunity to cure any default by borrower under the first lien loan
• the intercreditor agreement gives this definition: “’Enforcement Action’ shall mean . . . . acceleration of, or demand or action taken in order to collect, all or any indebtedness secured by the Premises (other than giving of notices of default and statements of overdue amounts) . . . . ”

So, based upon all of this information, what notices must be given by the first lien lender (or loan servicer)?

PICK THE CORRECT STATEMENT(S)

1: First lien lender must give borrower notice of borrower’s failure to make the monthly payment

2: First lien lender must give the mezzanine lender notice of borrower’s failure to make the monthly payment in order for a default to exist

3: First lien lender does NOT need to give default notice to borrower nor to mezzanine lender in order for a default to exist        

4: If or when first lien lender makes demand to the borrower for payment, then it must give mezzanine lender notice and opportunity to cure

#3 and #4 are correct (although the first lien lender might decide to give the notice of the default [under #3] merely as a business practice - if for no other reason that it would like to be paid - and to be able to show a court that it did give parties an opportunity to pay).

The lesson is read, read and read the documents; and then follow them.

Finally, don’t forget to give any notices required by local law or statutes.

Any questions or comments on this topic?

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In-house counsel and managers\directors understand that law firms have useful information that literally "sits" around law firms—used once or twice, and then forgotten or even misplaced by their lawyers (One of the dark secrets in the legal world is that law firms are horrible at the one thing they sell: knowledge and management of it).

In response to inquiries by clients on this topic, we've taken the step of putting our papers, presentations and speeches online so that our clients can logon, and then search the site (using key words or phrases), or simply explore a "folder" tree.

Instructions for you to access the site are located at the "client resources" tab on this blog (at the top of the page).

Yes, all of this is free.  And to give you a quick peak at the materials on the site (as of April, 2010), here is a flier listing some of the materials on the site: [donwload]

Of course, we really do NOT know "what" topics are important to our clients or the industry unless you tells us the topics.

So, periodically we ask some of our clients to identify "hot" topics.  Here's the response given to us recently:

• Non monetary defaults
• Maturity defaults
• Leasing issues in the current market.
• Assets in Distress: Restructuring & Workouts
• Finding Distressed Assets; Valuation and Financing; Buying Debt; Buying Real Estate; Investing in Distressed Businesses; Tax Issues Revisited
• Pre-Foreclosure Matters
• Use of Specialists or Experts: Loan Workouts, Exercise of Remedies, Litigation and Bankruptcy
• Workouts: From Default to Resolution
• Recourse Carve-Outs
• Foreclosure Consequences – Title Transfer and Effect on Other Liens
• Common Workout Tools
• Ticking Sound: Review Your Title Insurance - A Quick Checklist
• Two Tax Presentations
  • Capital Gain Tax and Ordinary Income Debt Forgiveness As Tools for The Real Estate Workout
  • The Tax Man Cometh: Webinar on Federal Tax Treatment of Debt in Workouts

Many of these topics already are included in the materials on our site.

QUESTION: what topics are missing from this list?

Please comment below.

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 In earlier postings, I've given you guidance on oral communication with the borrower and guarantor during a workout, or as you exercise remedies.

And I've stressed the importance of signing a discussion or pre-negotiation letter, which is a MUST DO in the workout or remedy process.

Here's another important tip: as you communicate via e-mail (or by FedEx, fax snail-mail through letters or memos), in each e-mail include a reference to your discussion or negotiation agreement.

For example: "As covered by our agreement dated _________, this e-mail is only a preliminary, conceptual communication covering the topics set forth in this e-mail.  This e-mail does NOT constitute a final, enforceable written agreement between the parties."

Ideally, this reference should "track" language in the discussion or negotiation letter.

• do you have another way of articulating this?
• what is your practice on this topic?

Please post your answer, or any questions, 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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Periodically we host webinars on hot topics for distressed commercial real estate.  Obviously, with so many properties in default (or heading that way), understanding some of the legal remedies is at the top of everyone's list.

On Tuesday, April 27 from 12:00pm to 1:00pm (central time), John Kincade, Roland Love and Brian Morris will discuss topics such as:

• extraordinary judicial remedies in Texas, such as receivers and special injunctions
• the Texas foreclosure process and the unique aspects of Texas foreclosure laws
• collection strategies and options
• title problems and challenges
• other issues which should be considered and pitfalls to avoid

We know that this topic is "hot" - 50 people signed up for this webinar on the day that we sent out our e-mail announcement for the seminar.  (These are free.)

Even though this webinar will have a Texas focus or slant, many concepts are common or similar in other states.  So, the content should help you as you work with your lawyer in a state other than Texas.

For registration information, log-in instructions and joining our e-mail distribution list for future webinars, click here.  Also, here is a PDF describing the webinar (note: click here for registration instructions and information).

Reminder: if you missed a webinar in the past, it is never too late (in this digital world) to listen and learn.  Here is a link to one of our other webinars:

• investing in distressed assets

If you have a topic that you'd like us to cover in a future webinar, or as a blog, please leave a comment below.

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As I've noted previously [link to due diligence topics], one big difference between the current commercial real estate melt down and the last big one (in the late 80s) is the amount or level of “structure” in the deals. Like the last time, the debtor\borrower side is “structured” (with a multi-tier borrower and perhaps even a “single purpose” entity); however, unlike the last time, the creditor\lender side also is structured.

A multi-creditor structure greatly complicates decisions covering a possible workout, the remedies to be invoked, and the management, leasing and eventual sale of the collateral (after foreclosure).

Indeed, co-lender disagreements are the most difficult part of this process.  (And one lesson learned is to NOT do co-lender deals in the future; or do them only with similar lenders having similar balance sheets, ownership, investment objectives and criteria, etc.)

Part of the difficulty flows from some confusion, or misunderstanding, on the part of all of us on the technical terms and attributes of the co-lender structure. Since the typical co-lender structure either is a syndication or a participation, I've identified some of the basic terms for those two structures:

• Nature of the creditor’s interest
• Recover of taxes & funding losses; gross up for reserves
• Common law rights
• Insolvency of originator/agent
• Legal opinions
• Assignments
• Enforcement actions
• Amendment (workout) rights
• Waiver rights
• REO decisions (management, leasing & sales)

To help you better understand the difference between (i) a loan that has been syndicated (typically where each lender has its own note and all lenders share the collateral) and (ii) a loan that has been participated (where there is a single, lead lender, and the other lenders only participate without their own notes), here is list of some of the major topics of interest.

(For postings on other co-lender topics, such as A\B Note structures and lender v lender litigation, search the site using the term "co-lender.") 

 (Click on "continue reading" for a table detailing differences on these terms)

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Have you checked your boilerplate lately? There is no longer anything standard about the "standard" language in financial services contracts. Whether you are drafting or litigating origination documents, workouts or settlement agreements, you won’t want to miss this seminar (on Thursday, February 25, in our Dallas office)! Otherwise, you could be litigating in an unfriendly forum, fighting over representations made before the loan documents were signed, or find yourself without adequate remedies when the other side defaults. Learn how to minimize your risks and strengthen your position by effective negotiation and drafting.

The seminar brochure [download] is attached.  And here's a short version of the agenda and session topics:

• 11:30 - 12:15: registration and lunch
• arbitration clauses
• forum selection clauses; venue and choice of law provisions
• indemnity clauses
• remedy provisions
• jury waiver provisions
• merger clauses
• panel discussion: The View From 10,000 Feet (I'm "on" this panel.)
• 4:30 - 5:30p: reception

We know that these topics are "hot" ones - we're dealing with them as we handle distressed investments.

Our seminar speakers include a former Texas Supreme Court Judge, litigators currently handling CRE finance litigation, and workout lawyers.

Who should attend?  This seminar is for any professional who regularly negotiates, drafts or litigates financial services contracts, including in-house counsel, transactional lawyers, special assets and workout professionals and litigators. If you deal with contracts on the front end or after the fighting starts, this program is for you.

I know that this blog announcement is late; but since space is limited (and we're paying for the food at lunch and then drinks at the closing reception), we first offered this one to clients.

However, we have a limited number of "extra" spaces.  And you're invited.

If you'd like to attend, please send (ASAP) an e-mail with your contact information to:

• mlee@winstead.com

Directions to our offices, and parking instructions, are on the brochure.

If you're in Fort Worth\Dallas tomorrow, please consider coming.

I'll enjoy the opportunity to meet you.

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As noted in my lengthy postings summarizing the recent 2010 CMSA January Conference in DC [Day 1 link; Day 2 link], over 1,000 commercial real estate professionals attended the conference – roughly 2X more than expected.

Why this unexpected attendance? Answer: All of us are looking for answers amidst the continuing liquidity problems in the CRE Capital Markets. This topic was the sole focus at this conference.  (And it even shows in the number of people "visiting" TTL blog since the Tuesday [Day 1] posting: we show over 1,000 total "hits", of which over 550 are "unique", as of this blog posting.)

 I've received feedback asking for a summary covering a specified set of topics from the two (much, much longer) blogs covering days 1 and 2.  (Keep that feedback coming!)

So, here is that subset of information from the 2010 CMSA January Conference:

INVESTORS FORUM

This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).

The meeting time was devoted to a survey of the 250+ people in the room. Here are some of the responses: 

• 45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
• with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
• 43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
• 69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
• for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
• 58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)

REAL ESTATE FUNDAMENTALS: "THE FACTS OF LIFE"

If the focus on "CMBS 2.0" (which is the "hot" phrase used to describe the "new" CMBS model and market) is a bit too out of touch for me, this session just hammered on the current picture of the CRE market:

• unemployment at historical highs (and still rising)
• retail sales still stumbling
• consumer confidence falling
• "asking" commercial rents falling
• commercial leasing activity (absorption) falling
• CRE sales activity: stagnant
• CRE values -43% from the high in 2007
• huge amount of CRE loan maturities over the next three years, with inadequate sources of credit to pay-off those maturities
• huge shortfall in CRE equity (such that it will not fill gap between the credit available and the looming CRE maturities)
• over 75 funds have been formed to buy distressed CRE debt and properties; but little it has been deployed
• very little CRE has been "re-priced" or "re-set" by lenders or servicers foreclosing or disposing of assets
• we're still early in the CRE recover (perhaps only 25% into the process!) (One interesting comment: remember that valuation adjustment occurs early in the CRE recovery process; so we might be 75%-90% into the valuation adjustment process.)
• importantly: no one on the panel, nor else where in the room, foresees an implementation by the Government of an "RTC style" approach (where the Federal government quickly closes large numbers of banks and thrifts, and then quickly sells the loans and assets at steep discounts – resulting in a "harsh pain" but quick re-pricing of CRE
• unlike the late 80s & early 90s: this time there is no new industry (such at technology) to lead the recovery by increasing employment

BORROWER PANEL: "SURVIVOR"

This panel focused on "how" a borrower could make it through until CRE liquidity returns.

The panel has some advice for borrowers:

• show up with $ if you want to restructure your debt
• if you're in a good city, with good tenants and with DSC (get it?
• Use $ to right-size the loan), then you'll probably survive

It was interesting that while reference was made to splitting up a CMBS loan into an A Note (with good DSC & LTV) and a B Note (representing the "bad" part of the original loan), no one gave any details on the structure (such as the terms of the B Note, the proceeds waterfall between the lender [under the B Note] and the "new" equity [that injected capital needed, in part, to right-size the Note A], the rate of return on the new equity, etc.)

SURVEILLANCE & WORKOUTS: "LET'S MAKE A DEAL'

This panel didn't give any real guidance on terms of workouts, other than to list some basic rules of the game:

Do This:

• be nice
• send all information in; be open and transparent
• sign a pre-negotiations agreement
• keep paying cash flow
• have a reasonable, cogent plan BEFORE you contact the lender or servicer

Do NOT Do This:

• tell lender or servicer that you're "partners"
• tell lender or servicer that you're a good borrower
• "fish" for information or for terms of a plan that will be acceptable
• cry
• hold lender or servicer hostage
• ask for any of the cash flow (nor a cash flow mortgage)
• fly in on a private jet
• offer a bribe
• rob Peter to pay Paul
• launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
• ask for any return on the new equity infusion made in borrower

It was an interesting day. Much like our experience in Munich – very little clapping at the end of any session (yes, it reminded me a little of the sessions at the EU conference that we attended in October 2008) [link]

In a future posting, I'll cover comments made to us by several elected and appointed Federal officials.

If you have any questions, comments or observations, please post them 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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Every downturn and recovery offer opportunities for investors to adapt and respond to changing economic conditions.  Today's climate requires investors to look for commercial real estate opportunities in new and challenging ways.  Investing in distressed assets presents investors with one opportunity for growth as market conditions improve.  Winstead PC and Cohen Financial hosted a webinar covering topics important to implementing an investment strategy in this difficult market.

Did you miss the webcast?
Don't worry, one reason that you follow this blog is to gather information on your own terms, and on your own schedule. 

• Click here to watch the webcast
  
• Click here for a copy of the presentation materials

After you watch this webcast or read the materials, please post comments or questions.
 

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For the next couple of days, I'll be attending the annual meeting of the American College of Mortgage Attorneys (ACMA).  Members of ACMA are a select group of in-house and outside counsel, who are recognized as leaders in commercial real estate finance.

OK, I know:  You're rolling your eyes as your internal big screen pans a view of a room full of (ego laden?) lawyers, sitting in your basic seminar setup, listening to speakers (most by now are far enough up the tech curve to use PowerPoint), and discussing . . . .

Here's where you should wake up to the relevance of it all:  What are the topics that the legal thought-leaders are focusing on?  What has their attention?

I'll admit that some (most?) events like this are grueling for me, but simply because I can't sit still for a stretch of 8 hours.  The content, however, keeps my attention.  And because I think that it might interest you, below is a summary of several of the topics.

A reminder for you:  If you want more information on distressed debt & investments, go to the "Client Resources" tab on our blog homepage.  It contains instructions on how you can access our extranet site, where we have posted 60+ papers, articles and presentations for you to read, download, etc.  It is free.  It is available 24/7.

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Periodically, we alert you of opportunities to participate in online webinars on various topics—from the "comfort" of your own computer.  No travel.  No hassle.

On Wednesday, October 7, Cohen Financial and Winstead PC are hosting a webinar on investing in distressed assets.

Every downturn and recovery offer opportunities for investors to adapt and respond to changing economic conditions.  Today's climate requires investors to look for commercial real estate opportunities in new and challenging ways.

Investing in distressed assets presents investors with one opportunity for growth as market conditions improve.  The professionals at Cohen Financial and Winstead PC will present you with the knowledge needed to evaluate this investment strategy.

During this webinar you will learn:

• How to find distressed commercial real estate assets
• What is involved in the valuation and financing of these assets
• How to buy debt
• How to buy commercial real estate
• The tax issues involve

Investing in Distressed Assets – Webinar

Wednesday, October 7, 2009
11:30am PT/12:30pm MT
1:30pm CT/2:30pm ET
Click here to register (link)

This webinar should interest players from every point or perspective, whether sellers, buyers, special servicers\asset managers, REO\asset managers, or intermediaries.

If you have questions in advance, please post a comment.

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Periodically, we post commentary on this important topic.  Frankly, it can literally drive the structure of a workout, and most certainly the timing of it.

And as painful as this is to admit (because I've really started to like writing on ToughTimes), reading this text might be a little "dry" or even tiresome (although I do try to spice this up—but within the boundaries of the "law firm thing").

As a change of pace, Mike Cook , who authored several pieces previously posted, will host a webinar on this topic.  The information is below, and I have attached the "official" invitation.  So, if you like a more formal approach, download the invite (PDF).

Please freely forward this blog entry or "official" invitation to anyone interested in this topic.

Note that unlike this blog, the webinar is NOT free.  However, the $12\screen charge is the cost charged to us by the 3rd party service provider—there is no profit in it for us.

If you have other topics that you think will merit a webinar, please post a comment. 

Federal Tax Treatment of Debt Workouts

When: Wednesday, September 16, 2009 at 10:00 a.m. - 11:00 a.m. CST
Speaker: Michael L. Cook, Winstead PC

Description: This webinar will highlight certain federal income tax consequences to debtors and lenders in the context of debt workouts (including cancellation of debt (COD)income, exceptions to COD income, and the tax consequences of foreclosures and deeds in lieu of foreclosure), including the 2009 legislative changes allowing an election defer COD income.

Who Should Attend: 
Accounting professionals, tax professionals, in-house legal counsel and consultants

Register by September 14 at:
http://www.winstead.com/CEWebinarSeries

$12.00 registration fee per computer screen
Payable via major credit card

Webinar instructions will be sent upon registration
**  Participants must have a Java-enabled browser  **

Continuing Education Credit Information
Texas Bar CLE: 1 credit hour
CPE: 1 credit hour

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This is the second posting on this topic (click here for part 1) which addresses the volatile combination: the aging population in America; the real estate industry looking for something to develop; and a lender community that is just now comprehending the value of understanding lease terms as a bedrock topic for the collateral.

The earlier posting addressed “problems” with standard lease boilerplate topics.

Here are some eccentric issues not found in standard office or retail leases:

• Building Name & Signage:  The naming rights of buildings on hospital campuses, together with related building signage, can be a significant source of revenue for the hospital, especially to nonprofit hospitals.  Hopefully all of this is addressed by the lease; and in fact conforms to the actual building names and signage.  So, watch for these provisions; and then determine if they have been violated.
• Prohibited Uses:  Medical office buildings affiliated with a particular hospital may prohibit uses that the hospital deems inappropriate given its particular mission.  For example, many not-for-profit hospital systems are created by faith-based organizations carrying a faith-based mission.  These hospitals may impose restrictions upon tenants relating to elective abortion services, stem cell harvesting from fetal tissue or other practices that violate their faith-based mission.  Also, watch for this issue in any restrictive covenants, if the building is located in a project\campus established by such an organization.  So, watch for these provisions, and then determine if they have been violated.
• Lease Restrictions Imposed by a Hospital:  Because the goal of a hospital system for medical office buildings on its campus is for them to support and create synergies with the hospital, the hospital system may also want to limit the leasing of space in buildings on its campus to only those physicians and physician practices that have staff privileges at the hospital.  This is a matter of convenience for both the hospital and the physician and additionally prevents competitors from occupying space in the hospital campus.  Likewise, the hospital may require that any tenant of a building on the hospital campus be a medical-related tenant (Again, watch for this issue in any restrictive covenants if the building is located in a project\campus established by such an organization).  So, watch for these provisions, and then determine if they have been violated.
• Lease Restrictions – Exclusive & Limited Uses:  Similar to exclusive rights in retail leases, tenants under medical leases sometimes seek to be the exclusive physician in a medical office building providing their particular expertise to patients.  Generally, landlords are also sensitive to the tenant mix on a hospital campus because their success in marketing the building to tenants will be enhanced if more specialties of medical practice are represented, which should enhance patient referrals among the tenants.  So, watch for this provision, and then determine if it has been violated.

Again, once you understand these issues, then the inquiries become:

• Have these been implemented?
• Have they been violated?
• Are these “problems” that you’ll inherit once you take back the property?

Please share your comments, suggestions or questions on this topic.

* Confession: This entry comes from a piece written by my colleagues at Winstead PC, Andy Dow and Allan Katz.   I thank them for bringing this good stuff to our attention.  My contribution is “adding” the workout perspective to it.

 

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Here’s a volatile combination:  the aging population in America; the real estate industry looking for something to develop; and a lender community that is just now comprehending the value of understanding lease terms as a bedrock topic for the collateral.

So, let’s take a quick look at unique issues in leases involving medical uses.  If you didn’t catch these at the loan closing (when lender approved the leases and the lease form), or during servicing following closing, you’ll need to understand this subject BEFORE you foreclose or take title to any collateral containing medical uses.  Indeed, those “standard” provisions create distinctive challenges when applied in a medical lease context.  In addition, medical uses often produce unique issues not found in standard office or retail leases.

“Standard” Provisions aren’t so standard in a medical lease.  Here are a few:

• Compliance with Laws:  Since patients visiting medical facilities are more likely than the general public to have special needs relating to accessibility, the parties should pay special attention to the compliance with laws and accessibility provisions of the lease.
• Landlord Access to Premises:  HIPAA and other federal and state laws regulating confidentiality of medical records and personal health data may necessitate modifications to some typical clauses in standard office leases.
• Environmental Provisions:  Medical tenants also frequently utilize materials and generate waste (such as immunotherapy and chemotherapy agents, biological specimens and the like), which require appropriate disposal to comply with applicable federal and state environmental and waste disposal laws.  Therefore, an absolute prohibition from the utilization of such materials is not appropriate, but the lease should clearly specify rules governing the use of such materials and which party is responsible for their disposal. Finally, surgery centers have their own, unique, environmental issues.
• Utilities & Services:  Medical tenants often have higher utility usage than standard office tenants because many medical tenants have sinks in each examining room and operate X-ray, MRI and other equipment that utilize more electricity than standard office equipment.  The lease should require separate metering of the premises in order to charge tenants equitably, if there are significant variations in utility usage among the tenant base.  In addition, medical uses such as surgery centers will require specialized utilities, including back up power generation.  Finally, medical uses often will restrict or require specialized janitorial services.
• Assignment and Subletting:  This is a topic that the lender\servicer must understand, and be flexible about.  Tenants under medical office leases are often more sensitive to assignment and subletting rights than tenants in other types of leases.  For example, in the case of a lease involving a physician group, the lease should adequately address the tenant's ability to admit new partners into the practice from time to time, as well as accommodating retiring physicians exiting the practice.  And, this topic should be addressed in any lease guaranty-–if there is person liability for the partners (Hopefully, the lease guaranty clearly runs to the benefit of landlord and its successors; and consider the merits in obtaining a confirmation of the lease guaranty as part of your workout strategy).

Once you understand these issues, then the inquiries become:

• Have these been implemented?
• Have they been violated?
• Are these “problems” that you’ll inherit once you take back the property?

The next posting will cover some unique issues not found in standard office or retail leases.  Please add your own comments, suggestions or questions on this topic.

* Confession:  This entry comes from a piece written by my colleagues at Winstead PC, Andy Dow and Allan Katz.   I thank them for bringing this good stuff to our attention.  My contribution is “adding” the workout perspective to it.
 

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Armstrong & Associates International, Inc. has given us a fabulous 2009 calendar that lists events and meetings for industry associations, legal education events, governmental meetings, etc.--all focused on bankruptcy and insolvency.

Click here to download the 2009 Bankruptcy & Insolvency Events Calendar

These meetings will put you in touch with other workout professionals, keep you up-to-date on industry developments, and give you access to hard-core training.  It is a perfect compliment to our Tough Times focus.

Kudos to Armstrong & Associates International, Inc.

If you have meetings to "add" to the calendar, or other helpful resources, please post a comment.
 

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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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The first day of the 2009 MBA's Commercial/Multifamily Servicing and Technology conference has ended.

It has been a long day, filled with attending panel presentations and meetings with people over meals, in the halls and at receptions.  It started at a 7:30 breakfast and ended @ 10p (when I refused to join a group that headed toward B___n Street).

Attendance this year seems down by @ 40%-50% from prior years.  Indeed, several companies told me that they would not be attending this year.  And many companies seem to have sent only 1 or 2 people this year; instead of the usual 4 or 5.

It is late, and if I don't get this down-load out soon, tomorrow will hit with more panel presentations and meetings - and I'll "lose" these data points.  They are in the order collected by me during the day - and so they are NOT ordered by relative importance.  Here is the down-load  (remember, this is a blog and not a thesis or brief; and it is very late).

(One other preliminary and important thought: if your boss requires that you prepare a memo on the conference, consider this permission to cut'n paste as you wish . .  . . )

From the opening general session:

• during the next 2-3 years, the commercial mortgage finance industry will focus on servicing & asset management, which will be the new front line for the industry
• unemployment remains a key leading indicator of the performance of real estate as an asset class (and since unemployment is expected to increase, it will take several years for the asset class to recover)
• while defaults presently are @ 3%, some predict that the default rate will increase to 6%; consequently, special servicing will become busier, and the need for greater transparency will be increased (in order to support better decision making) (Note the Fitch report described below.)
• one speaker articulated five areas of focus for the industry: (1) greater transparency (with "real time" property performance data); (2) the need for high quality and detailed physical asset condition inspections; (3) greater focus on customized business plans for each asset, which points to the need for more expertise by special servicing; (4) the increase in defaults will strain human resources at companies (and require greater recruiting, more training and better integration); and (5) companies must be better at understanding macro trends and changes

From a session on developments in Washington, DC:

• expect more changes and experimentation by policy makers
• accounting issues include: (1) FASB 140 (true sale changes); (2) FIN 46(r) (balance sheet consolidation with the "primary beneficiary" of securitization vehicles); and (3) FASB 157 (fair value); all due to "FASB's perceived suspicion" of real estate structures
• REMIC reform will take a back seat to other issues at Treasury
• Single Purpose Vehicle (or single purpose entities) and separateness covenants: the General Growth Properties bankruptcy will be an initial stress test of this "bankruptcy remote" structure; although one panelist labeled the GPP structure as "SPE light with bad cash management."  Another panelist called the GPP case simply "bad facts, which should not be followed by other situations."  (This last point puzzles me: a clever borrower might view the GPP case not as "bad facts" but as a "helpful road map.")
• One panelist expects to see a new securitization in 3rd or 4th Q of 2009.  Wow.  Given all of the accounting and structure "issues" detailed during the day, anticipated increase in the default rate, etc. - a securitization in 2009 would be . . . well  . . . wow.
• Federal limits on executive compensation are a huge problem for investors; and are chilling the market by impeding companies from participating in Federal programs
• Terrorism insurance needs to be addressed . . . but the Executive Branch needs to cut programs - not increase the funding of them.
• Welcome to the "Age of Regulation"

From a panel session on dealing with troubled securitized loans:

• even life companies are starting to see their mortgage portfolios in distress (so they are focusing in-ward on their portfolios; and not outward to refinance CMBS loans)
• the demand for new commercial mortgages exceeds the supply
• long term, fixed rate interest mortgages are limited in amount
• property values are difficult to establish
• debt service coverage & loan-to-value criteria are very conservative (and thus underwriting is tough)
• CMBS structures do not offer refinancing (with only a limited ability to extend)

From a panel session on today's servicing challenges:

• servicers are surprised that subordinate lenders do not understand their rights (relative to the rights of the first-lien secured lender)
• communication among the lenders in the credit stack can be "challenging" (Wow; that was an understatement.  I've seen some deals where the disparate balance sheets and agendas of the lenders present the biggest hurdle to resolving a distressed project.  The project and the borrower can almost be an afterthought)
• valuation is a huge problem: every party at every point of the debt stack and the equity stack needs a good\reliable value in order to make decisions.  No value=No decisions=No peace
• as reported by Fitch Ratings in an April 29, 2009 special report, CMBS special servicing volume increased by more than 5.0X in the 15 months ending March 31, 2009 (from $4.6B at 12/31/07 to $23.7B at 3/31/09).  And these figures do not address distressed bank debt, nor distressed life insurance company debt.  More wow.

Taken together, I come away from the day with much the same impression as I did on that day three session at the EU conference last fall: no one is clapping.

Time to go to bed.

If you have your own comments, or follow up questions, please post a comment below.

P.S.:  Returning to the eating theme from my posting on Tuesday, and before I get some sleep -  here's another good restaurant in New Orleans: Herbsaint Bar and Restaurant.  This is the second restaurant recommended to me by a New Orleans native.  I now understand.  It is very, very good.  Not as fancy as Nola; much more stylish than Jacques-Imo's. And not in the French Quarter. Together, all three restaurants will pull me back to New Orleans.

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There's an old, old joke about two old men and a dog.  They see a bus go down the street.  Pretty soon a little dog goes chasing after the bus, barking wildly and looking for all the world like it's going to try to bite it.  One old gentleman looks at the other and says, "There's that dog chasing that bus again."  The other one says, "Yep, he sure is.  And I wonder what he's going to do when he catches it."

Lenders and servicers contemplating foreclosure on property probably should take a moment to remember that dog and its bus before they try to catch foreclosed property.  The foreclosure process itself can be fraught with peril; for example, on September 11, 2008, the Nevada Supreme Court held a lender vicariously liable for punitive damages based upon the improper acts of its local asset manager in disposing of the personal property of a family that had been mistakenly foreclosed upon.  (Countrywide Home Loans, Inc. v. Titchener, 193 P.2d 243 (Nev., September 11, 2008).)  There also is case law to the effect that a foreclosing party's failure to maintain foreclosed property may subject it to claims for nuisance or other torts.  (Nuisance – cf. Willmschen v. Trinity Lakes Improvement Ass'n, 362 Ill. App.3d 546, 840 N.E.2d 1275 (2d Dist. 2005); other torts, see, e.g., Miller v. Everest, 212 N.W.2d 522 (Iowa 1973).)  And even if legal liability is not imposed, imagine the results of a Channel 7 Eyewitness News FocusTeam® Investigation about the meth lab found in a piece of property you foreclosed on . . .  Or on how Mr. & Mrs. Joe Doakes want to buy the property at 1234 Wisteria Lane but can't find anyone to sell it to them.

Whether your foreclosed property is commercial or residential, the same principles apply.  Before foreclosing – even better before lending – ask yourself what you're going to do with that "bus" if you catch it.  Most of the issues are ones you know from your own house: doing the paperwork right, maintenance, upkeep, safety, comps, and curb appeal.  Advance consultation with the right professionals and careful attention to details can spare you a mountain of heartache later.

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Guest Writer - Dan Susie, Winstead PC

A "borrowing base" is a financing structure where loan funds are disbursed NOT on a "cost incurred" basis, but rather are disbursed based upon a limited audit or information from across the collateral pool.

This structure often appears in oil and gas financing structures, and some times in loans to production (high volume) home builders.  Given the current prices of oil and gas, and of the home building market, this is the season of borrowing base reductions – because the value of the collateral no longer supports the loan or the amount outstanding.

Lenders should consider the following issues, steps and precautions in connection with any borrowing base reduction:

• In the case of a syndication, review the borrowing base determination provisions carefully to conform to the requirements of lender approval for the reduction.
• Comply with the provisions of the credit agreement with respect to the payout of the borrowing base deficiency.
• The borrowing base reduction and any change in the monthly commitment reduction amount must be confirmed in writing.  Use a form of borrowing base adjustment letter approved by counsel.  Where a change in the repayment terms is agreed to, amend the credit agreement rather than using a borrowing base adjustment letter, and make sure the amendment includes a release of all claims to date.
• Consider additional collateral and/or modification of the terms of the payout for those borrowers who cannot pay the entire deficiency in accordance with the terms of the credit agreement.
• If additional collateral is offered by a borrower to reduce or eliminate a borrowing base deficiency, obtain title information regarding any new properties and promptly file new mortgages to perfect liens against such collateral.
• In the case of a syndication, review the borrowing base determination provisions carefully to conform to the requirements of lender approval for the reduction.

If you have any other suggestions, or if you have any questions, please post a comment.
 

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Once a month, our regular group of authors discuss topics that we view as being of interest (the "hot" topics) in the commercial loan workout arena.  We then hash out a list of what we'll write on for the next month.

Identifying "hot" workout topics can be a dangerous thing for lawyers.   Yes, we -

• are active in industry organizations (such as the several committees with the Mortgage Bankers Association and working on creating workout data standards through MSMO 
• give workout seminars to clients and at legal industry meetings, and
• now handle an increasing number of workouts and bankruptcies every day . . .

BUT as "outside" counsel,  we're keenly aware that we are not privy to all of the discussions (both formal and informal) that you, the front-line participant, are having on this growing topic.  (There you have it: that long sentence proves I'm a lawyer - which is the reason why we need your help.)

While we believe that we're generally in touch with the market, we understand that we still remain "outside" legal counsel.  So, we're looking to you for the "inside" scope on topics of interest.

- Do you have any topics that you'd like us to address in Tough Times?

Please post a comment to give us some guidance.

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In several earlier postings (part I and part II), I listed several tips on oral communication with the borrower, loan guarantor or principals.

One tip covered included maintaining a level-headed "attitude" during the workout or foreclosure process.  A professional attitude is tough to keep when conversations go beyond hard-nosed negotiations, and start to attack you personally.

Below is the advice that I recently gave to a lender when another co-lender (in the bank group) started to attack him personally.  The advice applies equally to the situation where the borrower, the loan guarantor or the principals do the same.

Trust Your Judgment
Accept the situation for what it is - a personal attack. The other side obviously wants to start a real "shooting" war. Recognize it for what it is, and then . . . .

Go the other way:  If you've raised (or if you have) a teenage child, then you're already a veteran. Put those skills to work. As the other person raises his\her voice, increases emotional intensity and goes for your jugular, take the opposite approach in response: lower your voice, decrease your emotional intensity, and simply reflect on (or repeat) what is being said. You might be astounded at how this approach sometimes disarms the opponent. They want to go to war, yet, you're not willing to do the war dance. Baffling.

Note it:  Write down the exact words that were said. Then write down your "go the other way" approach.

End it:  Give the raving lunatic the chance to come back to earth by telling him/her that in X seconds you're going to have to get off the phone.

Report it:  Don't be alone in this - report it to another person on your team.

If you have other suggestions or a war story (literally) of your own, please share your comments with us. This is a topic that is rarely discussed.
 

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In a prior posting, I articulated several suggestions or tips on oral communication with the borrower or principal about a troubled loan.  The most basic goals of a workout (restructure or recovery) require some oral communication.  Another goal is to avoid "bad" communication.

Here are several more tips:

Power of Two:  All conversations should involve at least two (2) lender personnel.  There is strength in numbers – and it can help if (or when) at a later date, the borrower has a “different” version of the conversation.

Disclaimers:  At the start of the conversation, clearly state that you have no authority to bind the lender, that the call is merely meant to collect information, etc.  It is a good idea to repeat the statement at the end of the call.

No Threats:  Never ever threaten a criminal or civil law suit.  Never.

No Oral Agreements:  Agreements should be in writing.  Do not invite or create oral agreements.  In other words, simply agree to put terms into writing as a follow-up to the conversation so the borrower (and its counsel) can review them.  And, as noted above, make it clear that other lender personnel will need to approve the written terms before become a binding agreement.

Stick to Your Business:  Only make statements that are well within the scope of your business. Never suggest ways for the borrower to run its business or improve business.  Use “I need to see” statements.  Avoid statements like “you’d make more money if. . . . “  You should exercise control over your business as the lender, and NOT the operations of the borrower’s business.

One-sided Deals:  Avoid suggesting structures that solely benefit you.  A decision that solely benefits the lender (without benefit to borrower) probably will come back to haunt the lender.  Once again, avoid proposing the “too good to be true” idea.

No Recordings:  Don't. (Sorry that I even mention this, but it is always best to state the obvious.)

As stated in my earlier posting, in future postings, we’ll cover related topics such as (i) theories of lender liability and recommendations on avoiding it, (ii) attorney client communication, and (iii) the “drivers” behind the borrower’s perspective.

Any thoughts, suggestions or other comments on this important topic?

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What can I say in my discussions?
In a prior posting, I commented upon the lack of experience among the entire range of people on the workout team – from outside legal counsel to title company personnel.  Indeed, in our office, the experience topic is a matter of concern, and training and mentoring are focal points for those of us with experience.

One subject that I’m often asked about is this one: “What can I tell the borrower and the guarantors or principals?  What should I NOT say?  I just want to punch him\her in the face! After all the games of golf that we’ve played together through the years, now they . . . . ”

Behind this question is a healthy fear or concern of the “L” words: Lender Liability.   Oral communication with a borrower (and guarantors) and others about a troubled loan is a minefield – where innocent comments, a bad attitude at the end of a hard day, handwritten notes during the conversation, etc., can and will be “used against” the lender in a law suit alleging any number of lender liability claims (and defenses to performance under the loan).  (Theories of lender liability and defenses to performance will be the subject of numerous future postings.)

One important point before you pick up the phone:
Consider the value of entering into a discussion or negotiations agreement with the borrower and the guarantors. (We’ll cover this subject in a future posting.)

The following are some practical thoughts and suggestions on this important “say what” topic (several topics will be discussed in the second part of this two part series):

Attitude:  Be calm, be cool, be factual and don’t take it personally. Don’t react to emotional statements or threats. Stay far away from emotional displays of your own. No name calling. And don’t react to being called some thing. Leave your “bad day” in the other room before you make the call. (Yes, this can resemble a bad day at recess.)

Truth, Fairness and Good Faith:  Regardless of whether your state has an implied covenant of good faith and fair dealing, your statements should be measured against general standards of “fairness and good faith.” Stick with the truth. (In other words, if a jury heard your statement, would they think that you were being a jerk or an untruthful son of a ____ [ you know]?)

Loan Documents:  Know your loan documents and do not make a statement that contradicts them. If you are discussing possible modifications to the loan documents, make it clear that nothing will be modified until there is a written agreement, and that other lender personnel will need to approve all changes before they are binding.

Call Notes: Take written notes, but be careful in what you record (remember, these notes might be used by not only the lender’s lawyer, but also by the borrower’s lawyer in a law suit).

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If you did not make the Builder Finance Workout seminar, don't worry. 

• Click here to view a video of the seminar
   
• Click here for a copy of the seminar materials

We post this for your personal use or for use as part of your company's training program.  After you watch this video, please post your comments or send us your questions, so that we (and other readers) may respond.

We'll keep you advised of our future public speaking engagements; and we'll endeavor to do a digital "capture" to make them available to you.

To help us in looking around the workout corner (or into the next ditch):

• What other commercial credit products do you see as near term problems (as the next wave of distressed commercial debt)?
• What other seminar topics do you find of value or interest?

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This posting is part of a series addressing the training and mentoring of the loan workout team – as a practical and tangible follow up to my previous posting on the need for experience.  Resources such as this blog and other sites on the Internet allow management to both furnish and direct personnel to valuable materials – and on a 24/7 basis.  However, at some point, face-to-face communication becomes the best way to communicate and to learn.

We periodically speak and give presentations on issues surrounding problem loans or special servicing issues.  If you’re in or around Houston, Texas on Tuesday, October 7, 2008, we’ll be hosting a workout seminar focusing on Builder Finance (although the topics covered are equally applicable to other real estate asset classes).  Here are the details:

• Tuesday, October 7, 2008
• 3:30 – 5:00 pm seminar; 5:00 – 7:00 pm reception
• Four Seasons Hotel (Austin Room), 1300 Lamar Street, Houston, Texas
• Complimentary valet parking
• RSVP to Marianne Lee at builderfinance@winstead.com

Note that seating is limited, and that 1.5 hours of CLE and CPE credit may be available (we’re in the process of seeking the applicable approvals).

We hope to see you at the seminar.

IMPORTANT NOTE:  DAMAGE TO THE HOUSTON AREA CAUSED BY HURRICANE IKE MIGHT FORCE A DELAY OR CHANGE IN THIS SEMINAR.  PLEASE RSVP AND THEN BE ALERT FOR ANY FOLLOW-UP COMMUNICATION FROM US.
 

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Where have all the experienced people gone?

As the credit crisis deepens and gathers steam, it is becoming clear that the "problem" simply is not limited to "big picture" subjects favored by economists and industry wags.

Recently, we encountered several situations highlighting the inexperience of the title company and local counsel. In other words, problems arose during the execution of the recovery plan simply because key players in the plan were not "in" this sector of the commercial mortgage industry during the last real estate downturn. Below is a short description of both situations, with a couple of practical suggestions.

Separately, outside of a few large commercial mortgage service companies and the largest national banks, many banks and servicing companies are thinly staffed with personnel who are experienced in commercial real estate workouts, foreclosures, bankruptcies and related litigation (i.e., special servicing). Consequently, we devote a considerable amount of effort in training less experienced bank and loan servicing staff – both formally in seminars and informally in conversations. (In future postings, we'll cover a broad range of training and mentoring topics.)

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A new loan with an existing or impending default has just hit your desk. What do you do? Here is a check list that should help get you started.

1. Gather all of the loan documents and read through them. Along the way, pay particular attention to default terms (relative to your current situation) notice provisions and anything in your loan documents that are out of the ordinary.
2. Gather all background possible from the master servicer. Like the weather – there will always be a history. It may be full of events or show absolutely no events – but you need to know what that story tells. Look for past courses of dealing, waivers (formal or informal) and areas where your predecessor could have created problems for you.
3. Obtain all regular reporting documents available. Assemble and review those documents previously provided to the master servicer. Check your loan documents and make sure all required reports have come in. If not, make a formal request to your debtor to remedy that situation.
4. Obtain additional documents on the debtor's operations. Ask for all you are entitled to ask for – and them some. If your borrower is working with you, he should be happy to respond to reasonable requests for information. If he will not – you've learned more about your situation from that response.
5. Comb through the debtor's documents to learn why there is a problem and to see if any recourse events are apparent. Is the current situation the result of the general market or was it caused by your borrower? Did the borrower violate SPE covenants, misapply rents, misapply insurance proceeds, permit waste or take other action that raises the prospect of recourse liability? Look for leverage points going forward.
6. Determine if you can trust the borrower. He is in possession of your collateral and generally your sole source of repayment – the real estate and the cash it has earned. Is he forthcoming, consistent, cooperative? Act quickly on your instincts. If you guess wrong, it will probably cost you money. But – act strictly within your loan document rights (see the next point).
7. Get a handle on the required notices and follow the details carefully. You only have the right to do exactly what the loan documents give you the right to do. Many of your rights depend on whether an event of default has occurred and, in many instances, whether a formal notice of the default has been provided. Be aware that sometimes the loan documents are inconsistent as to when and what notices are required. Follow the most conservative standard.

Best practices will have many other points for this list, but these are the basics. When workouts start coming hot and heavy, it will help to have a basic checklist. Tailor this list to your situation in advance – and keep your calm as you work through these pressure situations.
 

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