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

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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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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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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By Guest Writer – Christopher T. Nixon, Winstead PC

CMBS Master Servicers typically lack the ability to modify a CMBS loan to preemptively address a potential loan problem. A CMBS borrower frustrated with such inability may elect to purposefully default on the loan to circumvent the restrictions placed on the Master Servicer and force the transfer of the loan to the Special Servicer. The borrower's expectation is that the Special Servicer will have the ability and agree to modify the CMBS loan to address the potential loan problem.

Risks:  If it is apparent to the Special Servicer that the borrower intentionally defaulted on the loan, the Special Servicer may elect to accelerate the debt and pursue foreclosure of the real estate collateral. The Special Servicer may determine that an aggressive foreclosure of the defaulted loan will maximize recovery for the bondholders as compared to attempting to negotiate a loan workout with an untrustworthy borrower acting in a manner detrimental to the economic interests of the REMIC Trust in which the CMBS loan is pooled.

Potential Solution:  Rather than taking the inflammatory step of defaulting on the CMBS loan to reach the Special Servicer to address a potential loan problem, a borrower should consider discussing the potential loan problem with the Master Servicer. If the Master Servicer determines that the loan problem constitutes a "reasonably foreseeable default," the Master Servicer may have the ability under the Pooling and Servicing Agreement (PSA) to transfer the loan to the Special Servicer at that time (without waiting for an actual loan default to occur) to address the loan problem. A Special Servicer may be more inclined to consider a loan modification as compared to a foreclosure if the Master Servicer and borrower present the loan problem to the Special Servicer at this stage. The effectiveness of this approach will largely depend on the quality and sophistication of the Master Servicer and Special Servicer. Given the current bad economy, Master Servicers are increasingly aware of the need to proactively discuss borrower loan problem concerns and to involve the Special Servicer early in such discussions.

Tips for the Borrower:

• Be honest about the potential loan problem when discussing it with the Master Servicer.
• Provide sufficient information to the Master Servicer for it to objectively determine that the potential loan problem constitutes a "reasonably foreseeable default."
• Do not create a potential loan problem merely to seek economic concessions from the Special Servicer. The borrower should have a sincere concern that a loan default is likely to occur if the loan problem is not promptly addressed.
   

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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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A straw in the wind; tax consequences will form the battleground, and be very actively in play on the negotiation table between owners, with relatively low adjusted basis in their commercial real estate projects, and lenders attempting to foreclose or otherwise enforce their lien rights with respect to commercial real property. Foreclosure as a triggering event for the imposition of capital gains taxes and lenders' ability to forgive recourse debt obligations (thereby creating either capital gain or ordinary income tax consequences to the borrower) will both be tools for some lively negotiations going forward in the work out process.
 

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