special servicers and defaulted cmbs loans

Special Servicers and Defaulted CMBS Loans Restructuring or Foreclosing Distressed Assets While Navigating Regulatory and Contractual Challenges

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WEDNESDAY, MARCH 28, 2012

Presenting a live 90-minute webinar with interactive Q&A

Patrick F. McManemin, Partner, Patton Boggs, Dallas

Patrick E. Mears, Partner, Barnes & Thornburg, Grand Rapids, Mich.

Susan C. Tarnower, Counsel, Kilpatrick Townsend & Stockton, Charlotte, N.C.

Mindy S. Planer, Partner, Arnall Golden Gregory, Atlanta

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PRESENTATION TITLE

Loan Documents and Restructuring

Presented by: Susan Tarnower | Kilpatrick Townsend & Stockton LLP

214 North Tryon Street, Suite 2500 Charlotte, North Carolina 28202-2381

704.338.5008 [email protected]

Part 1 – Loan Documentation:

• Things to look for: – Check for allonges and recorded assignments into current

noteholder. – Check for prior modifications. – Check for side letter agreements or verbal agreements. – Check for notices of default. – Check for correct addresses for all parties. – Check notice provisions in documents. – Check for any Master Lease. – Check for Guarantees. – Check UCC chain for assignments and continuations.

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Part 2 – Questions to ask:

• Is this the complete file? • Was a final title policy issued at the time the loan

closed? • Who are the current parties in interest? • Was there an assumption? • What is the complete outstanding amount owed?

How long does it take to get a full payoff quote? • Do you have current financials for borrower and

property? • Do you need an updated appraisal or Phase 1? • Whose approval is required (CCH, rating agency)?

How long will this take? 7

Part 3: Triggers in Loan Documents

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• A “trigger” or “trigger event” is an event that occurs which causes something to happen. For example, if A occurs (the “trigger”), then B must happen (the “consequence”).

Typical Trigger Events

• Typical trigger events include: – lockboxes/cash management. – reserves/escrow amounts. – letter of credit drawdown/release/expiration. – change in interest rate. – change in taxes. – shortfalls. – ltv/dscr tests. – new liens on the property. – transfers.

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Where are triggers found?

• Anywhere and everywhere in the loan documents.

• Read each loan document carefully.

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Deed to Secure Debt:

• Insurance: Borrower’s failure to maintain required policies/force placed insurance makes borrower liable for amounts advanced plus default interest until repaid.

• ACMs/institution of Maintenance Program. • Escrows: Reserve too high/credit to

subsequent payment or refund to borrower. • Escrows: Reserve too low/borrower to

deposit deficiency within ten days of written notice.

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• Release of funds from Repair and Remediation Reserve: written request, invoices, certificate, lien waiver – once every 30 days.

• Leases: – Deemed approved if no response in 15

days. – Prior approval requirements. – Certified Rent Roll annually.

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• Transfers, further liens and encumbrances: – Voluntary or involuntary. – Percent considered a transfer, i.e. 49%

OK. – Direct or indirect change. – Permitted transfers.

• Failure to provide financial statements – If 20 days late, $1,500 penalty plus default

interest until delivered.

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Additional Event(s) of Default

• Events of Default: – Look for notice requirements. – Look for grace or cure periods. – Look for extensions of cure periods.

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Other Items

• Key dates. • Payments/prepayments. • Side letter agreements. • Waivers of reserves. • Errors and discrepancies. • Nonrecourse triggers.

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Part 4 - Restructuring Options:

• Look at the current NOI. What loan terms will this property realistically support? How do we get there?

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Principal Paydown

• From borrower. • From new equity partner. • From reserves on hand – usually not

acceptable to lender.

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Outstanding Amounts Owed

• Default interest. • Late fees. • Enforcement fees.

– May be forgiven unless another default. – Capitalized into balloon at Maturity Date.

• Get a complete pay-off quote to be sure you have included everything outstanding.

• Lender’s third-party expenses – appraisal, Phase 1, legal fees.

• Servicing fees, advances, modification fees. 18

Interest Rate

• IO payments for x months. • Change rate – for short

term/permanently. • Waive collection of full amount owed for

certain time; roll waived amount into principal or into B note to be forgiven at maturity.

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Maturity Date

• Extend and pretend. • Forbearance/modification. • How long is realistic?

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A/B Note Structure

• Set up supportable loan amount, interest rate and maturity date. This becomes the A note.

• Roll amounts waived or forgiven into a separate note – B note (wish note) – Can be collected upon disposition of

property if an amount greater than the amount owed on the A note is collected.

– Can be waived at maturity.

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Tax Ramifications for Borrower

• Advise borrower to get its own counsel on the tax ramifications of any modifications.

• Do not offer your own ideas or options. • Tax losses can be mitigated through

different kinds of structuring. Be aware of how these operate.

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Fees

• What do the loan documents say regarding attorneys’ fees or other types of professional fees?

• What does the PSA say? • Who is affected if these are waived? • Various types:

– late fees – servicing fees – processing fees – recording fees – title update fees – third party vendor fees, i.e. appraisal, environmental

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CONFIDENTIAL

© 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is confidential, proprietary and the property of Barnes & Thornburg LLP, which may not be disseminated or disclosed to any person or entity other than the intended recipient(s), and may not be reproduced, in any form, without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

SPECIAL SERVICERS AND DEFAULTED OR DELINQUENT CMBS LOANS:

Requesting the Appointment of a Receiver, Commencing Mortgage

Foreclosure Proceedings and Pursuing Claims Against Guarantors

Presented by: Patrick E. Mears Barnes & Thornburg LLP Grand Rapids, Michigan 616-742-3936 [email protected]

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I. Seeking the Appointment of a Receiver Upon the Mortgagor’s Default

A. The Origin of Receivers and Statutory Grounds for Appointment

1. Origin of receivers in English and American law

2. Powers of state real estate receiver: statutory and common law origins

3. Powers of receivers appointed under federal law

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I. Seeking the Appointment of a Receiver Upon the Mortgagor’s Default (cont’d)

B. Considerations in Determining Whether to Seek the Appointment of a Receiver

1. Failure in negotiating workout/restructuring agreement

2. Fraud, conversion and other bad acts of mortgagor

3. Need for quick seizure of property to safeguard collateral (e.g., by avoiding/remediating threatened and actual waste) and prepare for possible sale

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C. Enforcement of Assignment of Rents

1. Compliance with state law requirements, e.g., recording notice of default and service of payment demands on debtor and tenants

2. Possible bankruptcy consequences of pre-bankruptcy enforcement, e.g., prepetition termination of debtor’s interests in rents

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D. Procedure for Court Appointment of a Receiver

1. Common sequence of events: filing complaint and motion for appointment

a. Availability in judicial foreclosure proceedings b. Availability in conjunction with non-judicial foreclosures

2. Preparation of order Appointing Receiver (“OAR”)

a. Critical document defining powers and duties of receiver

b. Identification of receiver candidate and his/her qualifications

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c. Common provisions in OAR (i) power to operate, lease and sell collateral (ii) duty to preserve and safeguard collateral and to obtain property/casualty insurance (iii) receiver’s compensation and ability to retain agents (iv) turnover of records and other property by the debtor (v) rejection/termination of executory contracts (vi) filing and service of periodic reports (vii) retention of agents to assist receiver in performing duties, e.g., attorneys, accountants, real estate brokers (viii) stay of proceedings against receivership assets

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E. Sales of Real Estate Free and Clear of Liens and Interests 1. General authorization to sell estate assets: state law and

OAR

2. Split in authority among the states re: ability to sell realty free and clear of liens and interests (See, e.g., P. Mears and D. Daniels, Sales of Receivership Assets Free and Clear of Liens and Interests, 38 Mich. Real Prop. Law 112 (Fall 2011)

3. Sales free and clear of liens and interests under federal law

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F. Termination of the Receivership Action

1. Filing of motion to approve receiver’s final report and closing case

2. Discharge of receiver from duties and dismissal of action

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II. Commencing Mortgage Foreclosure Proceedings

A. Review and Analysis of Mortgage Loan Documents

1. Common documentation in CMBS transactions, e.g., note, allonges, mortgage, rent assignment, guaranties, environmental indemnities, UCC financing statements and subsequent assignment documents 2. Scope and specifics of counsel review a. Execution by all parties b. Compliance with applicable law c. Review of current foreclosure/title commitment d. Verification of mortgagor’s default and consequences of same e. Determination of proper assignments and their recording

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II. Commencing Mortgage Foreclosure Proceedings (cont’d)

B. Selecting the Method of Foreclosure: Judicial or Nonjudicial

1. General considerations, e.g., judicial vs. nonjudicial foreclosure 2. Judicial foreclosure a. Advantages/disadvantages b. Joinder of parties c. Joinder of claims d. Discovery and motion practice e. Trial/summary judgment f. Entry of foreclosure judgment (i) timing of entry (ii) upset/minimum bid price (iii) redemption period

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II. Commencing Mortgage Foreclosure Proceedings (cont’d)

d. Conduct and confirmation of sale (i) time, place and manner of sale (ii) determination of bid price

3. Nonjudicial foreclosure a. Advantages/disadvantages b. Commencement of proceeding via publication of sale notice c. Requirements of sale notice d. Conduct of foreclosure sale e. Effect of minor errors in notice f. Redemption rights

4. Title insurance questions and concerns arising from mortgage foreclosure sales

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III. Pursuing Deficiency Claims Against Guarantors

A. Review and Analysis of Guaranties

1. Guaranties of payment v. guaranties of collection

2. “Springing” or “bad boy” guaranties a. Triggering events resulting in liability b. Full recourse guaranties vs. limited recourse guaranties

B. Commencement of Action Against Guarantors

1. Joinder of claims in judicial foreclosure/receivership action

2. Commencement of separate action in state or federal court

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III. Pursuing Deficiency Claims Against Guarantors (cont’d)

C. Potential Defenses of Guarantors

1. Unenforceable penalty

2. Unfairness 3. Violation of public policy 4. Timely cure of default

D. Entry of Judgment and Collection Actions

1. Expiration of appeal period 2. Garnishment and attachment 3. Execution 4. Receivership

Recent REMIC Rule Changes and CMBS Loan Modifications by Special Servicers

By Patrick McManemin

214-758-6675 [email protected]

General REMIC Characteristics

• To preserve tax-exemption, REMICs must continually hold “qualified mortgages,” meaning they:

– have a LTV ratio not greater than 125%, and – are transferred to the REMIC on the first day the REMIC

issues securities. “Significant” modifications to loans are held to be “deemed

exchanges” under IRS rules, thereby violating the second prong of the “qualified mortgage” test and incurring tax penalties.

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Exceptions to “Significant” Modification

• Prior to 2009, 4 exceptions to the “significant modification” rule were in place:

1. Modification occasioned by default or “reasonably foreseeable” default.

2. Assumption of mortgage pursuant to waiver of due- on-sale/due-on-encumbrance clause.

3. Assumption of loan by Trust. 4. Interest rate conversions pursuant to convertible

notes.

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2009 Changes to REMIC Exceptions

• In response to the economic collapse, REMIC rules were changed in three ways: 1. The interpretation of the exception for

modifications occasioned by default or “reasonably foreseeable” default was expanded to allow a broader interpretation of the phrase “reasonably foreseeable.”

- The intent was to allow special servicers to begin addressing problematic loans earlier in the loan’s life-cycle, instead of immediately prior to default.

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2009 Changes to REMIC Exceptions (cont.)

2. Two additional exceptions were added: A. Changes involving substitution/release of collateral

securing a loan B. Changes in recourse/non-recourse nature of the loan. Under either rule, the loan must continue to be

“principally secured by” an interest in real property after the modification.

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2009 Changes to REMIC Exceptions (cont.)

3. Lien Release Rule Prior rule: if REMIC released lien on real property, loan

ceased to be qualified mortgage unless pursuant to defeasance or provided for in terms of loan documentation.

New rule: release of lien does not disqualify mortgage if: a. release is not a significant modification per

the exceptions noted above; and b. loan continues to be principally secured by

interest in real property.

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Servicing Standard and PSA

• In addition to any requirements under the REMIC rules, special servicers are bound by the servicing standard and relevant provisions of the PSA:

The Special Servicer shall diligently service and administer the loans it is

obligated to service pursuant to the PSA on behalf of the trust and in the best interests of and for the benefit of the certificateholders.

The Special Servicer shall service the loans in accordance with the higher of the following standards of care: (1) the same manner in which, and with the same care, skill, prudence and diligence with which the Special Servicer services and administers similar mortgage loans for other third party portfolios and (2) the same care, skill, prudence and diligence with which the Special Servicer services and administers similar mortgage loans owned by the Special Servicer, with a view to the maximization of timely recovery of principal and interest on a net present value basis on the loans, and in the best interests of the trust and the certificateholders.

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PSA Requirements

- In general, the PSA’s terms will track REMIC requirements, as avoiding tax penalties under REMIC rules is the primary duty of the special servicer.

- Consent of Directing Certificateholder §3.20 of Sample PSA:

• If the Special Servicer determines that a modification, waiver or amendment is reasonably likely to produce a greater recovery on a net present value basis, then the Special Servicer may agree to a modification, waiver or amendment subject to the approval of the Directing Certificateholder.

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Typical Modifications

• Reduction in Interest Rate • Extension of maturity date • Addition of new guarantor(s) • Additional collateral • Forbearance agreements • Deed in lieu of foreclosure • The special servicer also has authority to

institute foreclosure proceedings and/or a receivership action.

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Sample Scenario

• Loan in 2007 securitization secured by multifamily development. Borrower is current, but several leases are about to expire without renewal or new tenants. Borrower is concerned about future ability to service debt in about a year’s time, and approaches Master/Special Servicer to reduce the interest rate and extend the maturity date. Result?

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Rules of Caution

• Regardless of the seemingly increased flexibility given to special servicers under the changes in the REMIC rules, the servicing standard and the terms of the PSA remain unchanged and continue to bind the special servicer. Any constraints imposed by those provisions remain in place, regardless of any changes in REMIC rules.

• In addition, note that the post-default landscape remains unchanged by changes to the REMIC rules. The new rules were meant to provide special servicers with greater leeway to “get out in front” of potentially problematic loans and enter into modifications to prevent default. Once default has occurred, the traditional remedies remain in place.

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SPECIAL SERVICERS AND DEFAULTED CMBS LOANS

March 28, 2012

STRAFFORD PUBLICATIONS WEBINAR

Mindy S. Planer Arnall Golden Gregory LLP 404.873.8626 [email protected]

mailto:[email protected]�

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FORECLOSURE PROPERTY EXTENSIONS

CONSTRUCTION ON REO

MULTIPLE SALES OF REO

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GENERAL OBSERVATIONS

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CONCLUSION

REO ≠ FREEDOM FROM REMIC CONCERNS