Selected Issues for Distressed CRE Mortgaged Debt: Leases; Lender Liability; Bondholder Concerns

Transcription

1 Selected Issues for Distressed CRE Mortgaged Debt: Leases; Lender Liability; Bondholder Concerns Keith Mullen

2 Issues for Distressed Mortgage Debt CRE Surveillance & Workout Issues: Commercial Leases Practical Take-Away s to Avoid Lender Liability Claims CMBS From the Bondholder s Perspective 2

3 Key Perspective: It s All About the Leases, Stupid Road Map: Leases (Credit and Space Tenants) Bond Lease Based CTL: hell or high water (SVO definition) Credit Lease Based CTL: few landlord obligations or little RE risk (mitigated) (SVO definition) Space Lease: all other Ground Leases: not discussed ([CTL] = unique to credit tenant lease; [S] = unique to space lease) 3

4 Leases (Credit and Space Tenants) [continued] A. Hot Issues 1. Communication & decisions with lessee/tenant Lender involvement Rent direction letter New estoppel from lessee/tenant Copies of lease default notices to lender: from borrower/landlord; from lessee/tenant Lease termination payments Prenegotiation agreement with borrower: include permission of lender to directly communicate 2. Ability to cure lease default in advance of loan default [CTL] power of attorney from borrower? included in SNDA? 3. Attornment & Rental Direction - Absolute assignment of rents (not cover the lease) (more information at 4

5 Leases -- Hot Issues (continued) 4. Lock box (blocking activated) & alternative approaches (cash sweep) Rent operating account[s] deposit[s] proper perfection (control) more at 5. Reversionary rights (improvements/fixtures/equipment) [CTL] 6. Third party liens: taxes; M&M liens 7. Personal recourse (current; add as part of workout) breach of leasing covenants? breach of lock box or cash management? breach of property (common areas; etc.) condition? 5

6 Leases -- Hot Issues (continued) 8. Effect of foreclosure on the lease Lessee/tenant SNDA in place? Local law issues Subject to foreclosure 9. Extrajudicial remedies (receivership, etc.) 10. Tenant audit of operating / common area expenses [S]) 11. Lease relief: typically rent [S] Pre-negotiation letter (one or more?) rent alternatives: reduction; relief; deferral; forgiveness; conversion to loan concessions from lessee/tenant (drop termination rights, assignment rights, exclusives & options; add operating covenant & guaranty; rental direction & attornment; subordination; etc.) 6

7 Leases -- Hot Issues (continued) 12. Retail Danger: co-tenancy clauses kill!! 13. Co-Lender Debt Structures: scope of lead/agent authority to deal with leases 14. More at search term leases 7

8 Leases Preparation: Surveillance & Review B. Preparation: Surveillance and Review 1. Monitoring lessee/tenant & lease guarantor (traditional sources; Google Reader [instructions at financial information current lessee/tenant contact information 2. Regulatory Bank Insurance company: NAIC rating (change?) Review SVO evaluation form [CTL] Refresh? 8

9 Leases Preparation: Surveillance & Review [continued] 3. Building attributes, uses & services [S] lease rollover analysis (& office lease stacking plan) ownership & location of hardware/software/data access or copies of historical operating data specialty services (data communication; utilities) green building requirements (code; lease terms) property inspection changes in use since last ESA? changes in use effect zoning compliance? changes in local code/laws since closing? historical data obtained (or with third-party) building technology (operating; services): third-party contracts? ownership of hardware/software? 9

10 Leases Preparation: Surveillance & Review [continued] 4. Title title policy & exceptions: complete; hidden problems? current status of title (any M&M liens from tenant work?; priority of loan over lease?) 5. Leasehold and tenant franchise tax status 6. Market information rental rates vacancy rates rollover competition financial health of competing projects type of debt encumbering competing projects (CMBS v. portfolio) 10

11 Leases Preparation: Surveillance & Review [continued] 7. Merchants Association [S] transfer of control to Lender? financial status & reporting 8. Status of third-party service contracts [S] property management leasing key service providers (data/communications; utilities; hardware & software not owned by Borrower; etc.) 9. Lease file review (completeness, etc.) right to ask for estoppel letter from tenant? informal lease modifications in borrower/landlord s file 11

12 Leases Preparation: Surveillance & Review [continued] 10. Selected lease abstract terms (does your form cover these?) TIPS: - Scan to searchable PDF; then word search the lease - Use data base if large number of leases up-dated lease abstract (best practice: use database or excel) credit enhancements (guaranty; LOC; cash deposit; bonds) alterations to leased premises: future funding obligation of landlord? alterations to project by landlord not restricted tenant responsible for environmental issues in premises and, if caused by it or its tenants, in common areas assignment of lease by tenant (or change in control of tenant); and subletting by tenant tenant termination rights tenant remedies upon landlord default (notice / cure for lender) radius restriction on landlord (or its affiliates) co-tenancy: interplay between go dark rights of tenant A and co-tenancy rights of tenant B covenant to operate tenant exclusive rights (use; parking; signage; etc.) 12

13 Leases Preparation: Surveillance & Review [continued] expansion rights ownership of improvements at end of lease (FF&E) purchase rights holdover provisions insurance/indemnification provisions match requirements of investment documents rent: future adjustments; concessions use of casualty or condemnation proceeds (including related insurance and indemnity provisions) scope of project services and specialty services to lessee/tenant compliance with laws operating expenses or common area expenses; pass throughs attornment & rental direction (to lender) 11. Specialty leases have special issues: Medical (more information at GSA 13

14 Issues for Distressed Mortgage Debt CRE Surveillance & Workout Issues: Commercial Leases Practical Take-Aways to Avoid Lender Liability Claims CMBS From the Bondholder s Perspective 14

15 Practical Take-Aways to Avoid Lender Liability Claims Minimizing the Risks Stay within your Documents. Know your loan documents and follow the terms/provisions. Refer to disclaimer language and provisions in loan documents when it makes sense to do so. Follow your policies and procedures. Get all required approvals. Use the three Cs in written and spoken communications: Be clear, concise, and consistent. Adopt proper tone and attitude: use language that conveys empathy and cooperation, but is firm and fair. 15

16 Practical Take-Aways to Avoid Lender Liability Claims Minimizing the Risks [continued] Avoid creating leverage for Borrower by making promises or adopting a pay or die attitude. Respond to set-up letters with professional tone. Never threaten criminal prosecution or referral. Follow your policies/procedures about disclosing information to thirdparties. Know that letters/ s (including internal s) are subject to discovery. Avoid nicknames, derogatory comments. Consider the words you use (spoken and written). Use common sense. (e.g., Don't make promise to Borrower at a ball game.) 16

17 Lender Liability-- Sticking to Your Business Avoid expressing personal opinions, observations, or conclusions. Avoid off-the-cuff remarks. You d be better off if.... You d make money if Confidential 17

18 Lender Liability -- Spoken Communication Tips Power of two, if possible. Make it a practice not to make oral agreements, modifications, representations, or waivers (Statute of Frauds). If made, follow up in writing (document) and have Borrower sign. Go into conversation with clear plan. Speak as if being recorded (you may be!). Remember the three Cs. More at 18

19 Lender Liability -- Written Communication Tips Read and re-read before sending written communication to Borrower. Remember tone and attitude. Clients/borrowers understand need for precision in legal documents, so adopt that approach in written (and spoken) communications. Remember the three Cs. 19 Confidential 19

20 Lender Liability -- Keeping a Good File Follow Guaranty's policy. That's why it s there. Keep the file clean. Make sure documents get in file (electronic overlay). Comply with record retention policies. Current Examples L v. L: 20 Confidential 20

21 Issues for Distressed Mortgage Debt CRE Surveillance & Workout Issues: Commercial Leases Practical Take-Away s to Avoid Lender Liability Claims CMBS From the Bondholder s Perspective 21

22 CMBS From the Bondholder s Perspective Tranche Warfare Reporting & Transparency IRP go to CRE Finance Council: Investors Forum (go to Disconnect: Forum v. IG Bondholder Investor s immediate goal: loan modification disclosure Open: disclosure of current rent and operating statements CMBS 2.0 Simple structure due to complex CMBS

23 CMBS Blog Comment: CMBS Special Servicing This CMBS loan is becoming a curse in my life. The [special servicer] says it is very difficult to make loan modifications....he has to get approval from the bond holders. He initially asked us to hold off payment until he completes the agreement. So we skipped payment for nearly two months and now he says we are in default.... We only requested for lowering of [interest rate] change. Is this CMBS loan a different animal and why are they not doing [a] loan modification? 23

24 CMBS 1.0 Attributes (did someone say structured [complicated] finance?) Relationship governed by an Intercreditor Agreement $500M Mezzanine 1 Note $100M Mezzanine 2 Note $100M Mortgage Note Mezzanine 3 Note Note A $430M Note B $70M Loan Structure Securitization CMBS Trustee Rating Agencies Mezzanine 1 Lender CRE CDO Trustee Collateral Manager Participation A Participation B-1 Master Servicer Special Servicer Participation B-1 Participation B-2 Participation B-3 asset $100M Rating Agencies Repurchase Buyer (Repo Lender) Certificateholder CMBS Certificateholder (controlling holder) Relationship governed by a Sub Participation Agreement CDO Bondholders CDO Preferred Equity Relationship governed by a Mezzanine 3 Participation Agreement Relationship governed by a Pooling and Servicing Agreement Relationship governed by a Repurchase Agreement Relationship governed by CDO Documents Relationship governed by a Mortgage Participation Agreement $100M Participation B-2 Slide Compliments of:

25 Guarantor CMBS 1.0 Attributes (did someone say structured [complicated] finance?) Managing Member Principal 1 JV Principal 2 JV Principals Joint Venture Entity Principal 3 JV Mezzanine 3 Borrower Equity Lien Mezzanine 2 Borrower Equity Lien Mezzanine 1 Borrower Equity Lien Equity Lien Equity Lien Equity Lien Equity Lien Equity Lien Mortgage Borrower 1 Mortgage Borrower 2 Mortgage Borrower 3 Mortgage Borrower 4 Mortgage Borrower 5 Mortgage Borrower 6 Mortgage Mortgage Mortgage Mortgage Mortgage Mortgage Property 1 Property 2 Property 3 Property 4 Property 5 Property 6 Slide Compliments of:

26 CMBS 2.0 [continued] Independent operating advisor (special servicing) Investors = traders Low Leverage Best DSC SPE changes (mitigate GGP) Restoring American Financial Stability Act of 2010 ( 26