ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations March 10-12, 2011 Coral Gables, Florida

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1 ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations March 10-12, 2011 Coral Gables, Florida PROGRAM FACULTY PARTICIPANTS STUDY MATERIALS TABLE OF CONTENTS Page xi 1. Real Estate Workouts 1 By John D. Hastie Study Material 3 Addendum A: Default Notice 10 Addendum B: Pre-Negotiation Letter (jury friendly) 12 Addendum C: Pre-Negotiation Letter (much more complete, but perhaps not so jury friendly 14 Addendum D: Forbearance Agreement 18 Addendum E: Loan Modification Agreement Commercial Real Estate Loan Workouts: Perspectives, Incentives and Documentation 49 By Jason O. Zeigler Study Material 51 Exhibit A: Sample Default Notice 59 Exhibit B: Sample Pre-Negotiation Agreement 61 Exhibit C: Sample Forbearance Agreement 65 Exhibit D: Sample Modification Agreement/Tips for Counsel Understanding Real Estate Economics 77 By Thomas F. Kaufman Table of Contents 78 Study Material 79 Exhibit 1: Formulas and Examples 96 Exhibit 2: Select Asset Class Performance 98 Exhibit 3: National Counsel of Real Estate Fiduciaries National Property Index 99 Exhibit 4: NPI Returns Graph 100 Exhibit 5: Power Point Examples 101 Presentation Slides What To Do About the Problem Project By William G. Murray, Jr. 5. Working Out Mortgage Loans and B Notes 141 By Richard D. Jones Submitted by Thomas F. Kaufman Table of Contents 143 Study Material 145 Exhibit A: Whole Mortgage Loan 174 vii xvii 121

2 Exhibit B: Pari-Passu Loan Structure 175 Exhibit C: A/B Loan Structure 176 Exhibit D: Pre-Event of Default Waterfall 177 Exhibit E: Post-Event of Default Waterfall 178 Exhibit F: Participated Mortgage Loan Structure 179 Exhibit G: Second Mortgage Loan Structure 180 Exhibit H: Mezzanine Loan 181 Exhibit I: Typical CMBS Transaction with B Notice 182 Exhibit J: Defaulted Mortgage Loan Purchase Price 183 Exhibit K: Control Appraisal Event Mezzanine Loan Workouts 185 By Richard D. Jones Submitted by Thomas F. Kaufman Table of Contents 187 Study Material 191 Exhibit A: Mezzanine Lender s Ownership Position 218 Exhibit B: Multi-Tier Mezzanine Loan Structure 219 Exhibit C: Senior/Subordinate Participated Mezzanine Loan 220 Exhibit D: Control Appraisal Event 221 Exhibit E: B Note Loan Structure When the Workout Fails 223 By Richard D. Jones Submitted by Thomas F. Kaufman Table of Contents 224 Study Material Two Faces: Demystifying the Mortgage Electronic Registration System s Land Title Theory By Professor Christopher L. Peterson 9. Conveyances in Lieu of Foreclosure 287 By John D. Hastie Study Material 289 Addendum A: Settlement Agreement 294 Addendum B: Alternative Settlement Agreement Provisions 335 Addendum C: Settlement Agreement 336 Addendum D: Promissory Note Deeds in Escrow: Are They Enforceable? 365 By John C. Murray Study Material 367 Appendix: Deed in Escrow Agreement Creditors Remedies Under State Law By John A. Glose and Aleana Harris 12. Restructuring Debt on Distressed Real Estate By Robert Gottlieb 13. Tax Planning for Difficult Times By Robert Gottlieb viii

3 14. Surviving a CMBS Bankruptcy By Sheri P. Chromow and K.C. McDaniel 15. Precision Industries, Part 1: Debtor-Lessor's Property May Be Sold "Free and Clear" of Unexpired Lease By John C. Murray 16. Precision Industries, Part 2: How Leasees and Leasehold Mortgagees Can Protect Themselves By John C. Murray 17. Balancing the Automatic Stay By Roger Bernhardt and James R. Stillman Commencement of a Business Bankruptcy Case 511 By Richard F. Broude Table of Contents 512 Study Material Disclosure Statements: Confirmation and Cramdown of Chapter 11 Plans 531 By Barbara J. Houser, Douglas Wade Carvell, and Holly D.F. Meister Table of Contents 533 Table of Cases 535 Study Material Adequate Protection, The Automatic Stay and Use of Cash Collateral By Margaret A. Mahoney 21. Classification of Claims 613 By Barbara J. Houser, Thomas S. Henderson, Richard R. Rosenberg, Shari A. Wilkins, and Jenny J. Hyun, and Douglas E. Deutsch Updated by Erithe A. Smith and William C. Hillman Submitted by Margaret A. Mahoney Table of Contents 615 Table of Cases 616 Study Material Confirmation of Chapter 11 Plans-Consensual Plans By Margaret A. Mahoney 23. Chapter 11 Plan Confirmation is Governed by 11 U.S.C. Section 1121 Through 1146 of the Bankruptcy Code By Kimberly W. Osenbaugh and David Neu 24. Cash Collateral Use and Use, Sale, and Lease of Property in Bankruptcy By Margaret A. Mahoney 25. Preferences and Fraudulent Transfers By Margaret A. Mahoney 26. Executory Contracts and Unexpired Leases in Bankruptcy 693 By Richard F. Broude Table of Contents 695 Study Material Section 363 Sales after Clear Channel By Margaret A. Mahoney ix

4 28. Asset Sales in Bankruptcy: Break-Up Fees, Window Shop and Sales Free and Clear of Leasehold Interests By Josefina Fernandez McEvoy 29. Asset Sales in Bankruptcy: Break-Up Fees, Topping Fees and Sales Free and Clear of Leasehold Interests By Kimberly W. Osenbaugh and David Neu 30. Postpetition Attorneys' Fees to Unsecured Creditors By Margaret A. Mahoney 31. Use of Bankruptcy by Solvent Debtors: What is Good Faith? By Kimberly W. Osenbaugh and David Neu 32. Professional Responsibility Hypothetical Cases By John D. Hastie 33. Retention of Professionals in Bankruptcy Cases: Ethical Issues and Special Considerations 34. Kuney-Overview of the Bankruptcy System-supplemental material By David R. Kuney x

5 ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations March 10-12, 2011 Coral Gables, Florida PROGRAM Thursday, March 10, :00 a.m. Registration and Continental Breakfast 8:55 a.m. Welcome and Announcement ALI-ABA Staff Webcast Segment A 9:00 a.m. Introductory Remarks 9:05 a.m. Analyzing the Default and the Loan Documentation Identifying the cause and extent of the default, potential parties in interest and their objectives, Probable outcomes, and available assets Document assembly, review of the closing documents and related material, conferences with client Personnel, position review, analysis of possible personal liability Third-party exposures, multiple liens, and the effect of tenant financial problems; Analysis of collateral Viability of single purpose entities Affiliates of single purpose entities Effectiveness of the bankruptcy remoteness of the borrowing entity; Analysis of securitized document remedies Liabilities of the parties to the pooling and servicing agreement Reviewing claims against and remedies available to junior lenders Establishing the priorities of multiple tranches Consideration of client objectives, constraints, and relevant legal limitations 10:30 a.m. Networking and Refreshment Break 10:45 a.m. Negotiating and Documenting the Restructure Approaches to restructuring Pre-negotiation agreements and disclaimer letters Holding arrangements during workout negotiations Analyzing the positions, exposures, and potential workout benefits of various parties; Dealing with special servicers Cash flow arrangements Forbearance and moratoriums Liability limitations, releases, and realizations of collateral Future advances Rating agency requirements and approvals Risks of substantive consolidation Use of administrative consolidation Tax considerations Standstill agreements Bankruptcy risks Use of escrows and reserves Environmental concerns Public/private deals how do they differ Issues if the government is involved in the project xi

6 How tax exempt bonds affect a workout Lender liability exposures arising from negotiations Third-party involvement Title insurance considerations Management pending the workout closing Negotiation formats, performance schedules, "drop dead" dates, interim reporting requirements, and access agreements Default notices and acknowledgments Reinstatement agreements Foreclosure agreements and modification agreements asset transfers Recoupment devices Inter-creditor agreements Performance "give-back" and earn-out agreements Subordination agreements Conditional releases from liability Title insurance policies and endorsements Anticipating post-modification bankruptcy issues (bankruptcy-related provisions of workout agreements) Dealing with subordinate liens, related assets, and executory obligations Cash flow provisions Limitation of remedies Payment of legal fees and other workout costs Releases, indemnities, guarantees, and additional collateral Control of rents and receivables and lender dealings with borrower's tenants Third-party claims; payment of employees, franchise fees and taxes Realization under letters of credit Legal and other professional opinions Use of escrows and reserves Lock box and other security devices Post-restructure management Use of workout entities Reporting requirements Management incentive compensation 12:30 p.m. Lunch Break Webcast Segment B 2:00 p.m. Construction Loan Defaults Monitoring a construction loan Troubled situation strategies for borrowers, lenders, contractors, and sureties in for-sale and investment-property projects Protection and assertion of rights under bonds Dealing with contractors, tenants, condominium and home associations, and contract purchasers Strategies in restructuring the loan for unfinished projects, including escrow agreements, out-of-balance provisions, collateral mortgages, and other additional security Contractor and investor involvement in workout joint ventures xii

7 Enforcement of completion guarantees, performance and payment bonds Protective provisions, and procedures for construction loan documentation Mechanic's lien issues Title insurance claims 2:30 p.m. Defaults Involving Insolvent Financial Institutions FIRREA revisited Superpowers of federal agencies The D Oench, Duhme Doctrine 12 U.S.C. 1823(e) Federal holder-in-due-course status 12 U.S.C (b)(2) avoidance of enforcement actions 12 U.S.C (j) avoidance of restraints Repudiation of burdensome contracts Repudiation of real estate contracts Actions against institution affiliated parties Use of pass-through receiverships Determination of claims Risks to attorneys representing the institution and attorneys asserting borrower claims 3:00 p.m. Problems with Foreclosures and Fannie and Freddie Impact on Multifamily Projects, MERS (Mortgage Electronic Registration System), and Related Issues; Mortgage Foreclosure Crisis; Document Problems in Foreclosure; Problems with Broken Condos for Bulk Buyers and Lenders 3:30 p.m. Networking and Refreshment Break 3:45 p.m. Lender and Third-Party Liability Theories of liability Negotiation and litigation strategies Guarantors and the anti-deficiency statutes Waiver of defenses by guarantors Letters of credit Guaranties of payment and of collection Collateralized guaranty agreements Limited guaranties Guarantor defenses 4:15 p.m. Conveyances in Lieu of Enforcement When to use them Negotiating strategies Title considerations and title insurance coverage Settlement agreements Conveyance documents Merger Representations and warranties Releases from liability Lease termination Agreements Transfer of tenant property xiii

8 4:30 p.m. Enforcement of Creditors' Remedies under State Laws; Multistate and Multinational Proceedings Pre-foreclosure rights of mortgagee Mortgagees in possession Relative rights of multiple mortgagees Title insurance policy exclusions and endorsements Economic waste Election of remedies Deficiency judgment proceedings Mezzanine loan defaults Foreclosure of mezzanine loan collateral One-action and similar rules Receiverships Asserting liens and security interests against multistate collateral 4:50 p.m. Tax Impacts of Default and Foreclosure Recognizing income at foreclosure Forgiveness of indebtedness income American Recovery and Reinvestment Act of 2009 How to use the leverage of tax issues and how to avoid tax issues Other tax planning 5:30 p.m. Adjournment for the Day; Reception for Faculty and Registrants Friday, March 11, :30 a.m. Networking Session and Continental Breakfast Webcast Segment C 9:00 a.m. Overview of the Bankruptcy Court System The bankruptcy alternatives Chapters 7 and 11 Voluntary and involuntary cases Partnership cases The role of committees 9:45 a.m. Adequate Protection in the Real Estate Context The automatic stay Use and sale of real estate during a pending case Rental income as cash collateral Debtor-in-possession financing and super priority The under secured creditor and cost of delay Prospect for effective reorganization Single asset real estate Environmental obligations 10:45 a.m. Networking and Refreshment Break 11:00 a.m. Chapter 11 Reorganization Plans Who proposes the plan The plan contents Non-recourse debt; Section 1111(b) elections Impairment of claims xiv

9 Voting and requisite majorities Confirmation standards and cramdown Equitable subordination The absolute priority rule and the new value exception Single asset real estate Discharge of third parties Availability of general partner's assets Post-confirmation proceedings Chapter 11 liquidations 12:30 p.m. Lunch Break Webcast Segment D 2:00 p.m. Preferences and Fraudulent Transfers Sections 547 and 548 of the Bankruptcy Code Uniform Fraudulent Transfers Act Reducing the lender's exposure Title insurance exclusions and endorsements 2:30 p.m. Leases and Other Executory Agreements in Bankruptcy Preservation and transfer of the debtor's leasehold interests Leasehold interests as an asset of the debtor's estate The lessor's need to act promptly and the steps to be taken Effect of rejection by lessor or lessee Limitation on lessor's claim under a rejected lease Assumption and assignment Shopping center provisions Pre-qualification Reciprocal Easements Agreement (REA) rejection issues Enforcement of operating covenants Appeals, stays, and the mootness doctrine Development phase tenant bankruptcies Effect of tenant bankruptcy on project financing and co-tenancy requirements Bankruptcy threats by prime tenants and co-tenants Amendments to lease agreements Threat of sale as a negotiating device Problems associated with the insolvency of a sandwich lessor Rights and risks of a subtenant Transfers of tenant security deposits and trade fixtures Bankruptcy-focused drafting and structuring considerations in negotiating leases Shopping center issues 3:30 p.m. Networking and Refreshment Break 3:45 p.m. Sales of Real Estate in a Bankruptcy Context Auction sales as a reorganization and liquidation device Sales free and clear under Section 363 of the Bankruptcy Code Bidder pre-qualifications Pre-negotiated sales Overbid requirements Specific property problems, broken condominium developments, and burdened retail pads xv

10 Use of stalking horses Allowable break-up fees Negotiating strategies Risks of sale and plan confirmation 4:45 p.m. Bankruptcy Filings by Solvent Debtors Continuing development of the "Good Faith Doctrine" Use of bankruptcy proceedings to avoid pending litigation, unprofitable obligations, burdensome leases, and other financial distress 5:15 p.m. Questions and Answers 5:30 p.m. Adjournment for the Day Saturday, March 12, :30 a.m. Networking Session and Continental Breakfast Webcast Segment E 9:00 a.m. Ethical Concerns Incident to Representing Debtors and Creditors Analysis of ethical issues incident to asset protection planning Other ethical issues relevant to representation of debtors, lenders, and third parties affected by real estate defaults FIRREA liability of institution-related parties Conflicts of interest and other issues in commencement and continuation of representation Ethical issues in foreclosures and filings with the courts how much diligence must the lawyer do? 10:00 a.m. Recent Developments Impact of the Dodd-Frank and other federal legislation The future of CMBS and mezzanine financing The required loan-to-value ratio after the market collapse The impact of regulators on the ability and willingness of a lender to restructure defaulted real estate loans When and how will acquisitions of raw land be financed What can a borrower expect if a real estate loan is subject to management by the Financial Stability Oversight Board Opportunities for acquisition of defaulted real estate projects Opportunities for acquisition of failing financial institutions or their assets 10:45 a.m. Networking and Refreshment Break 11:00 a.m. Recent Developments (Cont d) Traunche warfare between junior and senior creditors What is new in 2011 Cash management for certain projects Special issues for hotels, retail, multifamily, healthcare facilities, retirement communities and shopping centers New and unique bond issue problems and public/private deal issues 11:30 a.m. Questions and Answers 12:30 p.m. Adjournment xvi

11 ALI-ABA Course of Study Commercial Real Estate Defaults, Workouts, and Reorganizations March 10-12, 2011 Coral Gables, Florida PLANNING CHAIRS John D. Hastie, Esquire Phillips Murrah, P.C. Suite West Main Street Norman, OK Thomas F. Kaufman, Esquire Hunton & Williams LLP 1900 K Street NW Washington, DC The Honorable Margaret A. Mahoney U. S. Bankruptcy Judge 201 St. Louis Street Mobile, AL FACULTY Robert Feldman, Esquire Lecturer in Law University of California School of Law P.O. Box Los Angeles, CA Robert G. Gottlieb, Esquire Venable LLP 575 7th Street, NW Washington, DC David R. Kuney, Esquire Sidley Austin LLP 1501 K Street, NW Washington, DC Professor Christopher L Peterson Associate Dean for Academic Affairs and Professor of Law University of Utah, S.J. Quinney College of Law Room S E. Salt Lake City, UT M.J. Pritchett, Esquire Orrick, Herrington & Sutcliffe LLP San Francisco, CA Jason O. Zeigler, Esquire Hunton & Williams LLP Suite K Street NW Washington, DC Please go to for biographical information about this faculty. xvii

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