Presentation by: Lawrence J. Wolk, Esq.- Advanced Real Estate- New York, New York- December 12, 2016 (submitted 11/30/16)

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1 Hot Topics: Opinion Letters in Commercial Mortgage Financing Transactions Two Recent National Reports Provide Guidance for the Experienced Practitioner Presentation by: Lawrence J. Wolk, Esq.- Advanced Real Estate- New York, New York- December 12, 2016 (submitted 11/30/16) INTRODUCTION Opinion Letters have long been an integral component of the commercial mortgage loan transaction. The opinion is customarily delivered by the counsel for the Borrower. While borrower s counsel often contend that it is inappropriate for Borrower s counsel to be required to deliver an opinion addressing such matters as the enforceability of loan documents which have been drafted by the lender s counsel, I will not address what should be, or may be in the future, but will limit this presentation to the current customary practice and state of commercial mortgage financing opinion letter practice today, and will discuss in greater depth, two of the reports I have included in the materials, and how they can be of assistance to the practitioner, and how they provide insight into customary opinion letter practice in REPORTS THAT PROVIDE GUIDANCE Over the years there have been many reports produced by respected national organizations, such as the ABA, ACREL, ACMA and others, addressing the accepted do s and don ts and accepted inclusions and exclusions from mortgage loan financing opinion letters. In 1998, the Association of the Bar of the City of New York and the New York State Bar Association, the sponsor of today s CLE program, issued a Report, which is a fine primer and includes a sample mortgage loan financing opinion that is still a good starting point today. ( 1998 New York Report ) The 1998 New York Report focused on New York specific norms in opinion practice. I was fortunate to be a representative of the NYSBA to the committee that prepared the report. The 1998 New York Report is still a good starting place for a New York practitioner looking for language, a template, or an answer to questions relating to the mortgage financing opinion letter. In 2012, a national task force of lawyers, representing the ABA, ACREL and ACMAupdated the many prior reports on the subject. The 2012 Report was intended to educate, incorporate customary practice, and provide a framework for highlighting issues that often arise in

2 the arena of opinion letters. A similar national task force prepared a supplementary report in 2016.( 2016 Report ). I spent a great deal of time over the last three years as a member of the 2016 Report task force. While the template transaction, and Illustrative form opinion letter in the 2012 Report was based on the paradigm of a transaction in one state where a single Borrower primary counsel represented Borrower and delivered the opinion, the 2016 Report focused on issues that arise in connection with local counsel opinions, an opinion given along with the that of borrower s primary counsel, due usually, to the transaction involving the law of more than one state as a result of the borrower or guarantor being formed, or the real property located, in different states from each other, or different states than that under which lender wishes the loan documents to be governed. The 2012 Report and 2016 Report each contain specific examples of language which can be included in an opinion and while each report is careful to call the opinion form therein an Illustrative Opinion Letter and not a Form Opinion. The Illustrative Opinion Letters include language which can be used, as appropriate, in an opinion letter REPORT The 2012 Report is national in nature. As a result, not all of the issues addressed and customary practices noted are of import to or followed by New York practitioners. Custom and practice, or as referred to in the 2012 Report, customary practice has evolved to be the norm and has been judicially accepted. Customary practice allows the opinion giver to provide information in a variety of ways some of which acceptable alternatives are set forth below. Among other issues, the 2012 Report, provides the following: 1. Lawyers require implied consent to issue an opinion and must, of course, advise the client if the lawyer knows or reasonably should know that issuing the opinion might adversely affect the interests of the client. 2. The Addressee is important, as coupled with a paragraph, customarily located at the end of the opinion letter, it will ordinarily govern who may rely upon the opinion letter. 3. If opinion giver has only a limited role, it should be described within the opinion letter. Special Counsel usually refers to a lawyer addressing zoning, tax or other specific areas of the law, while the label local counsel usually refers to a lawyer who is not the primary counsel for Borrower, but who is providing an opinion addressing some of the menu of matters which lender s counsel expects to be included within the opinion letter or letters it receives at closing. The opinion giver should supplement the use of special or local by setting forth in greater detail the limits of the engagement, involvement and/or due diligence.

3 4. An opinion letter should only list the Transaction Documents which are the subject of the opinion paragraphs. Opinion giver should resist listing reviewed documents in addition to those Transaction Documents which are the subject of the opinion, except where, for example, Transaction Documents, such as a loan agreement or note, which may be governed by the laws of a different state and thus are not opined to, must be reviewed by the opinion giver in order to adequately deliver an opinion relating to those Transaction Documents which are governed by New York law. The 2012 Report strongly recommends and cites as the nor, the listing of all Transaction Documents that are the subject of the opinion letter, whether in the enforceability opinion or elsewhere. 5. When addressing organization documents and other documentation related to authority, there is no need to continually list the original creation documentation. Reference to the latest good standing certificate, using the actual title of the operative document in the State, will usually suffice. Many practitioners list all of the organization documents, but customary practice also allows for a general statement that the opinion giver has reviewed all documents in connection with organization or authorization without specifically listing the documents. 6. There is no need to include federal law in the opinion unless special circumstances require same. 7. Opinion giver is expected to have undertaken such review as is necessary to render the opinion. Language to that effect, while not necessary, is usually included by the opinion giver. If the scope of review is narrower, and only certain documents were reviewed, the opinion giver should include language describing the more limited nature of their review by stating that they have, reviewed only the following documents and have not made any further investigation or inquiry or utilizing similar language to that effect. 8. Certain opinions are based on the knowledge of the opinion giver. It is prudent to define the scope of knowledge. Some opinion givers will use the term actual knowledge and list the names of the lawyers who worked on the specific matter or include a more general reference to knowledge of those lawyers who worked directly on the matter. 9. An opinion giver may not provide an opinion which misleads the recipient but may express a hypothetical such as, with the permission of the recipient, if the loan documents were governed by New York, then.., when such is not the case. Lenders sometimes permit this in order to allow their customer, the borrower, to save money, by not requiring that Borrower retain or obtain an opinion from counsel in a state, the laws of which govern certain aspects of the transaction. 10. Assumptions are considered to be made without investigation. In light of the Dreier affair where a lawyer forged signatures of a New York developer, certain lenders are requiring

4 borrower s counsel to opine as to the genuineness of the signatures of the borrower/guarantor parties. While understandable, that as between borrower and lender, borrower should bear this risk,, an opinion giver who has not actually seen the client sign transaction documents, should never opine as to such genuineness. I have seen hard money lenders request that the borrower and guarantor sign documents, or at least the guaranty, at their office or at the office of their counsel. The 2012 and 2016 Reports each take the position that the issue of the genuineness of signatures is not appropriate for inclusion by borrower counsel in the opinion and that lenders should look elsewhere for comfort. 11. An enforceability opinion is not considered an opinion that each and every provision of the Transaction Documents is enforceable, however the issue of the breadth of the opinion is rendered moot because opinion givers customarily include a number of limitations and assumptions in connection with the enforceability opinion. These include the bankruptcy exception and equitable principles exception. Further, to soften the carve out, opinion givers often will provide statements that certain remedies may be available, under specific circumstance, listing same, or with more general language such as following a material breach of a material provision. Others prefer the ambiguous and subjective practical realization language, which is discouraged by the 2012 Report but which is still favored by certain New York practitioners specifically because of its ambiguity. 12. An opinion giver should specifically state its intention to cover f choice of law or usury in the opinion rather than to rely on whether the enforceability opinion implies that one or both are covered. 13. The no breach or violation opinion is often limited. It is acceptable and customary practice to limit the no violation opinion to payment obligations only or to refer to violations of a list of specific documents or to limit it to material violations of material documents to which borrower is a party. 14. Lenders who want to assure compliance with debt service coverage or other financial covenants should not look to inclusion in the borrower counsel opinion but rather, should seek a certification from a chief financial officer or other appropriate party of borrower/guarantor. 15. The absence of litigation involving borrower or guarantor is not an opinion, but is a fact, based on knowledge. Opinion givers should strongly resist addressing this issue in an opinion letter Report The 2016 Report is also a national report. Not all matters referred to therein are applicable to New York practice. The 2016 Report focuses on local counsel opinions. When a mortgage lender

5 receives an opinion letter, the letter is expected to cover a menu of matters. While the paradigm for the 2012 Report was an opinion from the borrower s primary counsel, the sole counsel for borrower, the paradigm for the 2016 Report was a transaction which required that opinions be delivered from counsel in addition to borrower s primary counsel, or lead counsel [as referred to in the 2016 Report,]. These local counsel opinions, together with the opinion from the borrower s lead counsel, provide lender with the entire menu of opinions expected and appropriate. The 2016 Report provides numerous references throughout, to the 2012 Report and updates, modifies and supplements same. Below I have listed some issues of import to local counsel opinion givers in New York, which are addressed in the 2016 Report: 1. Like the 2012 Report, the 2016 Report addresses customary practice and specifies those opinions which are customary as well as those which are inappropriate to request and unnecessary to provide 2. Local counsel is customarily engaged by lead counsel and often has no contact with Borrower. As a result, local counsel opinions are usually limited to law and do not include opinions based on knowledge. 3. Local counsel should list only those Transaction Documents which are governed in whole or in part by the state law being addressed in the local counsel opinion. 4. New York lawyers are often involved as local counsel in a manner not prevalent in other states. Other local counsel are customarily called upon when either real property is located in, or a transaction party is organized under, the laws of, or doing business in, the State. Because many financial institutions prefer that their documents be governed by New York law, the New York practitioner may be asked to provide an opinion as to New York law in a transaction where the Borrower entities were formed elsewhere and the real property is located elsewhere and where the sole nexus with New York is that, at lender s request, the note, loan agreement and other transaction documents are all governed by the law of New York except for those discrete issues set forth in the mortgage or assignment of leases or other security instruments, involving creation, perfection and remedies under the security instruments, and which are governed by the law of the situs of the property. This requires the New York counsel to make sure to include the appropriate assumptions and acknowledge that lender is relying on other opinions to address the non- New York documentation with respect to enforceability. 5. The local counsel and lead counsel should review the form opinion delivered by lender, or the list of opinions which the lender expects to receive, to determine which are most appropriately provided by lead counsel, which are most appropriately provided by local counsel, [or special tax/bankruptcy or other counsel] and in certain cases, which are inappropriate to request. Counsel should also determine if lender should more appropriately look to a service provider such as a title insurance company, rather than to a legal opinion, for comfort in certain areas.

6 6. Local counsel should set forth within the opinion letter and in detail, the limits of its involvement in the transaction, the purpose of the engagement [eg. solely to deliver this opinion], and the list of transaction documents reviewed. 7. Local counsel is often asked to deliver an opinion before the transaction documents are executed and delivered. It is, therefore, customary for opinion giver to state that it has received execution drafts of the documents, and to assume that they will be executed in the same form, without revision.[ See 2012 and 2016 Reports for specific language] 8. Local counsel usually opines under the laws of a state different than that governing other documents or elements of the transaction. It is, therefore, good practice to indicate that capitalized terms not otherwise defined in the opinion letter shall have the meanings ascribed to them in the [mortgage][deed of trust][loan agreement] as they may have different meanings in different states. 9. Local counsel should include assumptions relating to matters covered in opinions from other counsel or governed by laws of other states, and not addressed in the opinion paragraphs of the opinion letter. 10. Local counsel should review the five core opinions to assure that you have assumed away or covered all: (i)status[existence and good standing],(ii)power, (iii)authorization, (iv)execution and delivery, and (v) enforceability. 11. Local counsel is often asked to opine that a court sitting in the State applying the conflict laws of the State [would][should]give effect to the choice of law provisions set forth in par of the [mortgage][loan agreement]. As noted in the 2012 Report and the 2016 Report, and quite possibly of greater import in a local counsel opinion, the issues of usury and choice of laws should be either specifically included or specifically excluded from the opinion. 12. The 2016 Report addresses the issues of approvals required, form of documents, and responding for requests to address creation and perfection of liens, emphasizing that the opinion giver should limit the opinion to the document being in form sufficient to permit, recordation etc. The 2016 Report urges the local counsel to provide language making it clear that local laws are not covered, and it is not to be held responsible if a recording office rejects a document for same.

7 Conclusion While both the 2012 Report and the 2016 are tough reads in one sitting, but they each serve as a valuable resource providing guidance to an opinion giver seeking appropriate language or the customary practice to resolve a dispute with lender counsel or otherwise. The three reports l I have attached, provide a wealth of information, and taken together, provide guidance and assistance to the opinion giver in a commercial mortgage loan transaction with respect to almost any issue which may arise in Lawrence J. Wolk 12/12/16