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Presentation 1

Legal Discussion: Deed in Lieu of ForeclosureEric Johnson

Holme Roberts & Owen LLP

Case Study: Environmentally Distressed Development Site

Kenneth HoReal Estate Generation, LLC

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Legal Issues Concerning

Deeds in Lieu of Foreclosure

Eric E. Johnson

Holme Roberts & Owen LLP

1700 Lincoln Street, Suite 4100

Denver, CO 80203

eric.johnson@hro.com

Tel. 303-866-0657

4

When to Seek a Deed in Lieu Agreement

Debtor is cooperative and willing to negotiate an agreement.

Debtor is not attached (economically, physically or emotionally) to the property.

It is vital to remove the property from a potentially complicated bankruptcy case.

Debtor clearly has no equity in the property, and lender has a reliable appraisal establishing no equity.

Title to the property is relatively clean (i.e., no mechanic’s liens, senior liens, tax liens, etc.).

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When is a Deed in Lieu Problematic?

Opposite of earlier factors.

Uncertainty regarding value creates possibility that Debtor might have significant equity in the property.

Prior liens on the property - - i.e. Lender is stepping into Borrower’s shoes and must deal with difficult senior or priority (mechanics or tax) liens.

Automatic landowner liability, as under environmental laws.

Difficult land-use or other regulatory restrictions that could create liability or impose constraints on ability to use, sell or develop land.

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Components of a Deed in Lieu Agreement

Recital of history and defaults.

Conveyance of deed to Lender - - usually in escrow, pending expiration of cure period.

Global release of all claims and defenses against Lender.

Non-merger language, so Lender retains right to foreclose deed of trust and wipe out troublesome junior liens.

Non-release of Borrower, to permit foreclosure - - may require interim covenant not to sue Borrower, and global release with delayed effectiveness.

Allow Borrower short cure period, so agreement is not a naked forfeiture of Borrower’s statutory cure rights.

Escrow agreements should provide for delivery of deed based on unilateral notice by Lender; Borrower should have no rights in land as of cure date, to prevent land from staying in Borrower’s bankruptcy estate.

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Fraudulent Transfer Risks

Fraudulent Transfers: Did the Debtor Receive Reasonably Equivalent Value in Exchange for Transferring Assets?

Two types of fraudulent transfers. Intentional Fraud: intent to hinder, delay or defraud creditors.

Constructive fraud: debtor’s insolvency or undercapitalization plus lack of reasonably equivalent value in exchange.

– Depends entirely on valuation evidence of: (a) Debtor’s solvency; (b) property transferred; (c) property received in exchange.

Remedy is to nullify (“avoid”) the transfer and make the transferee disgorge or pay twice.

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Fraudulent Transfer Risks

What is Insolvency? Balance Sheet Test.

Fair value of all property rights vs. liabilities at a snapshot in time.

Fair value is not GAAP book value. Includes fair value of contingent liabilities (like

guaranties or pending litigation).

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Fraudulent Transfer Risks

“Reasonably Equivalent Value” is Always the Key in Distressed Assets Transactions

Borrower is usually insolvent, so other fraudulent transfer test is all-important: is Borrower receiving “reasonably equivalent value” for the transfer in terms of debt relief?

An asset isn’t an “asset” capable of being fraudulently transferred, to the extent it’s subject to a valid lien.

Does the Borrower have value in the property over and above Lender’s lien (and other liens)?

Does Lender have a reliable appraisal to show absence of asset value for Borrower?

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Case Study

Environmentally Distressed Development Site

Kenneth HoREGen, LLC

1125 17th Street, Suite 2500Denver, CO 80202kho@regenllc.comTel. 303-295-1732

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Background

Large, formerly industrial site (brownfield) purchased for redevelopment.

Non-recourse loans taken out for development activities (remediation, demolition) by strong sponsor with entitlements, public finance package and buyer under contract

2Q 2006 Appraisal based on contract and public finance showed LTV of 50%

Remediation plan in place with regulators and supposedly funded

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BackgroundCommensurate with capital markets distress:

Buyer dropped out;

Developer unable to provide additional funding for remediation or development

Demolition complete

Approximately $500,000 of remediation remains, chlorinated solvents in soil and groundwater

4Q 2009 appraisals show value of property is ~50% of principal amount. Significant investment (~$20 million) required to complete development

Borrower offered Deed-in-Lieu

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Outstanding Issues

Property taxes

Access & safety

Continued deterioration/ devaluation of asset

Environmental liability

Chain of title

Insurance coverage

Offsite concerns – environmental management

Active remediation vs. ongoing monitoring

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At the end of the day…

Preserve entitlements

Met District

Public Financing – asset or liability

Development Agreement(s)

Short Sale

All-Cash for 50% of current appraised value? (~25% of Principal value)

Joint Venture?

Zombie asset remains in title with borrower, but decision-making/funding by bank

Presentation 2

Legal Discussion: Receivership IssuesRobert A. Holmes

Holme Roberts & Owen LLP

Case Study: Receivership of a Condo/Hotel Resort Project

Ferd BelzReal Estate Generation, LLC

Legal DiscussionRegarding Receivership

Robert A. Holmes

Holme Roberts & Owen LLP

1700 Lincoln Street, Suite 4100

Denver, CO 80203

robert.holmes@hro.com

Tel. 303-866-0234

16

Conditions that would indicate a receiver may be appropriate♦ income producing properties

♦ protection of the property

♦ loss of entitlements

♦ other potential acts or failures to act which may cause loss of value or damage to the property

♦ relationship with Borrower

Why get a receiver?

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♦ If a receiver is justified, generally the earlier the decision is made and action taken the better.

♦ Does a foreclosure or anything else need to happen before a receiver can be appointed?

♦ In general, if justification for appointing a receiver exists, that can be done quickly and without notice to the borrower. courts will look to certain language in the deed of trust the documentation is fairly standard and easy to draft

and file with the court the possible changing attitudes of the courts regarding

ex parte appointment some possible negative aspects of electronic filing

When should the receiver be appointed and how does that happen?

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♦ The costs of appointment.

♦ Posting of a bond.

♦ Payments to the receiver.

♦ Funding additional construction/development if those activities cannot be paid from income from the property.

♦ Other legal or related actions arising from the receivership or steps which must be taken to protect the property.

What are the costs associated with a receivership?

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♦ Control of the property.♦ Immediate (usually) control of the income and

assets.♦ Stabilization with tenants.♦ Preservation of rights and other interests

effecting the property.♦ Insulation from claims of lender liability.♦ General ability to maintain, protect and

preserve the property.♦ Raising additional funds through receiver’s

certificates or otherwise.♦ Ability to sell the asset

Benefits of a receiver

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How to select an appropriate receiver

♦ Experience♦ Fit the job♦ Economics

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Case Study

Receivership of a Condo/HotelResort Project

Ferd BelzREGen, LLC

1125 17th Street, Suite 2500Denver, CO 80202fbelz@regenllc.comTel. 303-295-1730

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Background 24 Unit Condo-Hotel

48 hotel units with lock-offs

Property has full luxury amenities

Ski-in, ski-out location

Lender and Developer – AZ based Constr. Loan 75% L-to-C, mezz to 95% L-to-C,

Add Sub debt from related parties for cost overruns

Developer managed hotel

Only 4 units sold prior to default

Construction defects, mechanics liens and unpaid vendors on property

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Background/Issues

AZ receiver put in, CO hotel advisor hired

Decision made to NOT replace hotel manager, due to:

- small property and high cost

- unique aspect of resort

- liquor license

New marketing team hired

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Next Steps/Issues

Mechanics Liens negotiated, “necessary” vendors paid

Mezzanine Lender – private investor

- Buys 1st at 70c on dollar

- Pays off mechanics lienholders

- Takes property with deed in lieu

Brings in CO hotel advisor as receiver

Keeps marketing team

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Next Steps/Issues

To foreclose or not

- Effect on sales effort and further taint

- Add sub debt is with related parties

Sue on construction defects

- Effect on sales effort and further taint

- Contractor is a “close friend”

- Impact on potential future litigation

Hotel performance improving

Marketing team success – 6 more units sold

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Next Steps/Issues

Current owner exit strategy

- Sell remaining units

- Turn over property to HOA

Outstanding risks

- Sales market remains challenging

- Hotel performance uncertain

- Potential future litigation with HOA on construction defects

Presentation 3

Legal Discussion: Foreclosure IssuesRobert A. Holmes

Holme Roberts & Owen LLP

Case Study: Bank Foreclosure on a Partially Completed Development Project

Rick WellsReal Estate Generation, LLC

Legal DiscussionRegarding Foreclosure

Robert A. Holmes

Holme Roberts & Owen LLP

1700 Lincoln Street, Suite 4100

Denver, CO 80203

robert.holmes@hro.com

Tel. 303-866-0234

29

♦ Chances of a restructure or deed in lieu?

♦ Is there equity or a chance there will be equity?

♦ Is there personal liability of borrower or guarantor?

♦ Are there a lot of unknowns or potential risks in taking title to the property?

♦ Are there junior or senior liens?

♦ Will additional capital have any possible benefits?

♦ Judicial versus non-judicial.

Factors to be considered in deciding whether or not to foreclose.

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♦ Leads to control and ownership by the lender to facilitate disposition.

♦ Extinguishes junior liens.

♦ Possible negative (or positive?) stigma.

♦ The time involved and what happens in the interim?

♦ Certainty of the process and difficult to derail.

Positive and negative effects of a foreclosure.

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♦ The process is form driven and the costs are fairly easily determined.

♦ Non-judicial foreclosure takes approximately five months versus a potentially indeterminate time on a judicial foreclosure.

The mechanics and costs

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♦ Junior and senior liens.

♦ Mechanics liens.

♦ Marketing the asset during the foreclosure process.

♦ Discussions regarding whose interest to distinguish during the foreclosure.

♦ Possible bankruptcy.

Issues to consider

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Case Study

Bank Foreclosure on a Partially Completed Development Project

Rick WellsREGen, LLC

1125 17th Street, Suite 2500Denver, CO 80202

rwells@regenllc.comTel. 303-295-1731

BackgroundBorrower owned 6 acres

of land with a plan to build 100+ townhomes in multiple buildings.

One building (8 units) is completed and 2 units sold; 3 bldgs. partially complete.

4 acres undeveloped with some good infrastructure.

Bank foreclosed on land and buildings.

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Location, location, location

Located next to a large new rental project; a hotel; office buildings; a small work/live condominium project; a 6,500 seat events center; a large public parking garage; and some new local retail.

New pedestrian bridge across Hiway 36 to connect the Project to an existing RTD bus station and a “some day” commuter rail station.

Good location, bad timing?

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Bank Solution

Solution – rent finished units and sell the rest quick.

Bank incurs ongoing maintenance headaches and costs of ownership and selling.

Bank owns a deteriorating asset (liability?) in the unfinished buildings.

Bank becomes the “big pockets” owner in chain of title on buildings that are ripe for builder defect lawsuits.

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Longer Term/Higher Value Solution

Create an LLC with a qualified real estate developer/investor (cash) as the Manager and Bank (buildings) as a member.

New developer completes the 3 buildings as a rental project, manages the rental of units, in exchange for first cash flow and preferred interest.

Exit strategy - Sell the rental property to the developer/investor or a third party at a higher value than “abandoned buildings”.

Bank could hold or sell the remaining vacant land with a higher value due to adjacent improvements.

Advantages and Issues Avoids negative cash flow or

new investment by bank.

Increases overall value achieved by bank.

Mitigates litigation risk from bank ownership.

Bank holds buildings and land longer to allow time for successful implementation.

Bank must find a developer to participate.

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Presentation 4

Legal Discussion: Bankruptcy IssuesEric Johnson

Holme Roberts & Owen LLP

Case Study: Government Lease BuildingHal Hultquist

American Property Solutions

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General Bankruptcy Considerations Affecting Distressed Real Estate

Eric E. Johnson

Holme Roberts & Owen LLP

1700 Lincoln Street, Suite 4100

Denver, CO 80203

eric.johnson@hro.com

Tel. 303-866-0657

42

Fundamental Bankruptcy Principles

Mandatory collective process

Encompasses all claims against the debtor (accelerates all debts).

Encompasses all assets of the debtor (the "Estate").

No creditor may opt-out of the proceedings.

Automatic stay over all actions against the debtor or its property.

Everything is valued at the date debtor files for bankruptcy.

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Fundamental Bankruptcy Principles

Cash Collateral Debtor needs cash from rents to operate.

Secured creditor, with a lien on rents, needs to prevent the debtor from squandering cash.

Debtor cannot use cash collateral unless the secured creditor consents, or is adequately protected with a substitute or additional lien.

In Colorado, a debtor is automatically permitted to use rents to preserve property, as a receiver would.

Usually complex cash collateral agreements (like credit agreements) with detailed budgets, monitoring and enforcement provisions.

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Fundamental Bankruptcy Principles

Relief from stay Bankruptcy depends upon preventing creditors from opting-out of the

process by seizing and selling their collateral. All actions against debtor or its property are automatically stayed. The bankruptcy court may grant relief from the automatic stay if a

creditor can prove:• Creditor’s interest in property is not adequately protected; or

• Debtor has no equity in the collateral and the collateral is not necessary to the debtor’s effective reorganization.

“Single Asset Real Estate” bankruptcy Creditor automatically gets relief from stay 90 days after bankruptcy

petition unless:

• Debtor has filed a plan of reorganization that has a reasonable chance of being confirmed; or

• Debtor is paying monthly interest, at the non-default rate, on the value of the creditor’s interest in the real estate (lower of real estate value or secured claim).

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Fundamental Bankruptcy Principles

Asset Sales: the Hottest Thing in Bankruptcy Property subject to a lien can be sold “free and clear” of liens,

claims and interest, with the lien transferred to proceeds.

Many bankruptcies are filed simply to “launder” assets to a purchaser, free from other claims.

Existing secured creditor wants to “credit bid” its debt.

Controversies over:

• Break-up fees

• Provisions to chill competitive bidding

Recent cases challenge ability to credit bid and ability to sell “free and clear” of junior liens.

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Effect on Guarantors

No automatic stay unless you file for bankruptcy.

Guarantors are still liable and may be collected against.

Lenders in bankruptcy cases should keep preserving and reserving rights against guarantors.

Many bankruptcy plans try to discharge guarantors - - watch out!

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Benefits of Bankruptcy

Provides orderly, court-supervised process for administering or liquidating debtor’s business.

Lots of reporting requirements for debtor and vehicles for getting access to debtor’s financial records.

Cash collateral is protected and monitored.

“Free and clear” sale can maximize sale price for collateral.

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Costs of Bankruptcy

Generally an expensive, time-consuming and debtor-friendly forum.

Automatic stay prevents creditors from foreclosing on collateral until debtor exhausts alternatives.

Creditor loses control over the process, which is subject to ultimate control by Bankruptcy Judge, creating uncertainty.

Multi-party proceeding, where all constituencies are represented by counsel and entitled to notice; increases costs, delay and extortion through protracted litigation proceedings.

Bankruptcy sales require a public auction where initial bidder’s sale terms are widely-publicized and subject to overbids.

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When to File for Bankruptcy

When there is no reasonable alternative to protect assets or equity.

When you have reasonable confidence that you can control, or at least predict, the outcome.

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Case Study

Government Lease Building

Hal Hultquist

American Property Solutions

1610 Wynkoop Street, Suite 450Denver, CO 80202

hhultquist@apropertysolutions.com

Tel. 303-296-8500

52

Background

GSA project constructed in remote Colorado location subject to 20-year lease.

Construction loan with local community bank that was moved to another bank when loan officer changed banks mid-project.

Project was constructed under a Gross Maximum Price (GMP) construction contract with general contractor.

Project was completed October 1, 2009.

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Background

General contractor drew 100% of construction loan proceeds totaling $2.6 million.

After completion and issuance of C of O, developer received in excess of $1 million in mechanics liens and an additional $300,000 in claims from subcontractors who failed to meet lien filing deadline.

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Outstanding IssuesMechanic Liens

Developer signed off on draw requests with conditional lien releases from general contractor.

Both lenders failed to require conditional lien releases from the subcontractors pursuant to the terms of the construction Deed of Trust with developer.

Lender is currently in 26th position on title.

Lien holders consolidate lawsuit naming 1st lender only

Lien counsel for developer questions validity of liens based on incorrect filing naming 1st lender.

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Outstanding Issues

If Liens are validated by court would leave construction lender in 26th position behind subcontractors.

If liens are invalidated by court provides platform for aggressive negotiations by developer.

Lender Position Lender claims no responsibility for not obtaining conditional

lien releases from subcontractors pursuant to construction Deed of Trust.

Lender unwilling to take deed in lieu of foreclosure. Lender took assignment on rents allowed in agreements. Collect on personal guarantees disregarding equity.

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Outstanding Issues

Developer Position Developer believes lender at fault for not obtaining lien

releases from subcontractors.

Developer trying to protect $800,000 in equity based on recent appraisal.

Developer requires part of rent proceeds for operations and warranties.

Developer has asked lender for 1 year extension on loan.

Developer feels it can negotiate acceptable compromises on mechanic’s lien amounts once decision is made on lien litigation.

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Possible Outcomes

Developer sells the property and pays off pre-negotiated amounts to lien holders, lender, and salvages some return for developer.

Developer files Chapter 11 Bankruptcy to protect single asset entity and creates leverage for workout with lien holders and lender resulting in an approved plan that nets some return to developer upon sale of the property.

Developer allows lender to foreclose.

Developer litigates against lender for breach of fiduciary responsibility.

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