commercial real estate loan guaranty enforcement

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

Commercial Real Estate Loan Commercial Real Estate Loan Guaranty EnforcementMaximizing Lender Recovery Upon Borrower Default

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, JANUARY 17, 2012

Today s faculty features:

Henry P. Lorber, Managing Director, Hays Financial Consulting, Atlanta

Stephen D. Peterson, Partner, McGuireWoods, Atlanta

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

Kevin Watters, The Watters Law Firm, Atlanta

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Real Estate Finance:Finance:

“It’s Not Over Till It’s Over” – Yogi Berra 1973

Henry P. Lorber

hlorber@haysconsulting.net

Annual maturities ($billion) in CMBS, banks and life companiesp

YearCMBS –

Fixed Rate

CMBS Floating

Rate

Insurance Company

Bank/Thrift*

Annual Totals

2012 57.6 17.7 26.1 236.2 337.6

2013 40.9 0.7 24.8 264.6 331.0

2014 54.2 20.6 74.8

2015 104.5 25.7 130.2

2016 133.9 27.3 161.2

2017 148.2 21.4 169.6

2018 6.1 16.3 22.4

Total ($bn) 545.4 18.4 162.2 500.8 1227

* Maturity timing is estimated

65% Interest Only

WWW.HAYSCONSULTING.NET

Source: Deutsche Bank, Intex, Trepp Mortgage Bankers Association, Federal Reserve Maturity timing is estimated

6

Estimated maturity profile of commercial mortgages in CMBS, Banks and Life Companies g g , p

$350

CMBS - Fixed Rate CMBS - Floating Rate Insurance Company Bank/Thrift

$250

$300

$350

Bill

ions

)

$150

$200

al M

atur

ities

($

$50

$100Ann

ua

$0

2011 2012 2013 2014 2015 2016 2017 2018

Source: Deutsche Bank, Intex, Trepp Mortgage Bankers Association, Federal Reserve

WWW.HAYSCONSULTING.NET 7

Maturity profile of floating rate CMBS loans

Floating Rate Loans

$

$16

$18

$20

n)

$8

$10

$12

$14

ring

Loan

s ($

bn

$2

$4

$6

$8

Mat

u

$0

$2

2011 2012 2013

WWW.HAYSCONSULTING.NET

Source: Deutsche Bank, Intex, Trepp

8

Short term fixed rate CMBS loans maturing through 2013

Amortizing Full IO Partial IO

$25

$30

ns ($

bn)

$15

$20

Mat

urin

g Lo

an

$5

$10

Bala

nce

of

$0

2011 2012 2013

WWW.HAYSCONSULTING.NET

Source: Deutsche Bank, Intex, Trepp

9

2007 Fixed‐Rate Vintage Five‐Year Loans Maturing in 2012g

2007 Fixed‐Rate Vintage Five‐Year Loans Maturing in 2012

Current Balance ($)Percentage of loans with 70% LTV or greater

Percentage of loans with 80% LTV or greaterCurrent Balance ($) LTV or greater LTV or greater

Office 5,806,134,871  69.47% 60.75%

Multifamily 2,014,539,269  66.63% 46.60%

Lodging 1,746,467,888  58.01% 47.77%

Retail 1,480,815,776  90.97% 81.30%

Industrial 568,066,576  53.38% 37.03%

Subtotal 11 616 024 380 69 21% 57 81%Subtotal 11,616,024,380  69.21% 57.81%

Mixed Use 1,097,305,914  20.34% 14.91%

Other 245,924,053  13.83% 7.73%

Manufactured Housing 174,256,668  45.21% 22.60%

Self‐Storage 132,268,637  48.65% 37.55%

Health Care 72,442,749  0.00% 0.00%

Subtotal 1,722,198,021  23.24% 15.77%

WWW.HAYSCONSULTING.NET

Totals 15,060,420,422 63.27% 52.38%

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CMBS Delinquency Rates (30 Days +) by IndustryIndustry

% 30 D% 30 Days +

Property Type 12/31/11 9/30/2011                   6/30/2011 12/31/2010

INDUSTRIAL 12 03% 11 38% 11 68% 8 97%INDUSTRIAL 12.03% 11.38% 11.68% 8.97%

LODGING 12.2% 13.3% 13.87% 14.31%

UL I A ILY 1 % 16 96% 16 48% 16 48%MULTI‐FAMILY 15.57% 16.96% 16.48% 16.48%

OFFICE 8.97% 8.29% 7.35% 6.93%

RETAIL 7.85% 7.62% 7.82% 7.86%

WWW.HAYSCONSULTING.NET 11

Third Quarter 2011 North American CMBS Ratings ActionsRatings Actions

Third Quarter 2011 North American CMBS Ratings Actions

Upgrades Downgrades Ratings lowered to 'D ‘Percentage of ratings lowered to 'D '

1Q 2007 141 29 6 20.69%2Q 2007 224 31 5 16.13%3Q 2007 183 18 1 5.56%4Q 2007 149 52 1 1.92%1Q 2008 93 54 7 12.96%2Q 2008 37 216 5 2 31%2Q 2008 37 216 5 2.31%3Q 2008 64 598 7 1.17%4Q 2008 80 283 8 2.83%1Q 2009 18 384 46 11.98%2Q 2009 2 635 44 6.93%3Q 2009 12 1471 71 4 83%3Q 2009 12 1471 71 4.83%4Q 2009 22 1497 73 4.88%1Q 2010 0 1036 119 11.49%2Q 2010 26 1008 208 20.63%3Q 2010 35 559 126 22.54%YTD 2010 61 2603 453 17 40%YTD 2010 61 2603 453 17.40%4Q 2010 59 994 460 46.28%1Q 2011 36 687 307 44.69%2Q 2011 9 726 259 35.67%3Q 2011 12 684 256 37.43%YTD 2011 57 2097 822 39 20%

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YTD 2011 57 2097 822 39.20%

12

Why Special Servicers Look so Tired?

WWW.HAYSCONSULTING.NET

Source: Trepp LLC The number of loans in special servicing for February 2011 totals 4,783.

13

CMBS Delinquency Rates (30 Days +)

CMBS Delinquency Rates (30 Days +)

9.7

9.8

9.9

Month % 30+

D 11 9 58%

9.4

9.5

9.6

CMBS D li R t

Dec‐11 9.58%

Nov‐11 9.51%

Oct‐11 9.77%

A 11 9 56%

9.1

9.2

9.3CMBS Delinquency RatesAug‐11 9.56%

May‐11 9.37%

Dec‐10 9.20%

8.9

9

WWW.HAYSCONSULTING.NET 14

The Truth about the GSEs?Fannie Mae & Freddie Mac (60+ days)

0.80%

1.00%

0.80%

1.00%

0.40%

0.60%

0.40%

0.60%

0.00%

0.20%

0.00%

0.20%

WWW.HAYSCONSULTING.NET 15

CMBS + BANKS

5.00%

9.00%10.00%

2.00%

3.00%

4.00%

4.00%5.00%6.00%7.00%8.00%

0.00%

1.00%

2.00%

0.00%1.00%2.00%3.00%4.00%

WWW.HAYSCONSULTING.NET 16

Contact Us

Hays Financial Consulting, LLCProfessional Real Estate Receivers

Henry P. LorberDirector- Real Estate Practice

E-mail:hlorber@haysconsulting.net

Phone:Phone: (404) 926-0056

Address:Hays Financial Consulting LLCHays Financial Consulting, LLC Atlanta Financial Center3343 Peachtree RoadSuite 200

G

WWW.HAYSCONSULTING.NET

Atlanta, GA 30326-1420

NON-RECOURSE CARVE OUT GUARANTIES

Presented by:Stephen D. Peterson, Partner

www mcguirewoods com

CONFIDENTIAL18

www.mcguirewoods.com

“N R ” i Mi“Non-Recourse” is Misnomer

• More appropriately called “limited recourse.”• Educate your borrower clients

CONFIDENTIAL19

Types of Loans in Which Non-RecourseTypes of Loans in Which Non Recourse Carve Outs Appear• Any Non-Recourse Loan• Often CMBS or Life Company Loans

CONFIDENTIAL20

T G l C iTwo General Categories

• Actual Loss

• Full Liability, or “Springing Recourse”

CONFIDENTIAL21

Examples of Actual Loss Carve OutsExamples of Actual Loss Carve Outs

• Fraud or material misrepresentation• Environmental Indemnity• Waste• Misapplication of insurance proceedspp p• Misapplication of gross revenues• Non-delivery of security deposits

CONFIDENTIAL22

y y p

• Failure to pay taxes (try to negotiate for limitation• Failure to pay taxes (try to negotiate for limitation to failure to apply Net Operating Income to taxes).

CONFIDENTIAL23

l f ll C OExamples of Full Recourse Carve Outs

• Filing for Bankruptcy• Acquiescing in or joining in an involuntary

petition for bankruptcy• Subordinate financing without lender consent• Transfer without consent (can take many forms)• Breach of Single Purpose Entity Covenants

CONFIDENTIAL24

R l T hReal Teeth

• 15 reported challenges to limited recourse carve-outs, all failed

• Extended Stay America bankruptcy resulted in $100 million judgment against non-recourse carve

t tout guarantor

CONFIDENTIAL25

Separateness and Non-RecourseSeparateness and Non Recourse Guaranties Put to the Test - GGP• Bankruptcy filed April 16, 2009• Approximately 80 SPE entities included in

bankruptcy• Non-Recourse Guarantors Filed for Bankruptcy• Bad faith arguments rejected

CONFIDENTIAL26

OOutcome

• Bankruptcy Court asserted jurisdiction to modify loans

• Plan confirmed December 15, 2009• Maturity Dates Extended• Interest Rates Adjusted

CONFIDENTIAL27

Wh ’ N i h CMBS 2 0?What’s New with CMBS 2.0?

• Non-Interference Covenants• Tailored carve outs

CONFIDENTIAL28

N I f C ONon-Interference Carve Out

• Lender’s seeking to take opposition to judicial foreclosure out of debtor’s arsenal

• Can be full recourse

CONFIDENTIAL29

T il d C OTailored Carve Outs

• Specific obligations to tenants like tenant improvements

• Non-payment of ground lease rent

CONFIDENTIAL30

Pi f ll f M i BPitfalls for Mezzanine Borrowers

• New owners are typically not guarantors• Breach of recourse carve out results in liability to

“old” guarantor

CONFIDENTIAL31

THE ENDTHE ENDStephen D. Peterson

404 443 5719

Business DepartmentCapital Markets | Energy & Utilities | Health Care | International | Land Use & Environmental

404.443.5719speterson@mcguirewoods.com

Cap ta a ets | e gy & Ut t es | ea t Ca e | te at o a | a d Use & o e taMergers & Acquisitions, Securities & Corporate Services | Real Estate Transactions | Tax & Employee Benefits | Technology & Business

Litigation DepartmentAntitrust & Trade Regulation | Business & Securities Litigation | Complex Commercial Litigation | Financial Services Litigation | Government Investigations

IP Litigation/Patents | Labor & Employment | Product & Consumer Litigation | Restructuring & Insolvency | Toxic Torts & Environmental Litigation

ATLANTA • BALTIMORE • CHARLOTTE • CHARLOTTESVILLE • CHICAGO • JACKSONVILLE • LOS ANGELESNEW YORK • NORFOLK • PITTSBURGH • RALEIGH • RICHMOND • TYSONS CORNER • WASHINGTON, D.C. • WILMINGTON

ALMATY, KAZAKHSTAN | BRUSSELS, BELGIUM | LONDON, UNITED KINGDOM

CONFIDENTIAL32

www.mcguirewoods.com

2009 McGuireWoods LLP

PRESENTATION TITLE

Lenders’ Pursuit of Commercial Loan Borrowers and Guarantors

Susan TarnowerKilpatrick Townsend and Stockton LLP

214 North Tryon StreetSuite 2500

Charlotte, NC 28202

33

PRESENTATION TITLE

Review of Examples of Commercial Loan Guarantees

Please print and follow the PDF handout “Tarnower Handout – Guaranty Enforcement ”Please print and follow the PDF handout,  Tarnower Handout – Guaranty Enforcement,  during this portion of the presentation. The handout is accessible under the “Handouts” tab in the “Conference Materials” section on the left panel of your screen and also at the following link: http://www.straffordpub.com/products/commercial‐real‐estate‐

P d b

loan‐guaranty‐enforcement‐2012‐01‐17

Presented by:Susan C. Tarnower

What do lenders analyze?

• Actions• Attitude• AssetsAssets

35

Actions Do’s:

• Advance warning• Professional Demeanor and

Presentation• Open Books and Records• Realistic• Realistic

36

Don’ts:

• Fail to communicate• Arbitrarily stop or reduce payments• Fail to pay taxes insuranceFail to pay taxes, insurance• Fail to advise of material changes

37

Attitude

• Who is in default?• Who is your spokesperson?• Where are you spending your money?Where are you spending your money?

38

Assets

• Regular financial records of borrower/ guarantor

• Books and records of entityy• Tax records• Credit checks• Credit checks• Collateral

39

Liability Triggers

What to do:• Read the fine print.• Read all the loan documentsRead all the loan documents.

40

Where to look:

Deed to Secure Debt• Insurance• LeasesLeases• Transfers

F il t P id Fi i l St t t• Failure to Provide Financial Statements• SPE provisions

41

Cash Management Agreement

• Springing agreement• Cash sweep changes

42

Other Loan Documents

• Loan Agreement• Post closing Agreement• Post-closing Agreement• Reserves/escrows• Assignment of Leases and Rents

43

Recourse or Nonrecourse

• Full recourse• True nonrecourse• “Bad boy” carve-outs

44

Full Recourse

• Payment guaranty• Performance guarantyg y

45

True Nonrecourse

• Limited to claims against the property• Limited to losses incurred

46

“Bad boy” carve outs/springing recourse

• Conduit lending• Partial recourse for losses or damages g

actually incurred• Full recourse loan for certain actionsFull recourse loan for certain actions

47

Triggers:

• Fraud• Misapplication of funds• Unauthorized transfers• Bankruptcy filing• Bankruptcy filing• Others

48

Susan TarnowerKilpatrick Townsend and Stockton LLP

704.338.5008starnower@kilpatricktownsend.com

49

Emerging Trends and Legal Developments

Presented by:Kevin C. Watters

Th W tt L Fi LLCThe Watters Law Firm, LLCwww.watters-law.com

50

Non-Recourse GuarantiesNon Recourse Guaranties

T t d i i i di t th f tTwo recent decisions may indicate the future direction of the enforcement of non-recourse

t i icarve-out provisions

51

CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB Rental I, LLC –980 A.2d 1 (N.J. Super. , ( p2009).

• Loan documents and guaranties containedLoan documents and guaranties contained carve out provision requiring lender approval of subordinate financingpp g

• Borrower secured subordinate financing without lender approvalpp

• Borrower paid off subordinate financing, but defaulted on primary loan 18 months p ylater

52

CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB Rental I, LLC –980 A.2d 1 (N.J. Super. , ( p2009).

• Borrower triggered non-recourse carve outBorrower triggered non recourse carve out provision by failing to obtain Lender approval of subordinate financingapproval of subordinate financing

• Did not matter that the Lender did not suffer damages as a result of thesuffer damages as a result of the subordinate debt

53

CSFB 2001-CP-4 Princeton Park Corporate Center, LLC v. SB Rental I, LLC –980 A.2d 1 (N.J. Super. , ( p2009).

“Having freely and knowingly negotiated forHaving freely and knowingly negotiated forthe benefit of avoiding recourse liabilitygenerally, and agreeing to the burden of fullg y g grecourse liability in certain specifiedcircumstances, defendants may not now

th f th i b i ”escape the consequences of their bargain.”

54

111 Debt Acquisition LLC v. Six Ventures, LTD, 2009 U S Di t LEXIS 11851 (S D OH 2009)U.S. Dist. LEXIS 11851 (S.D. OH 2009)

• Borrower filed bankruptcy in violation ofBorrower filed bankruptcy in violation of non-recourse carve out clause

• Bankruptcy filing was subsequently• Bankruptcy filing was subsequently dismissedC t f d fili tit t d i l ti f• Court found filing constituted violation of “Springing Recourse Event”

55

111 Debt Acquisition LLC v. Six Ventures, LTD, 2009 U S Di t LEXIS 11851 (S D OH 2009)U.S. Dist. LEXIS 11851 (S.D. OH 2009)

• One of the owner-guarantors argued heOne of the owner guarantors argued he did not violate the carve-out provision, since he did not consent to the bankruptcysince he did not consent to the bankruptcy filing

• Court found guarantor could be held liable• Court found guarantor could be held liable even though he did not approve of bankruptcy filing which triggered thebankruptcy filing which triggered the springing recourse event

56

111 Debt Acquisition LLC v. Six Ventures, LTD, 2011 U.S. App. LEXIS 2464, 2011 FED App. 83N (6th Cir., pp , pp ( ,Feb. 7, 2011)

• Sixth Circuit upholds District Court rulingSixth Circuit upholds District Court ruling.

57

Other Decisions Finding Non-Recourse C O t P i i E f blCarve-Out Provisions Enforceable

• Blue Hills Office Park LLC v JP MorganBlue Hills Office Park, LLC v. JP Morgan, 477 F. Supp. 2d 366 (D. Mass. 2007) (transfer of mortgaged property without(transfer of mortgaged property without lender approval)

• LaSalle v Mobile 367 F Supp 2d 1022• LaSalle v. Mobile, 367 F. Supp. 2d 1022 (E.D. La. 2004) (amendment of articles of organization)organization)

58

Other Decisions Finding Non-Recourse C O t P i i E f blCarve-Out Provisions Enforceable

• Heller Financial v Lee 2002 U S DistHeller Financial v. Lee, 2002 U.S. Dist. LEXIS 15183 (N.D. Ill. August 12, 2002.) (filing of liens on property)(filing of liens on property)

• First Nationwide Bank v. Brookhaven Realty Assocs 223 A D 2d 618 (N Y AppRealty Assocs., 223 A.D.2d 618 (N.Y. App. Div. 1996) (filing of bankruptcy petition)

59

Other Decisions Finding Non-Recourse C O t P i i E f blCarve-Out Provisions Enforceable

• FDIC v Prince George Corp 58 F 3dFDIC v. Prince George Corp., 58 F.3d 1041 (4th Cir. 1995) (filing of bankruptcy petition)petition)

60

Kevin C. WattersThe Watters Law Firm, LLC404.991.3630404.991.3630 kevin@watters-law.com

61