Distressed Real Estate Roundtable Materials

November 4, 2010

K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp. k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office.

©1996-2010 K&L Gates LLP. All Rights Reserved.

Contents

Panelist Profiles

K&L Gates Distressed Real Estate Alerts

K&L Gates Distressed Real Estate Practice

Panelist Profiles Moderators David Jones Distressed Real Estate Task Force Chair, K&L Gates LLP Mr. Jones focuses his practice on real estate joint ventures, public/private partnerships, real estate financing, real estate debt restructuring and work outs, real estate development, and real estate taxation. He represents real estate investors, developers and lenders in the structuring and negotiation of real estate equity and debt financing and debt restructuring; owners and developers in the acquisition, development, disposition, and financing of multi-family housing; and real estate developers in negotiating for development incentives from local governments, and in structuring of tax-increment financing and similar transactions. Andrew Petersen Head of Distressed Real Estate Task Force Europe, K&L Gates LLP Mr. Petersen advises financial institutions and private equity funds on debt and equity lending, restructurings, workouts and enforcement of debt and equity positions. He works closely with business support, restructuring and litigation teams in relation to positions involving capital market issues, providing strategic advice to loan servicers and sellers of loans and mortgage-backed securities and investors owning or acquiring troubled or distressed assets. He has spent a period of time in the U.S. and has unique crossover experience acting for investors purchasing, selling and managing CMBS, B notes and mezzanine loans, both in the U.S. and in Europe. Panelists Steven Altman Director, Torchlight Loan Services (formerly ING Clarion) Mr. Altman joined Torchlight Investors in 2003 and is a Director overseeing special servicing and distressed debt workout. He has 23 years of professional experience. Prior to Torchlight, Mr. Altman worked at Commerzbank Securities, Fitch Ratings, Metropolitan Life Insurance Company and Arthur Andersen LLP. He is a Certified Public Accountant in Michigan and holds an MBA and a BBA from the University of Michigan. Jeff Fastov Founding Principal, Oasis Real Estate Partners Mr. Fastov specializes in all aspects of commercial real estate credit. He is the former head of Goldman Sachs’ commercial real estate lending business with responsibilities for new business development, client coverage, transaction negotiation and execution, underwriting, credit, and securitization. He previously co-headed the development of Goldman Sachs Commercial Mortgage Capital and joint ventures with Central Park Capital and AMRESCO. Mr. Fastov was a member of both the GS Real Estate Credit Committee and the GS Real Estate Partners Investment Committee. He has led banking teams responsible for acquisition diligence, asset and liability valuation, and developing funding structures for clients investing in banks, finance companies, and segregated loan portfolios. Mr. Fastov has also led transaction teams that bid on sub-performing and non-performing loan pools sold by the RTC, banks, insurance companies, and finance companies. Mr. Fastov joined Goldman Sachs in 1992 as a Vice

President and became a Managing Director in 1999. Previously, he worked at Moody's Investors Service, where he established the CMBS group and developed Moody's ratings criteria. Mr. Fastov serves on the Board of Governors of the Commercial Mortgage Securities Association. He is a graduate of the University of Rochester (BA Economics) and has an MBA from Columbia University. Jeffrey Lavine Managing Director, SNB StabFund Investment Management, UBS Investment Bank Mr. Lavine is a Managing Director and Senior Portfolio Manager at UBS AG and Co-Head of a Commercial Real Estate Group, where he co-manages a domestic portfolio of whole loans, subordinate debt, REO properties and securities. Prior to his role with the UBS AG, Mr. Lavine was the Head of Transaction Management and Loan Structuring for the Real Estate Finance Group at UBS Investment Bank. Prior to joining UBS, Mr. Lavine was a Senior Managing Director at Bear Stearns & Co., Inc. In that role he created and headed the U.S. Loan Closing and Structuring Group. Mr. Lavine had been a key member in the creation and implementation of large loan, small loan and other conduit programs for both securitized and balance sheet lending in all major property and transaction types. Mr. Lavine was also involved in the establishment of Bear Stearns’ London and Tokyo real estate lending units. He holds a BA from Tufts University, magna cum laude, an MBA from Columbia Business School and a JD from Boston University School of Law, where he was Administrative Editor of the International Law Journal. Andrew S. Levine General Counsel, SL Green Mr. Green has served as Chief Legal Officer since April 2007 and as General Counsel, Executive Vice President and Secretary since November 2000. Prior to joining the Company, Mr. Levine was a partner in the REIT and Real Estate Transactions and Business groups at the law firm of Pryor, Cashman, Sherman & Flynn, LLP. Prior to joining Pryor, Cashman, Sherman & Flynn, LLP, he was a partner at the law firm of Dreyer & Traub. Mr. Levine received a B.A. degree from the University of Vermont and a J.D. degree from Rutgers School of Law, where Mr. Levine was an Editor of the Law Review. Spencer Levy Senior Managing Director, CBRE Mr. Levy is responsible for overseeing and coordinating the activities of more than 300 investment sales and debt/equity finance professionals in the Eastern Region of the United States. In addition to his duties in Capital Markets, he is co-head of the Recovery and Restructuring Services (RRS) business line, which assists both large financial institutions and government entities with real estate services required for both REO and whole loan assets. Prior to joining CBRE, Mr. Levy was a Principal at Stifel Nicolaus (formerly Legg Mason Capital Markets), one of the most active and diverse real estate investment banking practices in the US. As Principal, he was responsible for leading overall execution several major merger and acquisition assignments. Mr. Levy played a significant role in the initial public offering of six REITs, as well as dozens of other public and private capital-raising transactions. Previous to this position, he served as Assistant General Counsel of the Witkoff Group, formerly one of the largest property owners in the New York City area. Mr. Levy is a frequent lecturer at real estate industry events and is often quoted in prominent real estate publications. Most recently, he was interviewed on Fox Business News and has been quoted in The New York Observer, The New York Times, Puget Sound Business Journal (Seattle), Crain’s New York Business, National Real Estate Investor, The Washington Post and Real Estate Forum.

Perry Mandarino U.S. Head of Business Recovery Services, PriceWaterhouseCoopers Mr. Mandarino, a Certified Public Accountant, provides assistance to clients in the areas of strategic planning, complex debt restructurings, preparation of turnaround and business plans, cash flow analyses, preference investigations, fraud and fraudulent conveyance investigations, collateral evaluation and claims resolution. He assists numerous clients in the negotiation, development and implementation of Plans of Reorganization. Mr. Mandarino served as the Chief Restructuring Officer of Hoop Holdings, Inc. d/b/a/ The Disney Stores. He also served as the Examiner in the Polaroid, Inc. and Summit Global Logistics chapter 11 cases. Mr. Mandarino has represented several lending institutions, including D.E. Shaw, BNP Paribas, Wachovia Bank and Lampe, Conway & Co. He has extensive experience in the Bankruptcy Courts in the Districts of Delaware, New Jersey and New York, where he has testified and been qualified as an expert in matters related to financial viability, valuation, general reorganization matters and financing. He has assisted clients in raising over $700 million in debt and equity financings, and has represented over 300 clients during his career. Mr. Mandarino received a Bachelor of Science from Seton Hall University. Matthew Webster Managing Director, Global Head of Real Estate Financing, HSBC Bank Plc Chairman, Commercial Real Estate Finance Council Europe Mr. Webster is responsible for coordinating Commercial Real Estate Financing activities on a $100 billion loan book. He joined HSBC in 2005 from Hypo Real Estate Bank International to develop a principal Commercial Mortgage Backed Securities loan origination and securitisation platform. Mr. Webster also has been responsible for initiating and developing the distribution capacity for real estate mezzanine risk for all European Real Estate products. He has held various positions at Goldman Sachs International, Morgan Stanley International, Fitch Ratings Limited and Capital Reinsurance Corp. Mr. Webster has over 18 years experience working with commercial real estate in various capacities as lender, debt investor, insurer, rating agency analyst and capital market participant in the U.S. and Europe. He has worked with numerous other asset classes, including Corporate Acquisitions, Mezzanine Loan facilities and various Corporate Receivables, amongst others, totaling in excess of $400 billion of investments. Mr. Webster holds a Bachelor of Science Degree in Economics and a Bachelor of Science Degree in Business Management from North Carolina State University. He obtained his Chartered Financial Analyst certificate in 1996 from the CFA Institute. He also represents HSBC on the Board of Governors for the Commercial Real Estate Finance Council – Europe and is the 2011 CREFC-Europe Chair. Trevor Williams Chief Economist, Lloyds Banking Group Mr. Williams joined Lloyds Bank from the UK civil service, where he worked as an economist after being offered a position whilst studying for a PhD. He has also worked as a lecturer. Mr. Williams is a member of the Economic Research, Corporate Markets divisions of Lloyds Banking Group. The Corporate Markets economics team supports the bank’s trading and sales activities. Mr. Williams is a member of the Institute for Economic Affairs Shadow Monetary Policy Committee, setup two months after the actual MPC in 1997. He is also on the executive committee of the Financial Statistics User Group (FSUG). Mr. Williams regularly appears on radio and TV to represent the economic views of Lloyds TSB Corporate Markets, and to be interviewed on current economic issues. He has a BA honours degree and a masters in economics.

Authors: William J. Brian, Jr. bill.brian@klgates.com +1.919.466.1261 Nathaniel C. Parker nathaniel.parker@klgates.com +1.919.466.1118 K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

Real Estate Alert

April 15, 2010

Going … Going … Gone! Why Time is of the Essence in Preserving the Value of Development Entitlements in Distressed Real Estate Assets In one more twist of the current recession, many banks and other institutional lenders have found themselves playing an unfamiliar role. Rather than financing development projects, they own them. Unfortunately, taking over a distressed real estate asset raises a whole host of potential challenges and risks. In particular, lenders acquiring projects still under development must understand the role the zoning and entitlement process plays in creating and maintaining the value of the asset. Land use regulations vary among states and localities, but the key to due diligence in any jurisdiction is understanding what approvals have been obtained, what they cover, and when they expire. In general terms, development entitlements derive from federal, state, regional, and local authorities. Most businesses dealing with real estate in any way are familiar with wetlands delineations approved by the U.S. Army Corps of Engineers, stormwater management permits issued by a state’s environmental agency, or a municipal building permit, but these entitlements are only the tip of the proverbial iceberg. Not only do development entitlements range up and down the jurisdictional hierarchy, but they also span the subjects of land use, environmental regulation, infrastructure, and contractual agreements. Determining what entitlements apply to a given project is wholly dependent on where the project is located, because each state, county, and city offers its own menu of land use, environmental, and infrastructural requirements – using inconsistent nomenclature and riddled with local peculiarities. A case study illustrates this complexity: A lender recently acquired an incomplete mixed use community. The infrastructure had been started, but no structures had been sold or leased. Therefore, the value of the asset was based on the ability to build and sell developed parcels. This ability, and therefore the asset’s value, was entirely based on a series of entitlements. First, the land use approvals that the project had received from the county included zoning to a greater density that required a special use permit, subdivision approval to create the saleable lots, and site plans for the common area amenities. Second, the project had received environmental approvals from the state’s environmental agency and the U.S. Army Corps of Engineers including a permit for development in an area of environmental concern, a state stormwater management permit, an approved erosion and sedimentation control plan, and an approved wetlands delineation. Third, the project was required as a condition of its special use permit to provide a portion of its water capacity for public use.

Real Estate Alert

Understanding what entitlements were present was only the beginning. Ensuring that these valuable entitlements were maintained required action. To move forward with the project (or to sell the project to someone who can move forward with it), the lender needed to transfer most of the approvals from the defaulting borrower to itself. Next, it needed to determine what the zoning, subdivision, and site plans allowed to be built. Re-orienting the plans to a changed market was limited by the prior land use approvals or required re-applying for new approvals. Not moving forward with the project was also problematic because the site plan approval would expire if specific progress was not made on the project. Moreover, the special use permit conditioned beginning the project on a number of specific commitments, for which the lender would have to bear the cost. The environmental entitlements also required oversight. Permits required renewal, or in some cases, that

infrastructure be constructed before the permit expired. In the case of this project, a new state law had extended the expiration date of several of the permits – a point which local authorities were unenthusiastic to learn. The moral of this case study is that a lender may acquire a real property asset to reduce losses, but in order to preserve the value of the asset, the lender must know the nature and timing of all approvals and entitlements that benefit and encumber the project. That process is complex, varies from jurisdiction to jurisdiction, and the clock does not stop for anyone, even foreclosing lenders. That is why engaging knowledgeable professionals to guide lenders through this process is vital. K&L Gates has attorneys experienced in all phases of the entitlement process across the country who can help you understand and preserve the value of real estate assets.

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San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d’Alene Taipei Tokyo Warsaw Washington, D.C. K&L Gates includes lawyers practicing out of 36 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp. k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2010 K&L Gates LLP. All Rights Reserved.

April 15, 2010 2

Authors: Terrence E. Budny terrence.budny@klgates.com +1.312.807.4293 Brian P. Evans brian.evans@klgates.com +1.704.331.7479 K&L Gates includes lawyers practicing out of 35 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

Distressed Real Estate Alert

February 2010

Title Insurance Industry Reacts to Recession: Creditors’ Rights Endorsements Decertified by ALTA and Generally Unavailable The title insurance industry has for all practical purposes eliminated an important layer of coverage provided by both owner’s and lender's title insurance policies. This coverage, embodied in what is called the “creditors' rights endorsement,” protected real estate owners and lenders from risks that would customarily arise when either the party from whom the insured owner purchased the property, or the mortgagor who granted the insured lender a mortgage, files for bankruptcy. Real estate purchasers and lenders will have to evaluate these bankruptcy risks themselves rather than relying on the title insurer to do it for them. Below is a discussion of what this means to the real estate industry. The current (2006) American Land Title Association (“ALTA”) form of loan policy of title insurance, which is in general use by title insurers throughout the United States, excludes from coverage the following (collectively, “Creditors’ Rights”):

Any claim, by reason of the operation of federal bankruptcy, state insolvency, or similar creditors’ rights laws, that the transaction creating the lien of the insured mortgage, is:

i) a fraudulent conveyance or fraudulent transfer, or ii) a preferential transfer for any reason not stated in Covered Risk 13(b) of this Policy. (Covered Risk 13 (b) covers loss arising out of Creditors’ Rights by reason of a failure to timely record the instrument creating the estate or lien, or a defect in that instrument resulting in failure to impart record notice.) There is a similar exclusion in the ALTA form of owner’s policy of title insurance. California has its own forms that are prescribed by the California Land Title Association and which tend to mirror the ALTA forms. The purpose of this exclusion is to isolate the title insurer from liability under the title policy in the event that the acquisition of the subject property (as to an owner’s policy) or the encumbering of the subject property by a mortgage, deed of trust or equivalent (as to a loan policy) by the insured is challenged by a creditor of the transferor or by a trustee in bankruptcy on the basis of the fraudulent conveyance provisions of Section 548 of the United States Bankruptcy Code (the “Code”) or substantively equivalent state laws, or on the basis of the preferential transfer provisions of Section 547 of the Code.

Distressed Real Estate Alert

In addition to transfers made with an intent to defraud a creditor, fraudulent transfers under the Code include transfers for less than “reasonably equivalent value” and in which the party transferring the property is insolvent, illiquid, or undercapitalized. If a creditor successfully asserts that a transaction is a fraudulent transfer under the Code, that transfer can be voided and the property that was fraudulently transferred, or its value, can be recovered from the transferee for the benefit of the bankrupt’s estate. Transferees are afforded protection if the property interest was acquired for value and in good faith, but the transferee would have to establish those facts in bankruptcy court. Therefore, if a purchaser acquires fee simple to a shopping center for a price that is drastically under market, and is aware that the seller will be insolvent after the transfer, then other creditors of the shopping center seller could force the seller into bankruptcy, attack the sale as a fraudulent transfer, and seek to recover from the purchaser the difference between the price paid and the market value of the center. A preference under Section 547 of the Code includes a transfer of an interest in property to secure an antecedent debt made while the debtor was insolvent and within 90 days before the date of the filing of the bankruptcy petition. Lenders in the current environment are scrambling to get better secured. Let’s say a lender made a $5,000,000 loan to an office building owner secured by a deed of trust on the building. Suspecting that the value of the property has declined, the lender obtains an appraisal, which shows that the property is now worth only $1,500,000. This breaches a loan covenant, and the lender notifies the borrower of that fact. The borrower responds that she owns a beach house worth $3,000,000 that is unencumbered. She offers to give a mortgage on that house to secure the $5,000,000 loan, and the lender accepts. Within 90 days she declares bankruptcy. The lender’s mortgage on the beach house can likely be set aside as a preference. Purchasers and lenders have been able to obtain coverage over Creditors’ Rights (except in New York, Texas and New Mexico), either by obtaining title insurance in the form of the 1970 (revised 1984) ALTA policies (which do not exclude Creditors’

Rights from coverage), deleting the Creditors’ Rights exclusion by endorsement, or obtaining a “creditor’s rights endorsement” (which ALTA adopted as ALTA Endorsements 21 and 21-06, and which CLTA adopted as CLTA 131 and 131-06) that results in insurance protection from the assertion of these Creditors’ Rights. In order to obtain such coverage, title insurers have had to separately underwrite the risk that Creditors’ Rights would be asserted and have customarily required the submission by the parties to the transaction of a “creditors’ rights affidavit” and financial information regarding both the subject property and the transferor under the deed or mortgage to be insured. In many states, an additional premium has been charged for this coverage. Given the considerable benefits conferred by Creditors’ Rights coverage, its issuance has become fairly standard for commercial real estate transactions, and the creditors’ rights endorsement has long been a staple on the menu of endorsements required by lenders. If the shopping center owner in the first example above had an owner’s policy with Creditors’ Rights coverage, it could have made a claim on its owner’s policy for the loss suffered. If the lender taking the beach house as additional collateral had a loan policy with Creditors’ Rights coverage, she could likewise make a claim for loss arising out of the avoidance of the lien of the mortgage, subject to the other terms of the policy. The recent turmoil in the commercial real estate markets has led to the challenge, particularly in the context of a bankruptcy, of sales and mortgages as either fraudulent conveyances or preferential transfers. Where the subject transaction has involved the issuance of a title insurance policy with Creditors’ Rights coverage, the insured has tendered the defense of these claims to the title insurer. This in turn has led to considerable exposure to the title insurance industry, both for the costs of litigation and ultimately for the full amount of insurance under the applicable title insurance policies. The magnitude of this exposure has led to the recent announcement by ALTA that it has voted to withdraw or decertify the ALTA Endorsements 21 and 21-06 as official ALTA forms effective March 8, 2010. ALTA has confirmed that title insurers may decide on their own whether to issue coverage over Creditors’ Rights and what form of

February 2010 2

Distressed Real Estate Alert

endorsement to use, but as of March 8 there will be no current ALTA approved form. Recently, the states of New Jersey, Pennsylvania, Delaware and Oregon (which are states that require the approval of endorsement forms issued by title insurers writing policies in their respective jurisdictions) have taken the same step. Pennsylvania’s action took effect February 1, 2010; the effective date in the other states awaits final administrative action. Effective February 4, CLTA decertified CLTA 131 and 131-06. The result is that creditors’ rights endorsements are no longer available in these states. As might be expected, the Fidelity National Title group of underwriters, which includes Chicago Title, Fidelity National Title, Ticor Title, Lawyers Title, Commonwealth Land Title, Security Union Title and Alamo Title, announced on February 4, 2010 that effective as of that date, Creditors’ Rights coverage will no longer be offered. In addition, First American Title Insurance Company announced on February 8, 2010 that it too will no longer provide Creditors’ Rights coverage. First American cites “the economic impact of our current market cycle, actions of rating bureaus, recent Bankruptcy Court decisions and a lack of availability of excess reinsurance for these risks.” While some title insurers may be willing to continue to issue coverage over Creditors’ Rights, the more

reasonable expectation is that all title insurers will follow suit. Where does this leave purchasers and lenders who have become accustomed to Creditors’ Rights coverage? The burden of underwriting the risk of a fraudulent transfer or preference has been shifted from the title insurers to their insureds. Lenders purchasing owner’s policies for property purchased out of a foreclosure or by deed in lieu must be careful to calculate any bid or relief of indebtedness to approximate the fair market value of the property. Lenders will need to pay even closer attention to the value of their collateral and the financial strength of their borrowers. Borrowers must negotiate any requirement for creditors’ rights coverage out of their loan commitments. Purchasers will likewise need to be alert to sales for less than value and sellers in financial distress. Doing so is particularly difficult in the current environment of declining values and general financial instability. There is likely little comfort in knowing that purchasers and lenders nationwide will now be treated the same as their counterparts in New York, Texas and New Mexico. In any event, just as these counterparts, they will have to rely on their own analyses of the fraudulent conveyance and preference risks inherent in their transactions, price them accordingly and act at their own, and not the title insurers’, risk.

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Los Angeles Miami Moscow Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park

San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d’Alene Taipei Tokyo Washington, D.C.

K&L Gates includes lawyers practicing out of 35 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. K&L Gates is comprised of multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2010 K&L Gates LLP. All Rights Reserved.

February 2010 3

Authors: David E. Rabin david.rabin@klgates.com +1.212.536.4002 David H. Jones david.jones@klgates.com +1.704.331.7481 K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

Distressed Real Estate Alert

November 10, 2009

New Policy Statement on Commercial Real Estate Loan Workouts – Providing Welcomed Flexibility When as a child we received a long-awaited toy that required assembly, so often we would rush to throw it together without even glancing at the thick instruction manual left sitting in the box, believing we could rely on past experience and instinct to get it right – that is, until we got towards the end and discovered that a critical piece could not be inserted without unwinding many of the prior steps. In a few cases, the error was irreversible, and the toy was ruined. The hard lesson learned was to take the time to follow the instruction manual in order to enjoy the gift both immediately and into the future. On October 30, 2009, the agencies of the Federal Financial Institutions Examination Council1 issued a Policy Statement on Prudent Commercial Real Estate Loan Workouts (the “Policy Statement”). Although the Policy Statement does not provide a “step-by-step manual” on how to structure workouts of commercial real estate loans, it does provide a broad overview of what factors the financial regulators will consider in determining whether a loan workout is conducted prudently, and it includes numerous practical examples of both successful and unfavorable strategies. Knowing how the financial regulators are likely to view a restructured loan provides (a) real estate borrowers with a realistic expectation of whether their loan workout proposals might be acceptable to their lenders and (b) real estate lenders with a road map to a restructuring that will avoid adverse regulatory treatment. Although the Policy Statement does in some instances require that lenders recognize losses for all or part of loans that are not reasonably assured of repayment, notably it also expressly states that an undercollateralized mortgage loan will not be adversely classified solely because the value of the real estate has declined to less than the loan balance—as long as the borrower has the ability to repay the restructured debt on reasonable terms. As a result, lenders now have new breathing room and may be permitted to retain billions of dollars of undersecured commercial real estate loans without having to write down these assets. The investors who have been waiting on the sidelines thinking that this recession might present a new opportunity to pluck out investments for pennies on the dollar and reap the type of bonanzas they saw during the RTC days will have to keep waiting. 1 The Policy Statement was issued on behalf of the Board of Governors of the Federal Reserve System, the

Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Financial Institutions Examination Council State Liaison Committee.

Distressed Real Estate Alert

The Council’s statement may be found at: http://www.fdic.gov/news/news/financial/2009/fil09061a1.pdf. The purpose of the Policy Statement is to instruct the examiners working for the various financial regulators on how loan workouts should be classified on the balance sheets of the institutions. The Policy Statement provides numerous examples of how the drafters of the Policy Statement believe those loans should be classified. The Policy Statement applies to federally regulated financial institutions such as banks and savings and loans institutions and to loans held for investment by those institutions. It does not expressly provide guidance to servicers and special servicers of loans in pools supporting commercial mortgage backed securities. In those instances, the servicer’s and the special servicer’s actions are governed first and foremost by the terms and conditions of applicable pooling and servicing agreements and by the tax limitations generally applicable to Real Estate Mortgage Investment Conduits (“REMICs”) (recent modifications to some of these limitations that bear on commercial mortgage loan workouts were discussed in our Distressed Real Estate and Tax Alert, “New REMIC Rules May Provide More Room to Modify Commercial Real Estate Loans,” which can be viewed at: http://www.klgates.com/newsstand/Detail.aspx?publication=5953. However, given that nothing as clear and detailed as the Policy Statement has been issued in the past in any forum, that the guidance provided by the Policy Statement with respect to evaluating loan structures is of general applicability and is not specific to regulated banking institutions, and that pooling and servicing agreements typically do not provide the level of guidance to special servicers as that found in the Policy Statement2, we believe that the principles of the Policy Statement will be adopted broadly and will find their way in some fashion into securitized structures.

Categorization of Loans How loans are categorized directly affects how banks and savings and loans report income, recognize losses and must maintain reserves. These regulated lenders will be less inclined to approve loan workouts that require them to recognize losses or increase their reserves or those that result in such lenders not being able to recognize interest income.

The Policy Statement focuses on three aspects of the loan categorization system in connection with commercial real estate loan workouts. The basic classification system sorts loans based on the likelihood of full repayment. The highest classification is referred to as “Pass.” A loan is classified as “Pass” if it is performing, and the bank does not perceive any specific potential weakness that might jeopardize its repayment. The next classification is “Special Mention.” Loans that are classified as “Special Mention” are performing loans that have a recognized potential weakness that deserve close attention by the lender and that, if left uncorrected, could result in a risk of prepayment. The next level down is a “Substandard” loan, which means that the loan is not adequately collateralized, or the paying capacity of the borrower is considered inadequate. A substandard loan has some well-defined weakness that jeopardizes the repayment of the debt in full. Below substandard loans are “Doubtful” loans. These are substandard loans where the identified weakness makes repayment in full highly questionable and improbable. Finally, the lowest category is a “Loss” classification. Loans classified as “Loss” are considered uncollectible. When the Policy Statement refers to a loan having a “weakness,” it means anything that increases the risk that the loan will not be repaid in full on time. A weakness could be a drop in the value of collateral, an adverse change in the financial condition of the borrower or the guarantor, market conditions that depress rents or sales activities, the bankruptcy of a large anchor tenant, a rise in rent payment delinquencies, the lack of refinancing options or combinations of any of these factors or others. 2 A typical pooling and servicing agreement will not offer the servicer or

special servicer as much guidance as the Policy Statement, but will contain restrictions on the servicer’s or special servicer’s ability to conduct certain workout activities, which may be circumscribed by, among other things, REMIC limitations, requirements for rating agency confirmations, and consent or purchase rights of holders of junior classes of certificates or subordinate or mezzanine debt interests. However, in all cases, servicers and special servicers are generally required to conduct their activities in accordance with a “Servicing Standard.” That usually is defined by reference in some manner to a paradigm such as “the customary and usual standards of practice of prudent institutional commercial mortgage lenders servicing their own loans.” The Policy Statement likely will provide a handy benchmark for what those “customary and usual standards” entail.

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Distressed Real Estate Alert

The second type of categorization conducted by bank management and regulators is whether the loan should be considered on “Accrual” or “Non-accrual” status. When a loan is on “Accrual” status, the interest accruing on that loan may be booked as income for the financial institution. If a loan is on “Non-accrual” status, the interest accruing on that loan is not recognized as part of the income of the financial institution. The final type of categorization addressed in the Policy Statement deals with so-called “Troubled Debt Restructures” or “TDRs.” A loan workout is considered to be a TDR if the borrower is experiencing financial difficulties and the terms of the workout provide a “concession” to the borrower. If a loan is classified as a TDR, then that loan must be assessed individually in accordance with appropriate accounting standards and will be deemed to be an impaired asset on the books of the lender, which will require the value of the loan to be reduced on the lender’s books to then market value. The Policy Statement is realistic in acknowledging that many restructurings will result in loans having an adverse classification (that is, anything below a “Pass”) and provides that entering into a workout will not be criticized by the regulators so long as management of the financial institution enters into the workout:

• Pursuant to a “prudent workout policy” that establishes appropriate loan terms and amortization schedules and allows the institution to modify a particular loan workout if the first attempt does not result in sustained performance;

• Pursuant to a “prudent workout plan” for each loan that takes into account current financial information of the borrower and any guarantor and that supports the ultimate collection of principal and interest; the key components of a prudent workout plan would include:

o review and analysis of an updated and comprehensive financial information regarding the borrower, the guarantor and the real estate collateral;

o procurement and review of current valuations of the collateral, which may or may not require a new formal appraisal;

o determination and analysis of an appropriate loan structure; and

o preparation of appropriate legal documentation for any changes to the loan terms.

• After a thorough analysis of a borrower’s and guarantor’s entire debt service capacities, not just as to the particular loan in question (referred to as its “global” debt); and

• With the ability to monitor performance under the terms of the workout plan.

The most interesting aspect of the Policy Statement is a series of six different examples, each of which presents multiple alternative scenarios involving hypothetical loan restructures. These hypothetical restructures are then critiqued using the categories described above (e.g., pass, special mention, etc., accrual or non-accrual and whether the restructure is a TDR). While space does not permit an analysis of these examples, there are two principles worth pointing out:

Extensions Will Be Easier The first principle relates to the loan’s maturity date. In reviewing the Policy Statement, one sees that the regulators’ primary focus is on the “ultimate repayment” of principal and interest, not necessarily on the “on time” repayment of principal and interest. Many loans held by banks and savings and loans are considered troubled not because of an existing payment default but because the maturity dates of these loans have come and gone without any refinancing available in the market (while the borrowers have continued to make their monthly payments of principal and interest timely, although the value of the real estate securing these loans might have fallen below the balloon payment amounts). A reasonable extension of such a loan’s maturity date which does not alter the monthly payment amount should be a restructuring that, absent some other glaring weakness in the loan or the financial status of the borrower or guarantor, poses little or no regulatory concerns to the lenders.

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Distressed Real Estate Alert

The Policy Statement also contemplates more complicated scenarios with different outcomes. Be Prepared to Create a Good Loan and a Bad Loan The Policy Statement makes it clear that a lender can benefit by severing a single distressed loan into a “good” loan and a “bad” loan: one of which will receive a pass grade, stay on an accrual basis and not be considered a TDR, and the other of which will receive a grade of some level below pass, be treated as non-accrual and be considered a TDR. The bank will come out ahead in terms of regulatory results when compared to a workout that keeps the distressed loan on the bank’s books as a single loan. If the loan remains evidenced by a single note secured by a single set of security documents, then the entire loan may be classified in one of the lower classifications, considered non-accrual or considered to be a TDR. A “good note/bad note” structure has the benefit of preserving at least a portion of the loan on the bank’s books as a performing asset without any financial impairment. It is not realistic for borrowers or lenders to believe that they will be able to create a restructured loan in all scenarios that will avoid adverse regulatory outcomes. There are many severely impaired commercial mortgage loans being carried today, and many inevitably will result in foreclosures and

losses. However, many distressed loans held under the cloud of uncertainty that has hung over the commercial real estate finance sector for more than the last year now can be restructured in a way that will avoid or minimize losses to the lenders while allowing borrowers to retain control of their properties on reasonable terms. Lenders will be better motivated now to clean up their balance sheets by implementing a “prudent workout policy” within the parameters set forth in the Policy Statement. Likewise, from the borrowers’ perspective, knowing the areas of concern for the financial regulators and working to minimize outcomes that would cause the lenders to come under scrutiny will make it easier for lending institutions to accept workout proposals. Borrowers need to understand the regulatory constraints that lenders are operating under and be prepared to deliver updated financial information and collateral values, to permit ongoing monitoring, and fundamentally to set their expectations of what might be achieved in a loan workout realistically. The Policy Statement will likely have the effect of reducing the number of loans, particularly those with “hidden” value, that find their way onto the secondary market, and it may curtail the flood of distressed loans that investors have been hoping to see. The Policy Statement may not be the perfect instruction manual, but it’s a good beginning to getting restructured deals assembled properly.

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K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; and a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2009 K&L Gates LLP. All Rights Reserved.

November 10, 2009 4

Authors: Andrew Petersen andrew.petersen.com +44.(0)20.7360.8291 James Spencer james.spencer@klgates.com +44.(0)20.7360.8176 K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.

Finance and Distressed Real Estate Alert

12 October 2009

Buying and Selling Real Estate Debt Introduction As liquidity in the European banking sector begins to improve, buyers aiming to capitalize on declining or declined real estate values prevalent in the market are increasingly seeking out opportunities to buy real estate-backed loans at realistically priced discounts to par. Such buyers are also now beginning to target loans made to distressed owners of sound properties (core assets at opportunistic pricing are today's holy grail), although this is not a pre-requisite to finding realistically priced assets. This sentiment is beginning to put pressure on sellers, particularly in the UK where there is a perception that it is at the bottom of the cycle in terms of perceived value, to consider the assets they hold. Real estate debt (more so at this stage of the cycle) is not without risk. Prior to buying such debt, a buyer must determine, through financial due diligence, whether or not: (i) the underlying borrower(s) and/or guarantor(s) of the debt have the financial capability to honour their respective debt obligations under the finance documents; and (ii) whether the value of the underlying real estate (and all other collateral) exceeds the amount paid by the buyer for the debt together with incidental costs. The answer to these questions will dictate the buyer's decision on whether or not to buy. A buyer will also need to analyze the underlying collateral for title issues, perhaps inspect the real estate and consider environmental issues (via desktop or otherwise) and other related matters, check the ranking of the security and whether such security has been validly created and properly perfected. While a buyer seeking to buy a single loan or a portfolio may think of itself as simply a buyer in the traditional, financial sense of the word, it is essentially a mortgage lender, real estate buyer, financial analyst, real estate operator and due diligence expert all wrapped into one. Accordingly, a successful buyer of real estate debt must possess expertise in all of the foregoing areas or be prepared to engage third parties who are experienced in such transactions. Moreover, it is important to remember the goals of the parties as a backdrop to the financing transaction. The ultimate goal of the seller is either to reduce its exposure to the real estate sector or to sell the real estate debt at a profit. The buyer of a real estate loan will generally utilise variations of a “loan to own” or a “buy-fix-sell” model by seeking to make a profit by (i) receiving principal repayments on the total loan balance from the borrower in an amount exceeding the price paid for the loan, or (ii) enforce and sell or operate the underlying real estate in manner that renders income to the buyer that exceeds the price paid for the loan. At the outset, given current market conditions, both seller and buyer will need to determine if the loan to be purchased is to be treated as a distressed asset given the status of the deal or merely an asset trading at a heavy discount. This approach will have some impact on how the buyer, and the seller will approach the transaction and the terms of the sale documentation (for example the level and scope of asset level representations, more on which below). In the current market, it is possible for distressed assets (e.g. those subject to payment defaults) to be trading at prices notably higher than non-distressed assets, where for example the price is being driven down to low levels as a result of loan to value ratios rather than any actual payment defaults.

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Finance and Distressed Real Estate Alert

The keys to limiting the buyer's liability during the purchase process and enhancing the likelihood of an eventual profit to the buyer are thorough due diligence and careful documentation of the transaction. A buyer of real estate debt should analyze the transaction as though it were buying the underlying real estate or as if it were underwriting and originating the debt in the first place. Considerations and issues differ depending on the type of loan and the type of collateral securing the loan. Regardless of the type of debt purchase transaction anticipated, competent counsel with an in-depth knowledge of real estate loan purchase and sale transactions can be the difference between a successful transaction and an unsuccessful one. Moreover, in a European context, its likely that the loan, security, obligors and the real estate will be subject to differing governing laws and therefore, buyers will need to seek advice from professional advisers in all applicable jurisdictions in order to be fully appraised of local issues, especially in the context of a work out or enforcement scenario.

The Loan Sale Agreement The loan sale agreement will contain all the terms on which the loan is sold by the seller and bought by the buyer, typically setting out the purchase price, the treatment of accrued but unpaid interest, and any other specifically negotiated deal points. The contract should provide for the seller’s agreement to unconditionally sell the loan and transfer all its rights under the finance documents, namely the loan agreement and all security documents. Such a transfer obviously includes with it all of the seller’s rights to enforce the terms of the loan documents and exercise all remedies against the borrower, including without limitation the right to enforce the real estate security and assert claims against guarantors. The contract should contain provisions requiring the seller to provide copies of all loan documents, report on titles, legal opinions, asset management agreements and all other material documents included in the loan file, such as copies of insurance, the latest real estate valuation, financial statements of the borrower and rent roll. It is common for the agreement to provide the buyer with an appropriate due diligence period during which the buyer can adequately conduct all due diligence, the outcome of which will determine whether or not the buyer is bound to proceed with the purchase.

The loan sale agreement will usually contain a number of representations and warranties. The type and level of representations given will often be the subject of heavy negotiation, depending on whether or not they are 'seller representations' or 'asset level representations', the latter being the area of most discussion. Seller representations typically include representations by the seller that (i) it is validly existing under the laws of its jurisdiction of incorporation, (ii) it has due capacity, power and authority to enter into the loan sale agreement, and (iii) its obligations under the loan sale agreement are legal, valid and binding. A seller's starting position will typically be that it will not give any asset level representations, however, in the current market, and especially if the buyer is viewing the transaction as a distressed asset, it is becoming increasingly common (but still dependant on the bargaining power of the respective parties) for buyers to benefit from asset level representations from the seller. As an absolute minimum, the buyer will want the seller to represent and warrant that (i) it is the legal and beneficial owner of the loan, free and clear of all encumbrances, (ii) the loan has not been previously assigned, transferred or sub-participated, and (iii) the loan is not currently in default. If the buyer considers the asset to be a distressed asset then it may require the seller give more detailed representations, such as those published by the Loan Market Association in its distressed debt documentation. It will, of course, ultimately be a matter of negotiation on the exact nature and content of the representations given. Moreover, representations and warranties can be taken out of the equation entirely with the use of title insurance as a method of ensuring the liquidity of the asset. Any buyer should, through its counsel or otherwise, make every effort to obtain as much information as possible on the loans and the documents governing the underlying loan before executing the contract. Further any seller should ensure that all loan files and information obtained in the underwriting and origination process (basically all material documents in its possession, in particular original land charges and other such security which will be needed in any subsequent enforcement situation) are collated and readily accessible to the buyer either through a virtual data room (which we are able to provide) or physically handed over to the buyer and its counsel. Thus, it is important to locate and put in order all documentation that will be required for the sale in a timely manner. The

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Finance and Distressed Real Estate Alert

more information the parties to a potential sale can gather at the outset of the process and prior to entering into the contract, the better able they will be to evaluate any resulting implications and incorporate them into any purchase price, as well as mitigating the risk of reaching an impasse (due to the necessity of a price adjustment mid-contract) after incurring due diligence expenses.

Due Diligence Process Generally The due diligence process is perhaps the most crucial undertaking in connection with buying or selling real estate debt. It is during this stage that the buyer can determine whether the price to be paid under the contract justifies the risks associated with the purchase. The only way the buyer can do this is by thoroughly analyzing each aspect of the purchase, including review of the loan documents (such review to consider, amongst other things, whether the security has been validly created and properly perfected), the real estate collateral for the loan, the financial condition and solvency of the borrower and any guarantors, the financial condition and solvency of the seller, and the legal opinions (each of which is dealt with in detail below). Often when we are advising on these transactions, we provide a detailed asset purchase check list for our clients setting out each stage of the due diligence process that needs to be completed to ensure that nothing is overlooked. If during this process an unacceptable risk is discovered (assuming the buyer's lawyers have appropriately drafted the contract), the contract may be terminated without continued liability prior to the expiration of any “free look” due diligence period. Haphazard due diligence, however, may place the buyer in a less desirable position with severely undervalued assets if, for instance, an unresolved title defect, development restrictions, or pre-existing environmental conditions exist on the real estate securing the loans. Review of Loan Documents (i) Loan Agreement The loan agreement governing the underlying loan, along with the related security, serves as a general guide of the lender’s remedies in the event of a borrower’s default. The terms of these documents determine the various rights and remedies of the buyer, as lender of the loan, and those of the underlying borrower. Other matters to be considered include the financial covenants such as the loan-to-value and debt service, other general covenants and income and expense

projections relating to the cash flow of the real estate. In the event of any existing borrower defaults, the buyer will want to consider whether the default is material, whether the lender (or loan seller) has formally called a default, and the likelihood that the borrower can cure such default. A buyer should ensure that the transfer provisions set out in the loan agreement (and any related intercreditor agreement) are complied with, namely ensuring that the restrictions on transfer are not breached and that the loan is in fact transferred pursuant to an appropriately drafted and correct form transfer certificate. This will require input from the buyer's legal counsel, as an incorrectly drafted transfer certificate raises numerous issues potentially nullifying the sale. Furthermore, there is a particular issue in Germany that the transfer provision and draft form transfer certificate in some loan agreements drafted under English law may fail to deal with the effect that if there is a novation of rights and claims, the accessory security (bank accounts, pledges and the like) cease to exist. The obligations of the Lenders under such transfer certificate however can be novated. The form of the transfer certificate set out in the underlying loan, which should substantially be followed, may need to be amended to deal with this, as at the time of origination, many lenders did not focus on this issue. A further issue resulting from the current market conditions surround the increasing number of borrowers (or other companies within the sponsor group) looking to buy-back their own debt from lenders under pressure to trade out of a position. There are a number of reasons why a borrower group company may want to buy its own debt, most notably: (i) buying its own debt at a discount is effectively the same as repaying the debt at a discount; (ii) it may be able to sell the loan at a later date for a profit; and (iii) it gives the borrower (or its sponsor) a seat at the creditor's table, which may enable them to influence the creditors. In the context of real estate debt transactions, the buy-back of debt would usually occur at the subordinated or B loan level (i.e. the first loss position). Whilst the underlying loan agreement may not prohibit borrower group companies from owning the debt, a number of intercreditor agreements in the market (especially those put in place in the later stages of the European commercial mortgage-backed securitisation (“CMBS”) boom) restrict subordinated lenders transferring the B loan to borrower group companies. In deals where a borrower group company has bought debt subject to these restrictions, the restriction must

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Finance and Distressed Real Estate Alert

first be waived. The waiver is usually subject to the subordinated lender rights being 'turned off' in their entirety (more on such rights below) and in some cases, there may also be a change to the waterfall of payments, removing the ability for the borrower group company to receive the interest coupon on the B loan, with such funds being redirected in prepayment of the senior loan (most typically held in the CMBS). During its analysis therefore, the buyer should also determine the existence of any intercreditor agreement and determine how they impact on the buyer's ability (or appetite) to purchase the loan. If the buyer is buying a B loan or other subordinated interest in a whole loan, it will need to consider and negotiate, amongst other things, what cure rights, control rights, purchase rights and other subordinated lender rights it requires, as notwithstanding any prohibitions in the intercreditor agreement, consent to a transfer of the B loan to a borrower/sponsor affiliate is typically only granted on the basis that the typical B lender rights should be ‘turned off’ and should not be exercisable whilst the borrower or sponsor affiliate remains a B Lender. Accordingly, immediately following any such transfer, the new borrower affiliate buyer may not be able to exercise, have exercised on its behalf (other than by a servicer or a special servicer in accordance with the terms of the servicing agreement) or have accruing to it any cure, enforcement, consultation, approval, appointment and/or control rights (together the ‘Rights’) otherwise available to it under the terms of the underlying loan agreement, the intercreditor agreement and/or the servicing agreement. Such transfers should provide that the Rights may be reinstated (a) for so long as the B lender, (i) does not control or manage (in each case directly or indirectly) the management or voting rights in the underlying borrower or an affiliate of the underlying borrower, (ii) is not controlled or managed (in each case directly or indirectly) by an underlying borrower or an affiliate of the underlying borrower, (iii) is not party to any arrangements with any other entity pursuant to which the underlying borrower or any of its affiliates would have any indirect control of whatsoever nature in relation to any of the Rights, and (iv) is not an underlying borrower or an affiliate of the underlying borrower, in each case being confirmed to the reasonable satisfaction of the facility agent; or (b) with respect to the whole or any part of the transferred B loans, following a subsequent transfer or assignment of such participation by the B lender. The transfer should further provide that each of the servicer and the

special servicer will be required to notify the B lender (or any of its designees) with respect to material actions (as determined by the servicer and/or special servicer acting reasonably) to be taken with respect to the whole loan provided that (a) neither the servicer or, as the case may be, the special servicer will be required to disclose any information to the B lender that, in the discretion of the servicer or the special servicer (acting reasonably), will compromise the position of the other lenders in the deal or reveal any strategy of the other lenders that could compromise the position of the other lenders with respect to the whole loan, (b) no such notification will be required where immediate action is required to be taken in accordance with the servicing standard; and, (c) for the avoidance of doubt, no such rights shall oblige the servicer and/or special servicer to take into account any advice, direction or representation made by the B lender in connection with such notification. Moreover, the B lender should agree that, prior to any subsequent assignment or transfer of whole or any part of any transferred B loan being effective (along with the ability to exercise all or any corresponding Rights) (i) the B lender either confirms or procures confirmation to a security agent that the subsequent assignee/B lender is a qualifying lender, and (ii) the conditions set out in both the underlying loan agreement and the intercreditor agreement must be otherwise complied with. (ii) Security The jurisdiction of the underlying real estate will dictate the appropriate form of security required and so appropriately appointed legal counsel will be needed to advise any buyer on the related security documents. Assuming the real estate is located in England Wales, the real estate should be secured by way of legal mortgage with the appropriate registrations made at the Land Registry (if registered land). The mortgage is the legal mechanism by which the buyer can obtain title to underlying real estate. This document plays a crucial role because it allows the buyer, directly or through any security trustee to take legal ownership of the real estate, appoint a receiver of the real estate or otherwise exercise its power of sale over the real estate. The mortgage should specifically entitle the lender (or its security trustee) to enforce the security following an event of default under the loan agreement. The buyer will want to ensure that the security it has is first ranking, and so it is important to ensure that the security was not only validly created, but also properly perfected

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Finance and Distressed Real Estate Alert

(through whatever registration, notice and other requirements are required in the relevant jurisdiction). The priority of the mortgage (and all other security) is of paramount importance, since a first ranking charge will entitle the buyer to enforce its security and apply all proceeds realised from any sale towards the discharge of the entirety of its debt, generally free and clear of any inferior security (iii) Real Estate Collateral With respect to any real estate collateral, the debt purchase should be treated as a traditional real estate purchase. The buyer should perform an onsite inspection of the mortgaged real estate and determine whether an updated survey is required. To limit the buyer’s liability, an environmental site assessment of the real estate should be obtained, and the buyer should ensure that the current use of the real estate is in compliance with user, planning and other governmental restrictions on the real estate. Additionally, it is essential that the buyer obtain a new valuation of the real estate, so that it may get an accurate understanding of the current value of the land. The valuation will show the approximate market value of the real estate, but not necessarily what the buyer could expect to receive on an enforced sale. The buyer should also obtain any other third party reports during this stage. Finally, the buyer should analyze any income stream from the real estate, and ensure that the purchase price justifies the risk relating to such income stream in the event the buyer ultimately owns the real estate following enforcement of the mortgage. Analyzing the foregoing issues will mitigate any chance of the buyer being exposed to unknown, and potentially costly liabilities relating to the real estate. (iv) Financial Analysis of Borrower and Seller The financial solvency of the underlying borrower and any guarantors of the loan is important to the buyer for several reasons. Determining the solvency of the borrower allows the buyer to assess the likelihood that the borrower and/or guarantor can remedy any current or future default under the loan or other loan documents. The buyer should analyze the borrower’s financial statements to determine if it is in compliance with any financial performance covenants and/or reporting requirements pursuant to the loan agreement (e.g., net worth requirements, debt-to-income ratios, etc.). Implicit in this analysis is a determination of the likelihood of whether the buyer will ultimately be

forced to enforce its security over the real estate. By determining the amount of equity the borrower has in the real estate (by comparing the latest valuation of the real estate against the outstanding loan balance), the buyer can determine the likelihood of default and subsequent enforcement risk, with the more equity held decreasing the possibility of a borrower’s default, and vice versa. (v) Legal Opinions All underlying legal opinions provided in connection with the debt being purchased should be reviewed by buyer's counsel. Such legal opinions should be checked for the following to ensure that:

• They are addressed to the underlying finance and secured parties and any permitted successors and assigns, or at the very least, the security trustee for the benefit of the finance and secured parties from time to time;

• They are not subject to any unusual assumptions and qualifications;

• They provide a legal valid and binding opinion on the finance documents and provides a valid security interest opinion on the security created by the security documents;

• That, if the security perfection opinion is qualified by reference to other acts or documents to be carried out or delivered, that these other acts or documents are made a condition precedent to the acquisition of the loan;

• They opine on all applicable documents; and

• There are no other major issues identified in the opinion.

Further, local counsel should review all relevant foreign law opinions for the same issues as set out above.

Conclusion Real estate debt purchases have once again become the opportunity of choice for clients to profit from the uncertainties in the cyclical real estate market. Real estate and real estate debt may still be an effective protective hedge against inflation. For those buyers and sellers that are willing to utilise and accept a mixture of “value-add” asset management through to implementing

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Finance and Distressed Real Estate Alert

successful “buy-fix-sell” and/or “loan to own” strategies, understanding the process as a whole and appreciating the risks associated with owning the underlying real estate through the debt is the key to success. Moreover, those buyers who see the current distressed real estate market as an opportunity to expand their 'core' investment portfolio with good quality assets which are trading at good discounts to poor, will be well placed to profit from their investment. On the other hand, those that can't distinguish between good assets at a cheap price and bad assets at a cheap price will be less successful. Likewise those buyers that think creatively and attempt to work with sellers to share upside and approach these purchases in an intelligent manner will benefit. Buyers cannot take the view that they can buy core assets at opportunistic pricing and hope to be overrun with an array of assets, as this time around, many sellers who lost out during the last downturn cannot afford to do so again. Those buyers that realise this will benefit. Finally, current conditions in the debt markets mean that, increasingly, parties to a proposed

debt purchase are having to explore more innovative ways of unlocking the transaction. At the buyer level, such solutions including deferred consideration, vendor guarantees, assumption/ novation of the debt, vendor loans, mezzanine debt, subordinated debt , tranched debt, capital injections, or total return swaps may be explored. At the real estate level, dropping the property into limited partnerships, or introducing geared leases (split or otherwise) and use of sub-trust are all options. Similarly at the seller level, traditional profit share schemes, debt for equity swaps or new share issuances can all be explored. Our lawyers at K&L Gates have extensive experience in the types of transactions and have geographically diverse, interdisciplinary teams focused specifically on Distressed Real Estate and a Real Estate Finance. We would be happy to provide assistance on the types of transactions discussed in this alert.

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Los Angeles Miami Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park

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K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), and in Singapore (K&L Gates LLP Singapore Representative Office); a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; and a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2009 K&L Gates LLP. All Rights Reserved.

* Co-Leaders

K&L Gates Distressed Real Estate Practice K&L Gates LLP is a global law firm with 36 offices across the United States, Europe, Asia and the Middle East. Our interdisciplinary global Distressed Real Estate team represents institutional real estate lenders holding troubled real estate loans and mortgage-backed securities and investors who own or desire to acquire distressed real estate and real estate loans. Drawing upon a large number of experienced bankruptcy and transactional real estate and finance lawyers, we help clients maximize their recoveries and preserve their legal and equitable rights in the most efficient and cost-effective way. With over 75 bankruptcy and insolvency lawyers and over 180 transactional real estate lawyers globally, we bring an experienced, business-oriented approach to analyzing the special issues arising from troubled real estate loans and collateral, and proposing specific solutions to best address the needs of our clients. Our practice offers deep market experience, knowledge and presence, affording our clients a local connection for interests they may have across a wide geography. The Distressed Real Estate team is led by a cross-section of experienced practitioners across several offices and disciplines throughout the firm: William J. Bernfeld Los Angeles william.bernfeld@klgates.com (310) 552-5014

James E. Morgan Chicago james.morgan@klgates.com (312) 781-7234

Koren Blair New York koren.blair@klgates.com (212) 536-4879

Richard S. Novak Boston rick.novak@klgates.com (617) 261-3241

J. Michael Booe Charlotte mike.booe@klgates.com (704) 331-7556

Dianne G. Penchina New York dianne.penchina@klgates.com (212) 536-4878

Philip M. Cedar New York phil.cedar@klgates.com (212) 536-4820

Andrew V. Petersen* London andrew.petersen@klgates.com +44.(0)20.7360.8291

Bill Finkelstein Dallas bill.finkelstein@klgates.com (214) 939-5757

David E. Rabin New York david.rabin@klgates.com (212) 536-4002

Sue J. Hodges San Diego sue.hodges@klgates.com (858) 509-7433

Eugene F. Segrest Dallas gene.segrest@klgates.com (214) 939-4991

* Co-Leaders

David H. Jones* Charlotte david.jones@klgates.com (704) 331-7481

Shannon J. Skinner Seattle shannon.skinner@klgates.com (206) 370-7657

Phillip J. Kardis II Washington, D.C. phillip.kardis@klgates.com (202) 778-9401

Edward Smith London edward.smith@klgates.com +44.(0)20.7360.8189

Richard S. Miller New York richard.miller@klgates.com (212) 536-3922

Richard J. Smith London richard.smith@klgates.com +44.(0)20.7360.8200