Presenting a live 90 ‐ minute webinar with interactive Q&A Commercial Real Estate Loan Commercial Real Estate Loan Workouts and Modifications Strategies for Developers, Owners and Lenders Restructuring Underperforming Loans WEDNES DAY, AUGUS T 24, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f David A. Barksdale, Partner, Ballard Spahr , Los Angeles Ren R. Hayhurst, Partner, Bryan Cave , Irvine, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Real Estate Loans in Trouble: Understanding Securitized Lending Lending Ren Hayhurst (Irvine,CA) 949-223-7125; rrhayhurst@bryancave.com
Differences in CMBS Lending vs. Portfolio or Balance Sheet Lending g • Basic Differences from Balance Sheet Lending • Significance/Impact on Commercial Real Estate Finance • • Structure Structure • Parties and Relationships/Roles and Motivations • Special Servicer p 6
Overview of Securitized Loan Originations g • Making the Loan – Originator Underwrites and Closes Loan in Own Name – Loan Usually “Table Funded” By Warehouse Lender • Warehouse Lender and “B” Piece Buyers Play Key Roles In Underwriting • Immediate Loan Sale – Along with Closing Documents, The Loan is Assigned to the Along with Closing Documents, The Loan is Assigned to the Warehouse Lender – Importance of Representations and Warranties Relating to Standardized Documents Standardized Documents 7
Overview of Securitization Process • Key Players – Securitization Trust Securitization Trust – Investors • Tranche Investors – “A” Piece and “B” Piece Investors – Servicers – Master and Special Servicers Servicers Master and Special Servicers • “B” Piece Investor Often in Role as Special Servicer • Purpose of Trust Structure – Use of REMIC Trust Structure for Tax Benefits – Legal Limitations of REMIC Structure for Individual Loans 8
Role of Servicers • Pooling and Servicing Agreement (PSA) – Sets the Operational and Control Issues – Controls the Actions of the Investors and the Servicers Controls the Actions of the Investors and the Servicers • Master Servicer – Manages Basic Loan Administration • Limited Authority to Make Decisions • “B” Piece Owner is “controlling investor” • Special Servicer – Manages Unique Decisions and Default Situations • More Authority than Master Servicer, But Still Limited By PSA Terms and REMIC laws • “A” Piece Owner is “controlling investor” • A Piece Owner is controlling investor 9
Master vs. Special Servicers • Role of Master Servicers – Oversees Loan Payments, Application of Reserves, Basic Lease Approvals Within Terms of the Loan Documents Lease Approvals Within Terms of the Loan Documents • Not Authorized to Make Major Lease Decisions or Changes in Reserve Provisions • Not Authorized to Work Through Default Situations • Role of Special Servicers – Review Loan Modifications, Post Default Issues, Post Maturity Problems – Role of the Controlling Investor Class (Usually “A” Piece Owner) • Tension between investor classes in default situation 10
Commercial Real Estate Loan Workouts and Loan Workouts and Modifications Loan Defaults and Loan Modifications/Restructuring Strafford Webinars & Teleconferences Wednesday, August 24, 2011 D David A. Barksdale id A B k d l Ballard Spahr LLP 2029 Century Park East, Suite 800 Los Angeles, California 90067 424 204 4322 Direct 424.204.4322 Direct 866.254.2297 Facsimile barksdaled@ballardspahr.com | www.ballardspahr.com
Loan Defaults • Types of Loan Defaults yp - Payment Default • • A CMBS loan will be transferred from the A CMBS loan will be transferred from the master servicer to the special servicer if the loan is 60-days past-due - Maturity Default • With respect to CMBS loans, the master servicer may delay the transfer of the loan to the special servicer if the borrower provides an acceptable refinancing commitment p g 12
Loan Defaults • Types of Loan Defaults (continued) yp ( ) - Covenant Default • Typical violations relate to SPE provisions, subordinate Typical violations relate to SPE provisions, subordinate financing, financial performance covenants, etc. • May not be discovered until after monetary defaults arise arise • A CMBS loan may be transferred from the master servicer to the special servicer upon the occurrence of a covenant default if the default will materially adversely t d f lt if th d f lt ill t i ll d l affect the certificate holders and is not remedied within the applicable cure period set forth in the loan documents documents 13
Loan Defaults • Evaluation and Analysis – Lender v. Borrower y - Identifying the Cause of the Default • The borrower must acknowledge the default g • The borrower and the lender must agree on the underlying causes • Outside or within the borrower’s control - If outside, it may be worthwhile for the lender to work with the borrower work with the borrower - If within, an arrangement leaving the borrower in control of the project is probably not an option 14
Loan Defaults • Evaluation and Analysis – Lender v. Borrower y (continued) - What is the relationship between the borrower and p the lender? • Does the lender trust the borrower? • How has the borrower addressed the problems to date? o d e? • Does the borrower have the experience and ability to solve the existing problems? ab ty to so ve t e e st g p ob e s? 15
Loan Defaults • Evaluation and Analysis – Lender v. Borrower y (continued) - Lender evaluation of the borrower • Evaluation and analysis of the borrower’s credibility and ability for future performance y y p • Pre-default v. post-default conduct • Q Questions: ti - Who, what, when, why and how 16
Loan Defaults • Pre-Negotiation Agreements g g - A Pre-Negotiation Agreement (PNA) is designed to: • Protect the lender and its representatives • M Manage the borrower’s expectations at the start th b ’ t ti t th t t of discussions concerning the modification or extension of a loan e e s o o o 17
Loan Defaults • Pre-Negotiation Agreements (continued) g g ( ) - There are five basic provisions that the PNA should address: • No final agreement until reduced to a final, signed agreement • All discussions and writings are confidential and inadmissible • The borrower and all guarantors affirm the loan documents and acknowledge that the lender is not waiving any of its rights under acknowledge that the lender is not waiving any of its rights under the loan documents • Current borrower representatives should be identified and the PNA should be signed by the borrower and all guarantors should be signed by the borrower and all guarantors • Costs to be borne by the borrower 18
Loan Defaults • Pre-Negotiation Agreements (continued) g g ( ) - Additional PNA terms: • • Other terms may be included such as Other terms may be included, such as - releases - certain representations and warranties t i t ti d ti - interim forbearance terms • But only if they can be obtained without lengthy discussions 19
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