Presenting a live 90-minute webinar with interactive Q&A Consensual Resolutions of Distressed Loans Evaluating Modifications, Forbearance Agreements, Deeds in Lieu, Short Sales and Other Options for Loan Workouts WEDNES DAY, MAY 2, 2012 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Adam B. Weissburg, Part ner, Cox Castle & Nicholson , Los Angeles Gregory G. Gosfield, Part ner, Klehr Harrison Harvey Branzburg , Philadelphia Y olanda Rodriguez, General Counsel, O'Neill Properties Group , Philadelphia 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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Consensual Resolutions of Distressed Loans Evaluating Modifications, Forbearance Agreements, Deeds In Lieu, Short Sales and Other Options for Loan Workouts CLE Webinar | www.straffordpub.com May 2, 2012 | 1:00pm – 2:30pm EDT Gregory G. Gosfield, Esquire Adam B. Weissburg, Esquire Yolanda Rodriguez, Esquire Klehr Harrison Harvey Branzburg, LLP Cox, Castle & Nicholson LLP O’Neill Properties Group 1835 Market Street 2049 Century Park East 28th Fl 2701 Renaissance Blvd Philadelphia PA 19103 Los Angeles, CA 90067 King of Prussia PA 19406 215-569-4164 310-284-2270 610-992-5885 GGosfield@Klehr.com aweissburg@coxcastle.com YRodriguez@ONeillProperties.com 5 PHIL1 2037308 Strafford
Outline • Hypothetical- Basic Facts • Facts of the Problem Loan Applicable to All Strategies – Due Diligence (both sides). • Forensic accounting of document and issues • What are leverage points • What are the concerns – Goals (both sides) • What are you trying to accomplish – Recovery – Workout – Avoidance of Recourse 6 PHIL1 2037308 Strafford
Outline • Options – Loan Modification • Amendment v. Forbearance • Possible tools to workout – Friendly foreclosure – Deed in lieu – Mortgage Debt Purchase – Receivership – Bankruptcy 7 PHIL1 2037308 Strafford
Hypothetical – Basic Facts • Speculative office building under construction • Leases in place for 25% of gross leasable area • Money invested into deal to date: $10 million • Current fair market value: $5 million 8 PHIL1 2037308 Strafford
Hypothetical – Capital Stack First Mortgage Loan $6 million outstanding Mezzanine Loan If only $5 million of value exists, what ► $3 million outstanding survives and at what value? Equity $1 million invested 9 PHIL1 2037308 Strafford
Facts of the Problem Loan Applicable to All Strategies – Financial Strength Evaluation • Financial Strength of Mortgagor • Financial Statements with footnotes • Tax Returns • Financial Strength and Positioning of Guarantor • Financial Statements with footnotes • Tax Returns • Analysis of Guarantor Presence/Reputation in Market 10 PHIL1 2037308 Strafford
Facts of the Problem Loan Applicable to All Strategies – Collateral Evaluation • Value and Condition of Collateral – Appraisal and Market Analysis – Title and Survey – Environmental – Consideration of Positioning of Asset in Market, i.e. “trophy asset” 11 PHIL1 2037308 Strafford
Facts of the Problem Loan Applicable to All Strategies – Loan Document Evaluation • Inventory defaults and accompanying remedies • Consider potential claims of invalidity of documents, lender liability, etc. • Perform technical analysis, i.e. review for state law compliance • Evaluate guarantor recourse 12 PHIL1 2037308 Strafford
Guarantor Recourse: Recent Decisions • Wells Fargo Bank, NA v. Cherryland Mall Limited Partnership, et al (2011 Mich. App. LEXIS 2360); 51382 Gratiot Avenue Holdings, LLC v. Chesterfield Development Company, LLC and John Damico v. Morgan Stanley Mortgage Capital Holdings, LLC (2011 U.S. Dist. LEXIS 142404): “Non-recourse” borrowers breached SPE covenant that required borrowers to remain solvent to maintain SPE status; courts upheld that insolvency triggered full recourse to borrowers and guarantors • GECCMC 2005-C1 Plummer Street Office Limited Partnership v. NRFC NNN Holdings LLC (Los Angeles County Super. Ct. No. BC419513): When non-recourse borrower’s tenant (Washington Mutual) ceased to pay rent and abandoned the property, this did not trigger breach of “bad boy” covenant requiring borrower to obtain lender consent to lease termination because lease was not terminated. 13 PHIL1 2037308 Strafford
Establishing Goals – Mortgagor v. Mortgagee • Mortgagor • Mortgagee – Swift result – Swift result – Lowest cost – Lowest cost – Highest preservation – Highest preservation of value for equity of value for debt – Privacy – Privacy – Prevent long-term – No precedent repercussions – Avoid personal recourse to guarantor 14 PHIL1 2037308 Strafford
Establishing Goals - Who Is Your Lender – Relationship Lender – Special Situations/Workout Officer – Special Servicer – Loan Purchaser 15 PHIL1 2037308 Strafford
Loan Modification “Delay and Pray”/“Extend and Pretend” Before After •Revised deal terms which Mortgage First Mortgage Loan may include: Lender $6 million outstanding -Extension -Deferrals of Payments -Positioning for future sale or conveyance of asset •Needs to correspond/defer Mezzanine Mezzanine Loan to first mortgage terms Lender $3 million outstanding unless mezzanine lender is replacing borrower Borrower Equity $1 million invested 16 PHIL1 2037308 Strafford
Loan Modification “Delay and Pray”/“Extend and Pretend” Pros: • Everyone buys time to optimize strategies • Parties can further their due diligence in a friendly setting, i.e. update of representations and warranties Cons: • Busy bankers/servicers have excuse to move to next item in their queue • Regulatory limitations • If borrower/guarantor are cash-starved, this may just delay the inevitable and lead to reduction in asset value 17 PHIL1 2037308 Strafford
Loan Modification “Delay and Pray”/“Extend and Pretend” • Amendment • Forbearance - May reset terms - Suspends remedies only - Impairment of junior creditors - Intercreditor risks - Loss of lien - Course of priority conduct taints enforcement - Loss of guaranty - Less regulatory - Loss of special restrictions waivers 18 PHIL1 2037308 Strafford
Loan Modification – Sample Structuring Options – Split current interest from operating income – Accrue interest on fixed/unpaid arrearages – Back-end loan modification fees – Earn out of guaranty release – Stipulated Judgment/Deed-in-the drawer – Consensual sale 19 PHIL1 2037308 Strafford
Mortgage Foreclosure Before After Mortgage First Mortgage Loan Owner of $5 million Property plus potential Lender $6 million outstanding Deficiency Claim Against Guarantor (if not negotiated) Mezzanine Mezzanine Loan Lender $3 million outstanding Borrower Equity $1 million invested 20 PHIL1 2037308 Strafford
Mortgage Foreclosure – Pros and Cons For Mortgage Lender For Borrower and Mezzanine Lender ability to manipulate/create delay Pros: • Court supervision • Routine procedures • Ability to divest, subordinate encumbrances Cons: • Cost • Lose everything • Procedural challenges • Public • Failure of notice • Cost to fight • Local requirements • Guarantor exposure for deficiency (if not negotiated) • Public Auction dilutes transfer control • Guarantor personal liability for bankruptcy of Borrower by Mezzanine Lender (if not negotiated) 21 PHIL1 2037308 Strafford
Mortgage Foreclosure - Mortgage Lender Risks • Transfer Risk – Defective collateral – Borrower bankruptcy – Defective sale 22 PHIL1 2037308 Strafford
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