Presenting a live 90-minute webinar with interactive Q&A Bank Notes Secured by Real Estate: Latest Opportunities and Risks for Investors and Lenders Navigating Representations and Warranties, Lender Liability, and Foreclosure Issues THURSDAY, MARCH 28, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Thomas O'Connor, Partner, Duval & Stachenfeld , New York Adriana Vesci, Partner, Cox Castle Nicholson , Los Angeles 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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Bank Notes Secured by Real Estate: Negotiating and Investigating a Note Sale Adriana A. Vesci 310.284.2243 avesci@coxcastle.com March 28, 2013 Attorney advertisement. The content of this packet is an introduction to Cox, Castle & Nicholson LLP’s capabilities and is not intended, by itself, to provide legal advice or create and attorney-client relationship. Prior results do not guarantee future outcome.
Current Trends in Note Sales While many industrial professionals indicate that they are being active in the distressed market, there has been a noted a material decrease in note sale activity, signaling that loan defaults are down and that large numbers of expiring conduit loans appear not yet to have created a second wave of defaulted note sales. Distressed market transactions are giving way to more traditional “market” deals as more conservative investors, looking to stabilized real estate as a traditional component of their portfolios, are re-entering the market. Low interest rates are making this a good time to be a borrower but the concern regarding refinanceability in 5-10 years is starting to creep into the market. (Source: CREFC’s 2013 Distressed Debt Summit) 6
Risks and Rewards of Note Purchases Buying a loan v. buying real property Reasons to buy: Investing in loan “loan to own” Potential pricing advantages Costs of enforcement Bankruptcy risk avoidance Diminished collateral value 7
Risks and Rewards of Note Purchases, Cntd. Borrower loan repayment Costs of enforcing remedies Borrower bankruptcy Unenforceability of loan documents Limited diligence opportunities Uncooperative borrower Uncooperative seller 8
Loan Purchase Sources Banks and private lenders Mortgage brokers Real estate owners and investors Hedge funds and private equity funds Attorneys 9
What Type of Loan is Being Sold? Loan Portfolios Individual Loans Construction Loans Permanent Loans Bids Whole loans v. A/B Notes, Participations and MBS/CDO Interests Senior Loans v. Junior/Mezzanine Loans Intercreditor Agreements 10
Who is Selling the Loan? Most sellers are the FDIC, portfolio banks, insurance companies and servicers. The identity of the seller will impact: The scope of seller’s reps and warranties Exercising remedies against seller Insolvency risks Special considerations when FDIC is seller D’Oench Duhme Doctrine 11
Documenting the Loan Purchase Note Purchase Documents: Term Sheet or LOI Loan Purchase and Sale Agreement Allonge Assignment of Recorded Instruments Assignment of Loan Policy (or new Loan Policy) General Assignment of Other Loan Documents Closing Statement UCC-3s Notices to Relevant Parties 12
Loan Purchase and Sale Agreement Typically a Lender Form Generally “as is” with limited reps & warranties Important Terms and Provisions: Representations and Warranties Remedies Asset Management Provisions Confidentiality Provisions Release of Claims 13
Loan Purchase and Sale Agreement: Seller Reps & Warranties Seller will provide as few representations and warranties as possible; maybe none. Try to get the following: Total outstanding debt (P&I, penalties and expenses) Seller has provided all diligence materials and they are true and accurate Seller has not previously released any loan collateral Seller has received no notice of casualty or condemnation Seller has received no claim or notice from borrower regarding lender liability 14
Loan Purchase and Sale Agreement: Earnest Money Deposit of 5-10% of purchase price may be required Seller may require earnest money to go “hard” upon execution If deposit is non-refundable, ensure that all due diligence has been conducted before executed of purchase agreement. 15
Loan Purchase and Sale Agreement Other Tips and General Characteristics: Attach forms of closing documents as exhibits Clearly identify purchase price, earnest money deposit, diligence period and closing date List all diligence materials to be provided in an exhibit 16
Note Purchase Diligence: Timing Due Diligence Timing Diligence often begins at term sheet phase Typically short due diligence period, if any, provided in Note Sale Agreement Request due diligence materials as early as possible. Order new title search as early as possible Order borrower UCC, judgment, bankruptcy and litigation searches as early as possible. 17
Note Purchase Diligence: Loan Documents Confirm all loan documents provided and executed Confirm recordable documents actually recorded and UCC financing statement filed. Review business and economic terms: Interest rate Amortization Maturity Pre-payment rights Defaults and remedies Notice and cure periods 18
Note Purchase Diligence: Loan Documents, Cntd. Promissory Note – make sure lender has the original executed note in its possession security interest in a promissory note is perfected upon attachment attachment of security interest in note is also attachment of a security interest in the mortgage “follow the note”: in order to enforce the note, the party seeking to enforce must show present possession. Deed of Trust/Mortgage Guaranties (recourse or non-recourse; full or partial payment) Security Agreements Environmental Indemnity Agreement Assignment of Rents and Leases UCC Financing Statements Closing Statements Deposit Account Control Agreements Pledge Agreements 19
Note Purchase Diligence: Loan Documents, Cntd. Confirm total accrued and unpaid interest and any penalties Confirm status of Borrower’s default and Lender’s enforcement Has notice of default been given? Are there monetary or non-monetary defaults? Have all lender notices been properly given? Has the foreclosure process commenced? Has a receiver been appointed? Multiple lenders and intercreditor issues Review Intercreditor, Co-Lender or Participation Agreements Review Mezzanine or Junior Loan Documents 20
Note Purchase Diligence: Consent Issues Borrower Consent Rights Depository Institutions – collateral accounts and lock-box accounts Intercreditor Agreements Syndicated Loan issues – participant consents Franchisor/manager consents Licensing and permits 21
Note Purchase Diligence: Borrower and Guarantor Financial statements, income tax returns, UCC, tax and judgment lien, pending litigation and bankruptcy searches Borrower’s organizational documents Operating statements Borrower’s and Guarantor’s counsel’s legal opinion 22
Note Purchase Diligence: Property Due Diligence Property Documents: Survey Appraisal C of Os Environmental reports Zoning reports Leases/SNDAs Tax bills Management agreements Service contracts Rent roll Insurance certificates 23
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