Presenting a live 90-minute webinar with interactive Q&A Bank - - PowerPoint PPT Presentation

Bank Notes Secured by Real Estate: Latest Opportunities and Risks for Investors and Lenders

Navigating Representations and Warranties, Lender Liability, and Foreclosure Issues Today’s faculty features:

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

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.

THURSDAY, MARCH 28, 2013

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

Thomas O'Connor, Partner, Duval & Stachenfeld, New York Adriana Vesci, Partner, Cox Castle Nicholson, Los Angeles

Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-871-8924 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the SEND button beside the box

FOR LIVE EVENT ONLY

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

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

• 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

Loan Purchase and Sale Agreement

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

 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

Note Purchase Diligence: Borrower and Guarantor

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

Note Purchase Diligence: Property Due Diligence Considerations

 Property Diligence Considerations:



Tenant issues



Environmental issues



Labor and employment issues



Valuation



Deferred maintenance



Status of licenses/permits



Access for inspections



Unpaid taxes



Compliance with CC&Rs



Easements/3rd-party rights



Parties in possession

 Special Considerations for Construction Loans:



Construction Contracts



Development Agreements



Mechanic’s Liens



Unfinished construction

24

Note Purchase Diligence: Title

 Obtain new title report and underlying

documents

 Review all liens

 Junior loans

 Assignment of existing loan policy or new

policy

 Date down of existing policy, if necessary

 Endorsements:

 Assignment endorsement (ALTA 10)  Date down endorsement (ALTA 10.1)  Modification endorsement (ALTA 11-06)

 Updated survey

25

Note Purchase Diligence: Loan File

• Correspondence among Lender,

Borrower and Guarantor

• Look for Lender Liability Issues
• Have defaults been waived, expressly or by

course of conduct?

• Did Lender make promises to Borrower

regarding forbearance or future funding?

26

Note Purchase Diligence: Lender Liability Issues

 Borrower could have defenses to lender

actions

 Borrower could have claims against

lender:

 Litigation re wrongful acts or omissions  Breach of fiduciary duty  Covenant of good faith and fair dealing

27

Closing the Note Purchase: Process

 Closing date will typically be scheduled very

shortly after due diligence period expires

 Original loan documents and loan file will be

released to buyer when funds are wired

 “New York”-style closing

 Recordation of Assignment of DOT/Mortgage  Settlement/Closing Statement  Financing availability or all cash

28

Closing the Note Purchase: Closing Documents

 Instruments to effect the purchase:

 Allonge to original Note  Assignment of recorded instruments  General assignment  UCC-3  Notices to relevant parties

 Underlying Loan Documents and Loan File

 Importance of the original Note

 what to do if the original Note is lost or destroyed

29

Legal Requirements to Own a Loan

 Purchasers should consider whether

there are any legal requirements to holding a real-estate secured note.

 Usury issues  Finance Lender’s License (CA)

30

ISSUES IN HOLDING DISTRESSED DEBT

Thomas D. O’Connor 212.692.7383 toconnor@dsllp.com March 28, 2013

www.dsllp.com 32

Borrower Defenses

• Verbal Promises, Waiver/Reliance
• “You said you loved me!”
• Estoppel/Course of Conduct
• “I didn’t know murder was against the law!”
• Negligence
• “The Devil made me do it!”

www.dsllp.com 33

Lender Liability Claims

• Failure to fund (breach of contract)
• Failure to approve (breach of covenant of good faith/fair

dealing)

• Interference/Control

www.dsllp.com 34

Lender Protection to Defenses/Lender Liability Claims

• Recourse Guaranty
• No Modification Clause/Merger Clause
• Notices
• Comply with loan documents
• Reservation of rights, non-waiver language
• Document Actions
• Internally and to Borrower as appropriate
• After a default, always include reservation of rights and non-waiver

language in all correspondence

www.dsllp.com 35

Lender Protection to Defenses/ Lender Liability Claims (continued)

• Follow loan document procedures
• No stupid emails (externally and internally)
• Pre-Negotiation letter

www.dsllp.com 36

Workouts

• Pre-Negotiation Letter
• Purpose
• Preserve status quo
• Permit negotiation without prejudice to any parties
• Elements
• No waiver of existing rights
• No obligation to modify loan documents or enter into any agreements
• No admissions/settlement discussions
• Terminable upon notice

www.dsllp.com 37

Forbearance Agreement

• Purpose
• Delay exercise of remedies to give borrower time to perform in

some specified manner

• Enhance ability of lender to exercise remedies upon expiration of

forbearance if borrower fails to perform

• Elements
• Borrower acknowledges occurrence of specified defaults
• Sometimes, alternatively, parties will only acknowledge a dispute
• Lender forbears from exercise of remedies for specified period of

time

• Lender reserves right to exercise remedies for all other defaults
• If defaults are acknowledged and lender only forbears for specific

defaults, critical to identify all existing defaults

www.dsllp.com 38

Forbearance Agreement (continued)

• Elements (continued)
• Borrower waives any defenses/claims against lender
• Can include loan term modifications/concessions during

forbearance period

• Can include deed-in-lieu/confession of judgment

www.dsllp.com 39

Loan Restructure

• Purpose
• To effectuate a modification of loan that provides viable terms for

borrower and lender through maturity

• For lender to revise loan terms to improve position in the event

restructure documents do not work

• Elements
• Monetary concessions
• Interest rate reduction
• Debt service payment forgiveness
• Pay and accrue
• Discounted payoff
• Maturity Date Extension (thresholds)

www.dsllp.com 40

Loan Restructure (continued)

• Elements (continued)
• Lender Enhancements
• Debt service reserves
• Other reserves
• Credit enhancement
• Additional guaranties and /or additional collateral
• Financial covenants/performance tests
• Equity participation
• New sponsor
• New equity and control
• Additional equity
• Deed-In-Lieu

www.dsllp.com 41

Foreclosure

• Foreclosure
• Judicial vs. Non-Judicial
• Timing
• Issues
• “Junior” interests
• Bankruptcy

www.dsllp.com 42

Deed-In-Lieu

• Advantages of Deed-In-Lieu
• Timing
• Cost
• Disadvantages of Deed-In-Lieu
• Title issues
• Transfer taxes
• Enforceability issues (if borrower opposes)

www.dsllp.com 43

Enforceability of Deed-In-Lieu through Forbearance/Workout Agreement

• Right of Redemption
• Deed as Security vs. Absolute Conveyance
• New York Law: (Kirby v. Tricker, et al., 265 A.D. 149)
• A mortgagor and mortgagee may, at any time after the creation of the

mortgage and before foreclosure, make any agreement concerning the estate they please, and the mortgagee may become the purchaser of the right of redemption.

• Although a party may not waive the right of redemption in the granting
• f a mortgage, a party may convey its right of redemption to a lender in

consideration for concessions made by a lender in a loan workout.

• When a lender receives a deed in connection with an agreement in

which it agrees to forbear from exercising its rights and remedies, the deed in lieu is treated as an absolute conveyance, free from the borrower’s right of redemption.

www.dsllp.com 44

Enforceability of Deed-In-Lieu through Forbearance/Workout Agreement (continued)

• Deed as Security vs. Absolute Conveyance (continued)
• California Law:
• A purchaser may not, as part of an original mortgage, convey title to the

property to the lender. Cal. Civ. Code § 2889; Hamud v. Hawthorne, 52 Cal.2d 78, 84 (1959).

• A trustor and beneficiary may subsequently enter into an agreement

whereby the trustor deeds the property to the beneficiary. Hamud, 52 Cal.2d at 83.

• The subsequent agreement must be fair, not procured by fraud, and

supported by adequate consideration. Bradbury v. Davenport, 120 Cal. 152, 154 (1898); Bastajian v. Brown, 57 Cal.App.2d 910, 915 (Ct. App. 1943).

• What constitutes adequate consideration is a question of fact. Wright v.

Security-First Nat. Bank of L.A., 35 Cal.App.2d 264, 280-281 (Ct. App. 1939).

www.dsllp.com 45

Receivership

• Summary
• Receiver is an officer of the court
• Loan documents generally provide lender with right to have

receiver approved by the court having jurisdiction

• Receiver reports to the court and has authority granted to receiver

by court order

• Receiver’s primary responsibility is to act in place of debtor in
• rder to preserve and protect the debtor’s estate

www.dsllp.com 46

Receivership (continued)

• Advantages
• Vest control of property (and property cash flow) from borrower
• Expedited remedy (30-60 days)
• Protects property while foreclosure is pending
• Disadvantages
• Selection of receiver
• Control