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Lenders 360

Good Times for Lenders

New Name, New Look, Same Financial Community

By Keith Mullen on Posted in Good Times for Lenders

Welcome to the newly redesigned Lenders 360 blog, formerly known as Tough Times for Lenders.

Financial analysts and banking news headlines all point to better times, maybe even “good times,” for commercial lending markets.  For the first time since 2008, employment figures are promising and major banks are well capitalized.   Although challenges remain, economists generally agree that there are glimmers of hope, which is a remarkable change from the last few years.

The change requires our original blog site, Tough Times for Lenders, to implement a new look and a new name—Lenders 360.  The new blog site covers issues affecting  every type of lender and spans through both the “good times” and “tough times” of lending.   In addition, a newly added column recognizes the importance of technology in commercial finance and will focus on trends and tips for maximizing technology.

We’re proud that Lenders 360 has become a go-to resource for commercial lending.  The online engagement, combined with the different perspectives and knowledge-sharing, are what give the blog site value and make a difference to the financial community.

We thank all our readers for their continued support of “Tough Times for Lenders,” and we look forward to publishing more helpful news and resourceful information at Lenders360blog.com.

The list below represent some of our most widely read postings in 2011.

Good Times Category

Tough Times Category

Technology Category

 

Technology Notes

My Apology: When Understandable is NOT Excusable

By Keith Mullen on Posted in Technology (including Green Buildings)

Technology is all about fewer people doing more.

Part of the "doing more" is dealing with too much information; and then in crafting and implementing personal habits and self-control to deal with it.

The chief culprit is e-mail. Many of us receive 200+ e-mails a day – in our work e-mail.  Separately, our personal e-mail will pile on another 20+ e-mails.  Many commentators, such as Dennis Kennedy, believe that e-mail is broken.  E-mail simply can be overwhelming.

Then social media tools such as blogs, Facebook, Google+, Linkedin, Twitter . . . all add to the problem. 

No doubt each of us is different in our approach and use of these tools, but ultimately and eventually many of us reach the "make my day" moment: part of me wants to stand up, stare down the screen and then blow it up.

Earlier this week, this blog put some or probably many of you in that position.

  • I apologize for the numerous e-mails sent from TT4L – sent by me – to you.

I became part of this problem.  It was horrible.

Last month I mentioned David Gulati’s piece on the HBR Blog Network called "Facebook is Making Us Miserable."

For those of you who were pounded by e-mails coming from TT4L: it was miserable.  For a time, TT4L became a spam machine.

The misery was not the same points of pain painted by Gulati.  But on some level, pain is pain and misery is misery.  E-mail will kill us all.

So, what was going on?

The service provider for this blog was moving various blog posts, as they prepared for a significant change to this blog.  Unfortunately, the "send notification" was not disabled; and the move triggered the email barrage.  It was a mistake.

All this technology is great; but -

  • humans still linger about

When alerted to the problem, the servicer provider quickly worked to correct it.   Frankly, this has NOT changed my appreciation of the company.  They really are good.  Now I know "how" they deal with problems.  In a sense, knowing this puts them in the small list of people who if I had to go to war, I’d want them in the fox hole with me.  (But, I’d like to avoid war.)

This is where one of my favorite sayings swings in:

  • this might be understandable, but it is not excusable

The e-mail barrage (the spam effect) was wrong.

The purpose of TT4L is to assist you in your work with distressed investments, by furnishing helpful information (and maybe a different perspective spiced with some humor).

  • For a day, TT4L and Keith Mullen (me) became part of the problem*

Again, I apologize.  It was not excusable.

 * for a complete list of the "problems" with Keith Mullen, call my office or my house

Technology Notes

“Good” News in CRE Finance in ’12? Not Really (& Real Uptick for CMBS Requires a 3-step)

By Keith Mullen on Posted in Market Trends, Technology (including Green Buildings)

Rick Jones at Crunched Credit has a thoughtful piece where he offers a hopeful picture for commercial real estate debt markets in 2012.  I can’t go there.

On several basic points he’s overly optimistic (his view in bold).  My view is this:

  • Unemployment (6-7%): for the next 3-4 years, the new normal is +8% – with the most important segment of our work force (the young adults) hammered at +16%.  Hammering the future workers of America will  . . . . ugly thought for old people like me.
  • Commercial Real Estate ("firming of demand . . . mostly expand’): demand for and expansion of commercial real estate will firm up only in limited markets, and only for certain products in those markets.  For example, the opening of the "new" Panama Canal will result in increased demand for industrial space along the Gulf Coast. But, across the nation, retail will remain a point of pain: tepid consumer spending and significant increase in online purchases will undermine the recovery in "sticks’n bricks" retail. As I’ve noted, the human vulture effect of online shopping will impact the retail footprint, and it will ripple across the entire CREF platform.  Next up: office demand will feel a similar squeeze.  For example, my law firm will move in 2012 – with more lawyers but into a much smaller leased premises.  The technology mantra for office space is "fewer people doing more in LESS SPACE."
  • Housing ("housing will finally make a bottom"): its all about moving back the US percentage of home ownership to the more frugal 1960 average of 62% - which will be a significant drop from the ’09 high of @ 67%.  It could be a ten year downward trek, which could take us until 2019 for a return to close to the 1960 number. (Part of me begs to be wrong on this one.) 
  • "EU" feels like "OUch":  by some measures, the EU’s economy is the biggest in the world. We’re tied to the EU both through our heritage, and as a major trading partner.  This is why the US Treasury periodically supports the EU banks. Rick Jones and I agree on this one. The EU is OUch.
  • CMBS comeback ("modestly better"): like Rick, I anticipate an improved CMBS market. Unlike Rick, I pin meaningful improvement for CMBS on the adoption of my "three-step" model:
    • risk retention
    • loan level transparency
    • consistent appraisal & underwriting standards

We’re entering into "tepid" times, which does not equate to "good" news.

Sure, we’ll be innovative and the like.

But  . . .  we can’t structure our way out of this one.

If you view any of this differently, please comment below.

It’s “That Time”: What are the Most Important Terms of a Guaranty?

By Keith Mullen on Posted in Guaranty Issues, Training

The holiday season is behind us, but one of my favorite songs still resonates: "It’s that time of year, when the  . . . ."

 

Holiday season.  Fireplace. Home.

But it’s back to work, where . . . after being back at the law firm for several weeks, clearly we’re at "that time" of the distressed debt cycle where the focus turns to the guarantors of the bad loans.

This time is far from the world of falling in love, and "wishing you and yours the same thing, too."

Instead, back at work, it’s about hits to the balance sheet and decisions on pursuing loan guarantors.

A different kind of fireplace.

The focus quickly becomes very pointed: does the guaranty, whether it is a payment and performance guaranty or a merely a non-recourse carveout guaranty (or indemnity), contain the "key" provisions?

The broader topic of guaranties is huge.  We devoted an entire afternoon to it in the fall of ’09.  (You can download materials on it by following the instructions under the "client resources" tab above.)

  • But what are the "most important" guaranty provisions, regardless of the type or nature of the guaranty?

Here are some of the provisions on my list:

  • Independent Agreement:  does the guaranty agreement expressly state that the guarantor may be sued independently from the borrower?  Are there "conditions precedent" that must occur before the guarantor has liability? 
  • Service of Process:  this provisions has become very important in that unlike the last major turn down, many people now live "behind" or in gated communities, which make it difficult to serve legal notices and law suit papers.  Does the guaranty agreement appoint a third party as a recipient of legal notice or papers?
  • Consideration: what direct or indirect benefit did the guarantor receive in signing the guaranty agreement?  If it is "indirect," then what "is" it and what does the lender have to prove it? And, who has the burden of proving consideration?
  • Waivers:  does the guaranty agreement contain a good (read: long and longer) waiver provision or paragraph?

Please add your "most important" provisions below.

It’s that time. 

Technology Notes

Foreclsoures Mimic Life: New Focus on Fees & Data (How They Met – Natur’lly)

By Keith Mullen on Posted in Remedies, Technology (including Green Buildings)

The importance of data and the public sector’s need for cash is a marriage of convenience, and necessity.  It just will be. (Annie Oakley calls it “natur’lly.”)

In the not so distant future, pairing the two will be assumed; and there will be a short diversion in special asset training programs, where the “wise” will tell the young the story of the day when data met cash – or “how I met your mother.”

Data.  My bottom line perspective of all the due diligence and closing binders (paper or electronic) generated by armies of us across the nation as we close, and then service and dispose of commercial real estate investments, is this:

  • it is all about the information pulled from the deal, the contract, the filing – the anything
  • even at foreclosure

Put another way: it’s all about the data.

Sure, the paper must be correct; but unless and until it is data . . . in a sense it is worthless.  Or at least it has less worth.

Public Sector Seeks Cash:  At the same time, local governments, schools, public hospitals, etc., all are under intense financial pressure. It’s all about declining tax revenue.  Each of us hear about it in our local community; and others view it as a global curse (paper by Thierry Paulais for the Cities Alliance). While the specific action taken by a governmental or public entity probably is founded on a legitimate public purpose, often the action includes a new fee or charge.  (“Often” – OK, almost always.)

The marriage of the two directly impacts our work lives – even impacting our work in foreclosing on commercial real property.  We’ve seen this with new city ordinances covering the maintenance of property after foreclosure (list of cities & ordinances curated by the AFSA).

Now, even the state of Texas extends the digital age to foreclosures of real property – and I just have to believe that in time, it will include a fee or charge that marries the thirst for data with the cash.

A new Texas statute (Tx Property Code section 51.0022) requires the filing of a “data collection form” as part of the real estate foreclosure process.  Right now the statute limits the information collected to whether the property is residential and the zip code of the property.

Counties complain that they don’t have the staff (read: budget) to process the forms – which I understand is a call for new fees (see comment #3).  And it makes sense.  Someone must enter the information into the state’s database.  (Or put a kiosk in the lobby, or build a website, where the lender or servicer “registers” the foreclosure on line and furnished the date – like enrolling your kid in school.  But . . .  that takes money to build.  So that’s a fee for sure.)

Of course, preparing the form or entering the information online (and paying the “soon to come” fee) will be a new financial burden on the lender or servicer.

Watch for a similar change in your state.

Data and cash.  They just belong together.

And we’re seeing how they met.

s”Please post your comments below.   (Yes, the 2 “typos” in the title – i typed it natur’lly.)

Lessons Learned: More Tips on Topics to be Included in Loan Documents (& Modifications)

By Keith Mullen on Posted in Market Trends, Training, Workout Issues

Periodically I touch on topics that could be, or should be, covered in loan documents – either when the loan is initially closed and funded, or when the terms of the loan are revisited during an extension or a restructure (collection of blog posts on "lessons learned" [it is a long list]). 

 

Here are a few more topics:  AVOID . . .

  • Complicated Ownership Structure: if the ownership structure of borrower is complicated, then don’t be surprised if the loan closing or the restructure is complicated – and in a distressed loan, this could translate into "impossible" or at best very costly.  Complicated at loan closing = COMPLICATED AT THE WORKOUT.  Here is an example:
    • a structure that has multiple "levels" of entities (between the borrower and the loan guarantor or indemnitor) simply brings into the equation the possibility of more creditors, more owners and more agendas.  The "we can work around" it comment at loan application becomes "it is working me around" at loan workout or default.
  • Unsophisticated Borrowers:  if the sponsor or ultimate owner of the borrower is not sophisticated, then don’t be surprised if you devote an inordinate amount of time (and money) to structuring around, and cleaning up, problems planted by the borrower.  Avoiding these people at the loan app stage, or consenting to a loan assumption during servicing (i.e., permitting a more sophisticated borrower to take over the loan), could be the smartest decision for the investment.  Here is an example:
    •  Borrower signs a major tenant lease with these lease terms: low base rent with an emphasis on percentage rent (but it excludes delivery at the store of items sold via online sales); or where the major tenant has the ability to extend the term (but with a smaller store – where the store increasingly relies on online sales)
  • Uncooperative Borrowers:  if almost every item on the closing checklist, or "new" disclosure requirement on the restructure term sheet, becomes the target of complaints or whining by the borrower, ask yourself this:  "what will it be like if this loan every hits a tough spot?"  You know the answer.
    • Since your time and company resources are scarce, consider moving on to the next deal – and avoid the "20/80" rule: 20% of the people (the difficult people) take up 80% of your time and resources. Cut and run. If you can. 

Special "thanks" to Charles Guerin for some of these suggestions.

Like me, Charles is a member of the American College of Mortgage Attorneys.  Importantly, he’s a good guy.

If you have any comments or additions to this list, please post a comment below.

Financial Reform (Dodd-Frank Act) Watch: Outlook for 2012 and beyond? Tepid

By Keith Mullen on Posted in Market Trends

(Continuing my "change is our friend" focus as we start 2012 . . . )

At the fall meeting of the American College of Mortgage Attorneys, Maureen Young‘s overview of financial services reform under Dodd-Frank contained an insightful outlook for 2012 and beyond.

  • Capital is KING: greater capital and liquidity standards.  Well-capitalized banks will eat troubled banks.
    • My comment #1: this also could mean that cash will be used to for a purpose other than "let’s lend money."
  • Get Tough: regulators will implement tougher prudential standards and enforcement positions.
    • My comment: repeat #1
  • Increased Compliance: more compliance requirements will increase operational costs and strain available resources
    • My comment: well . . .  repeat #1
  • State Standards Increase:  due to diminished federal preemption, states will implement new regulations and standards
    • My comment:  . . .  right . . .  repeat #1
  • Uneven Impact:  the new regulatory landscape will impact financial services companies in very different ways.
  • Fewer Charter Choices:  for example, a moratorium on industrial banks, little incentive to create new thrifts and charter conversions will be restricted if the institution is under an enforcement action
  • General Outlook:
    • tough environment for US financial services industry
    • weak earnings
    • consolidation
  • My wild card: EU banks now a target, and not a threat

"Tepid" is the word most often use by my banker friends.

Tepid is not an exciting term: moderately warm? lack of force?

Tepid Times For Lenders.

Looks like little change for the better in 2012. 

However, it is an improvement over Tough Times For Lenders.

Please post your comments below.

Year End Grab Bag: Change & 3+ Years of TT4L Point to . . . Change

By Keith Mullen on Posted in Market Trends, Training

A friend once comforted and challenged me with these words: "Change is our FRIEND."

The words of wisdom were offered up to me as I wrapped up a 90 minute program for first, second and third grade kids .  140 of them were sitting in chairs, looking at me and waiting for Mom or Dad to pick them up (well . . .135 of them were looking at me and at least touching a chair).

The 90 minutes had zoomed-by as planned: in the large group and in very small "learning centers," we laughed, sang, wiggled, focused, talked, questioned, listened and  . . . now were waiting for Mom or Dad.  Time to move on. We were hungry.  And I was "out" of planned content.

Standing at the front of the room with the microphone in hand,  I was repeating the morning’s succinct message and giving the "next week" tease, when the friend whispered a shocking message into my ear: "they are running at least 15 minutes late."

The soft words slammed me into freeze mode.  So, she took the microphone and turned to the sea of kids:  "Heh, your parents won’t be here for a while."  And then she turned to me, gave me that great smile, and said in the microphone: "Mr. Mullen, change is our friend." 

Dana Williams is right.  Change is our friend.

We’ve experienced a lot of change since the first blog entry in September 2008.  A quick look back shows that we’ve adapted to it.  

  • Numbers Show You’re Interested: it takes some time, and some kind assistance of others, before a blog is noticed.  We now have both, and the numbers show your interest:
    • 200,562 visits
      • 29% of you come directly to TT4L
      • 23% of you come from other sites, which "refer" you to TT4L
      • 48% of you come using an Internet "search" term
    • 450 subscribers, and now growing at @ 5-10 new subscriptions each week
  • A Library of Information:  TT4L now contains information on a wide-range of topics:
    •  432 blog entries or posts, which are accessed directly by browser searches, or by using the "topic" folders or keyword searches on TT4L
    • Free access to 90+ papers and presentations on distressed investments are accessed by following the directions under the "client resources" tab on the TT4L home page
  • Year-End Entries:  These posts tell the story of our tough times trek -
    • 2008:  the December 23 post comments on the human element on evicting apartment tenants
    • 2009: the December 30 post attaches a calendar of events for ’10, and a warning about new uses of technology in buildings (and raising [the reality] that lenders are in the dark on understanding the use of technology in the operations, management and marketing of commercial real estate collateral)
    • 2010: the December 29 post contains tips on negotiating agreements.

The "change is our friend" approach soon will change this blog.  In January, you’ll experience a changed perspective and approach on covering topics of interest to commercial lenders, investors and servicers.

My expectation is the new approach will resonate with you.

If it doesn’t, please give me a course correction.

I hope that you’re having a good holiday season, and hope that 2012 will be a good year for each of us.

Change will be our friend in 2012.

Please post any comments below.

Technology Notes

More Trouble: Will Record Online Sale Numbers Transform Sticks & Bricks Retailing in 2012? I say “yes”

By Keith Mullen on Posted in Market Trends, Technology (including Green Buildings), Training, Workout Issues

2012 should be the year when online sales broadly impacts "how" retailers view and use their "physical" stores.  This will impact both the owners AND the lenders.

Record online sales point to the need (RIGHT NOW) to take a different approach in reviewing and approving retail leases – which for lenders with shopping center and mall collateral, brings new challenges in underwriting leases at loan origination and during the life of the loan.  And also, in assessing the time period that it will take to lease empty retail space – both during the life of the loan AND after the lender owns the property (after foreclosure or deed in lieu).

Retail collateral, if not already at the bottom of the food chain, is nesting in a very rough spot.

Here are the early statistics of interest for this holiday season -

  • 14% to 26% growth in online sales for various days & periods during the holiday season (over 2010) (reported by comScore on Dec 20)
  • 10 days showed online sales exceeding $1Bill each day (reported by comScore on Dec. 20)
  • 36% growth in individual online transactions (over 2010) (Investors.com)
  • 16% increase in online sales on Christmas day (ABC reports on IBM study)

And one comment, just to make it personal:

  • Human Vultures: Amazon has a "price check" app for your smartphone and tablet, which allows you to scan the bar code of a product (while you’re "in" a physical store) so that you can determine if the price for the product is cheaper on Amazon.  The app turns each of us into vultures – allowing us to pick over the physical store inventory, purchase only the store’s "loss leader" (that landed us in the store); but for any other product at "regular" pricing, we’ll fly away and buy from Amazon.  In a tough economy, we are very price focused. We are the enemy of sticks and bricks stores.

Technology changes everything, and retailing now is in the high beam.

 

This disruptive change in retailing should result in these changes for lenders and loan servicers:

  • Underwriting: this adds an entirely new, and complex, factor for underwriting decisions, such as -
    • what is the retail tenant’s online strategy? What is the online strategy of its competitors?
    • do the sales figures include online sales or deliveries (purchased online but picked up at the store)?
    • to what extent should you consider future online sales or deliveries – merely going to the "health" of the tenant or also going to the rental to be paid under the lease?  Could any of this change?
    • how will this impact or influence small shop owners? Will they need to compete online? Will a web presence be required for underwriting a small shop tenant?
  • Reviewing leases (during servicing & at loan origination): new lease clauses come into play.  For example -
    • does the percentage rent clauses carveout (or exclude) deliveries of goods purchased online but picked up at the store? What about purchases made at a terminal in the store?  Or on a smartphone in the store?
    • what is the retailer’s business model for the store?
    • will the retailer need LESS space at renewal?
  • Loan Documents: how will this play out in loan document provisions describing the lease and the approval process (for new leases and lease amendments)?
  • Dispositions:  how will this impact the disposition or sale of debt secured by retail space, or by foreclosed property that contains retail space?
  • Retail California? Will retail space be viewed, to some extent, like a hotel (as an operating company?)  Will "checking out" of the loan and collateral be a challenge?

Sure, all these issues will be resolved over time; but until then, it will be tough times.

If you have comments or suggestions, please post them below.

Technology Notes

Facebook’s Impact on Commercial Real Estate: Connected Apartment Community + Lender Remedies = Misery??

By Keith Mullen on Posted in Market Trends, Technology (including Green Buildings)

This is a wonderful time of the year.  And maybe I simply need to move on, to stop beating the drum about lenders needing to come to the technology party,  and to drop this thought:

  • Social media tools, like Facebook, will make a foreclosing lender miserable, unless the lender understands the tools and thoughtfully takes control of them

But it is impossible to move on.

It is everywhere.

It hit me again earlier this week as I drove by a new, partially vacant apartment building, where I saw this sign:

 

The sign connected these thoughts:

  • Lenders are total ignorant of "how" technology is changing the physical attributes, operations and marketing of certain types of commercial real estate collateral
  • Example: social media.  Lenders must squarely recognize and address the uses and importance of social media to the success of the borrower and the loan collateral
  • Foreclosing on an apartment community (without control of the social media) only will be the beginning of the battle to keep current tenants happy – and to keep and grow occupancy at the apartment community.
  •  If the lender fails to understand this . . .  the results will be miserable.

The sign also reminded me of a recent blog posted by Daniel Gulati on the HBR Blog Network.  The piece is called "Facebook Is Making Us Miserable."  He makes these three points about the effects of Facebook on our personal lives, which I extend into our work lives:

  • Facebook Creates a Den of Comparison
    • personal life (Gulati): as we read about all of the "happy stuff" on Facebook, it doesn’t reflect the realities of our own lives, which bums us out
    • work life (foreclosing lender):  as tenants read about all of the "bad stuff" at our loan collateral, and all of the "good stuff" at the apartment project down the block, tenants move out – or don’t want to move into our loan collateral; which bums us out (ok, it "impairs" us to death)
  • Facebook Fragments Our Time
    • personal life: it fragments our time, which makes us less productive and less engaged in the present reality
    • work life: we’re totally unprepared and not equipped to deal with the effects of social media on our loan collateral.  We’re already over worked in our work loads.  Now we have to deal with this?  Fragmented?  This will blow us up – perhaps as the final straw . . . .
  • Facebook Contributes to a Decline In Closer Relationships
    • personal life: it takes the place of richer forms of interaction and communication, but it can not replicate them.
    • work life: if the tenant or prospect will not walk into the leasing "center" for a face-to-face discussion, then do we really have a chance at signing the extended or new lease? Nothing replaces the one-on-one interaction in the leasing office.

Now take all of this into other commercial real estate products, such as shopping centers and malls.  And office buildings or mixed used projects.

Granted, commercial real estate collateral is old as dirt.

Our challenge is understanding how technology impacts it.

If you have any thoughts or comments, please comment below.