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Lenders 360

Tough Times for Lenders

Need to “Reposition” the Distressed Project or REO? Consider a Condominium

By Keith Mullen on Posted in Tough Times for Lenders, Workout Issues

So much of dealing with distressed commercial real estate is an “out of the box” experience.

But my use of the phrase “out of the box” is extremely nuanced:

  • change your thinking; and
  • change the box (the property), too.

Here’s an approach that goes out of box and then reverses field to “remake” the box -

Bob Burton at Common Interest 360 has an interesting thought for increasing the value of under-valued improved real property, whether ownership still is with the borrower or is with the lender (or servicer) after a foreclosure or deed-in-lieu of foreclosure:

Sure, this approach is tied to:

  • local demand for specific uses
  • the physical and\or operational attributes of the property, and
  • it probably includes spending money to make changes to the property itself or to building services (such as HVAC, etc.)

So, this “out of the box” by “remaking the box” requires some creativity.

But, what’s “new” about creativity in dealing with distressed commercial real estate?

However, if parts of the property could be put to a different use (turning it into a “mixed use” project), yet these parts share basic structural components or building services, then it is simply smart to consider a condominium structure.

For example, if there is a demand for traditional office or medical office, could the second story retail, or the rear of the shopping center be converted into those uses; and would converting ownership of that area be more valuable if it was a separate ownership structure?  In other words, make these areas into a “medical office building” but clothed as a separate condominium unit; with the balance of the project being a separate retail condominium.  Create a condominium structure with two units: retail unit; and a medical office unit.

The result could be new value – indeed, a present of sorts.

 

 

Take a look at your property.

Then wander over to Common Interest 360, and consider subscribing to it.

Kudos to Bob.  He gets it.

If you have any comments or questions, please do so below.

Good Times for Lenders

2012 MBA-CREF Convention (Day Two) – “Play It Again” is the Forecast

By Keith Mullen on Posted in Articles, Good Times for Lenders, Market Trends

The MBA does a great job in planning sessions, and in selecting a location where lenders and their mortgage bankers can meet.

The convention takes place at the beginning of the year, so that the lenders can articulate their goals, which allows immediate feedback from the mortgage bankers; and gives the mortgage bankers direction in their match-making between the lenders and the borrower.

It also allows me to test drive my earlier 2012 forecast for the commercial real estate finance market.

The mood at the MBA-CREF convention this year is very workmanlike. This is not the “we’re back” chant of prior years. For positive lending, the view is that

  • new commercial mortgage lending in ’12 will mirror ’11

This mirrors the same message I heard last week in Dallas from several commercial mortgage workout managers.  Like the loan producers here at the MBA-CREF convention, the distressed mortgage servicers know they’ve resolve a lot of loans, but they’re not finished.  For distressed mortgage debt, the view is that

  • the inventory of distressed commercial real estate in ’12 will mirror ’11
My forecast was spot on.
 
Let’s get back to work.
 
Post your comments below.
Good Times for Lenders

2012 MBA-CREF Convention Starts: Top Topics Span Good Times, Tough Times & Technology

By Keith Mullen on Posted in Good Times for Lenders, Market Trends, Technology (including Green Buildings)

Yesterday (Sunday) was the first day of the 2012 MBA-CREF Convention.  The theme or tag-line is “Where Market Makers Meet.”

The formal sessions start today, which cover content planned by the various councils comprising the MBA.

Some times the “off the record” content is just as interesting as the planned presentations.  (Or maybe they just reflect the most current focus, since the planned presentations were planned several months ago.)  Here are some observations and comments collected by me during the parties and gatherings before and after the Super Bowl game.

  • Co-lender structures:  this meeting, and the tag-line, does NOT signal a return of loan structures where multiple lenders share or co-own the loan. In other words (the “so what?”): don’t expect a quick return of the large loan market
  • Sticks’n Bricks Retailed  Whittled Down to “Necessities“: Lenders understand the on-line retail trend.  Lessons learned at home by lenders (i.e., shopping on-line), translate to work into a focus on retail centers and uses featuring “necessities” such as perishable food (grocery stores); and in affluent communities, this concept will expand to speciality stores.  In other words (the “so what?”):  if the property is not in this favored category, then the property just dropped a notch (or two) in the underwriting grading, so it looks to the following for financing . . .
  • Sustainable CMBS Market: One thought is that CMBS loan production eventually should settle into the $50Bill to $70Bill range.  Given the push to NOT include risk retention in the CMBS structure, investor appetite will be tepid, which will allow portfolio lenders the opportunity to capture the best properties – which in turn will drive lower quality properties as the primary collateral for CMBS loans.  In other words (the “so what?”): the markets will “self regulate” or differentiate capital sources.
  • Technology Needs to Be Understood:  The impact of technology on the physical aspects of commercial real property, on the operations of the property and on the tenants (or the tenant “community”) needs to be understood, with appropriate changes in the underwriting, documentation and servicing of the loan.  In other words (the “so what?:):  this could be very, very interesting.
Today the planned content starts.
Please add your comments below.

 

Tough Times for Lenders

MERS Update: NY Attorney General Sues Major Banks Claiming Improper Foreclosures Due to Use of MERS

By Keith Mullen on Posted in Technology (including Green Buildings), Tough Times for Lenders

Based upon a series of wins by MERS in various courts, it looked like MERS would survive, and we’d avoid the need for a federal solution in suppport of  the continued use of the MERS electronic registry, which is a fundamental component of  securitized home loans (and some commercial loans).

That was yesterday.

Today, the New York Attorney General filed suit against some of the nation’s largest banks, alleging that the use of MERS in foreclosing and taking other action was without legal power, which resulted in fraudulent foreclosure actions.

The suit, filed in New York state court,  describes the use of MERS as “an end run around the property recording system.”

The initial reaction is that this simply is a negotiating ploy, timed to increase settlement offers between the varioius state attorney generals and the major banks.

Maybe.

But in an election year, this bright idea probably will be replicated in every state that has not settled with these banks.  (Name an elected official, who has the power to follow New York’s lead, who would NOT file a similar suit.)

Unless and until this mess is resolved, taking the home mortgage loan “back” to the purely paper world will slow the process of selling pools of loans – and further inhibit much needed liquidity.

We need technology solutions to price and then quickly bring home loans to the investor market.

As I’ve said in the past, we need a federal solution.

If you see it differently, or have other comments, please post below.

Tough Times for Lenders

Bad-Boy Liability: Courts Find Liability for Violating Solvency or Net Profit Retention Covenants

By Keith Mullen on Posted in Guaranty Issues, Tough Times for Lenders

We’re in that part of the cycle where many of us are focusing on guaranty agreements, which run the full spectrum from full payment and performance guaranties to “bad boy” indemnification agreements (my recent comment).

One issue being litigated is the bad boy or recourse event tied to a breach of these types of covenants in commercial mortgage documents:

  • failure to maintain adequate capital in the Borrower (to the extent there exists cash flow from operations)
  • failure of Borrower to remain solvent (to the extent there exists cash flow from operations)

These provisions constitute part of the “single purpose” or “special purpose” nature of the Borrower, which lenders require in situations involving a “bankruptcy remote” borrower entity  (as part of the loan structure).  This is very common in permanent loans from lenders such as life insurance companies, GSEs and CMBS lenders.

The use of these provisions as a basis for bad-boy liability is now being recognized (or enforced) by various trial and appellate courts.

One example is this recent Michigan case:

  • Wells Fargo Bank, NA v. Cherryland Mall Ltd. P’ship, et al. (Mich. App. Dec. 27, 2011) (link)

This case might be accepted for review by the Michigan Supreme Court.  So, the ultimate outcome of this case still is “open” – but my personal bet is that the case either will NOT be accepted for review, or the court will review the case but not change the outcome (it will reach the same result).

I’m sure that commentators will take the results of these cases (liability of the guarantor or indemnitor) and spin it into dire predictions of the “end” of the commercial real estate finance world.

It will be an over-reaction.

The fundamental concept behind bad-boy liability for these events or triggers is simple, and even intuitive:

  • run the borrower’s operations and balance sheet like a business; in other words, not as a your personal check book
  • don’t strip cash from operations out of the borrower; in other words, don’t run it into the ground
  • in return, ownership (as bad-boy guarantors) will not have personal liability on the commercial mortgage debt if the local or national economy falls into the ditch (like the one we’re in right now).

If I’m making this too simple, or if you have another perspective, please comment below.

Good Times for Lenders

Meet Me at These Meetings? MBA-CREF convention or ABA LPM’s meeting?

By Keith Mullen on Posted in Good Times for Lenders, Technology (including Green Buildings)

If you’d like to step out of this web stuff and actually meet, I’ll be at both of these events in the next few days:

  • the mid-year meeting of the Law Practice Management Section of the American Bar Ass’n (I’m the liaison to this section from the group of lawyers in the ABA who focus on real property law and trusts\estates law [i.e., the Real Property Trust & Estates section, or "RPTE"])
  • the Mortgage Bankers Association – Commercial Real Estate Finance (or “MBA-CREF”) convention early next week (I’ll be there with a large group of Winstead lawyers)
Please reach out to me via e-mail at kmullen@winstead.com; or during either event on my cell at 214.538.6813.
As I’ve done in the past, I’ll blog during or after both events, so that you’ll hear my perspective on each.
I’ve enjoy meeting with you.

 

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.