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Good Times for Lenders

OCC’s Commercial Real Estate Lending Handbook: Misses the List on Legal Issues

Posted in Articles, Good Times for Lenders, Guaranty Issues, Market Trends, Remedies, Technology (including Green Buildings), Training

Over the last few weeks, I’ve commented on the new version of the OCC’s Commercial Real Estate Lending Handbook (I give it a gentlemen’s C); and I listed a few legal topics that deserve some guidance from the OCC.

“Guidance” could even merely be a list of important topics (ending with a warning that the list is NOT an all-inclusive list).

I expect legal issues to be identified and put on the “check the box” list by the OCC  - with the banks expect to check the box.

The "Blank" List

 

Unfortunately, instead of leading the class by at least listing legal issues associated with risks in commercial real estate lending, the OCC implicitly affirms those banks that under value and under utilize legal counsel.  (Let’s resist the temptation to comment on “why” this takes place.)

Fortunately, some banks are very good at identifying and monitoring legal issues. Several of them do this by a simple two step process:

  1. List key legal provisions in loan documents
  2. Instruct legal counsel to report, in writing AND PRIOR to closing, if these provisions are altered

Here is a sample list (it is NOT an exhaustive or all-inclusive list):  legal counsel must report (in writing) any changes, from the bank’s standard form, in loan document provisions that cover the following -

  • grace period, late charges and default interest
  • prepayment, lockout and yield maintenance
  • transfer restrictions (due on sale) provisions
  • subordinate financing (due on encumbrance provisions)
  • material deviations in, or deletions of, the remedies provisions (unless required under the governing law of the state in which the collateral is located)
  • recourse provisions
  • environmental provisions
  • taxes and insurance premiums escrows
  • any reserves or other escrows
  • granting clauses or form description of collateral contained in such granting clauses (unless required under the governing law of the state in which the collateral is located)
  • casualty or condemnation provisions
  • addition of a provision allowing a release of collateral (unless expressly provided for in the credit approval)
  • lender approval process relating to amendments, renewals or termination of major leases (or new leases)
  • cooperation provisions, including use of any future technology required by lender (such as on-line reporting and delivery of required materials and information)
  • WARNING: __________ [this list is not "all-inclusive" and you should revise it as needed]

My suggestion is that every bank (or other lender) take this approach.  Surely at some point, the OCC will view this simple approach as a key to safe and sound banking practices.

Please share you comments below.

 

 

 

 

 

 

 

 

OCC Lending Handbook Needs Parenting on Important Legal Topics

Posted in Articles, Training, Workout Issues

In an earlier posting, I reviewed the OCC’s new Commercial Real Estate Lending handbook .  The purpose of the handbook is to give parenting – I mean guidance – on risks inherent in commercial real estate lending.  On legal topics, the handbook takes a mind-boggling approach: it swings from legal light, to “I know it when I see it,” to neglect.   Even with this inconsistency, my main complaint with the handbook is that, with a few exceptions, it misses the opportunity to give bank examiners and lenders guidance on important legal topics.  Based on this, I give the handbook a gentleman’s C.  (One reader followed up with me, and gave it a D.) 

As we all know, guidance often comes in a list (starting with your first ”star chart” on the kitchen refrigerator). The OCC lending handbook needs a “star chart” on important legal topics.

 

In this posting, I’ll identify and list some of the legal topics that create risks in commercial real estate lending.  Of course, this is “not an exhaustive listing” – and you ou can add to the list (or chart) by commenting below.

Topics in the list are not described in detail.  The value in the list is the indentification of some (but not all) of the more prominent legal issues, when little or no guidance is offered in the OCC Commerial Real Estate Lending Handbook.  The goal is NOT perfection – it simply is about being better.

Fortunately, legal lists do not need to be created.  They are everywhere.  One place to start is by looking at topics covered by key legal education providers or by legal organizations at their annual meetings.  I’ll start with two of my favorites.

At the annual meeting of the American College of Mortgage Attorneys, members (actually, “Fellows”) present papers and discuss legal issues of immediate importance to lawyers working on real estate finance transactions.  This is a top-notch group.  If they identify the following legal topics as important, then . . . this list is a good list.  Here are a few of the topics from the recent annual meeting (no priority order and with my comments in parentheicals):

  • credit enhancement tools: letters of credit (currently in disfavor); earnout provisions (stay away from subjective triggers); guaranty agreements (choice of law and service of process provisions are important); and master leases (you’re better off with a guaranty)
  • intercreditor agreements (never, ever use the “standard” form – craft it to the deal)
  • ground leases (approval of any changes to the ground lease by the mortgage lender)
  • golf course loans (a trap for the inexperienced; and be sure to include websites and other technology rights in the collateral package)
  • Islamic Shiriah loans (a trap for the inexperienced)

Recently, I’ve been speaking on legal technology at the University of Texas Law School’s Mortgage Lending Institute.  This annual seminar draws accomplished speakers on a wide variety of important real estate lending topics.  Again, here are a few of the topics presented at the seminar (no priority order and with my comments in parentheicals):

  • construction lending (lien waivers; payment and performance bonds; and full-funding conditions)
  • tenant subordination agreements (might not be needed if already addressed in the lease; lender will NEVER accept liability for anything arsising prior to lender acquiring full legal title to the project)
  • impact of oil, gas and other mineral interests (merely relying upon local drilling ordinances could be risky)

Every list, of course, should end with a statement that “this list is not an exhaustive listing.”

In future postings, I’ll list other topics. 

Right now you can locate other topics by using  the “search” function (near the top of the page) to look for information and my perspective on other issues.

If you want to dig even deeper, “click” on the “Resources” tab (near the top of the page) for instructions on accessing Winstead’s on-line training and presentation materials.

Again, use the comment field below to list some of our favorite topics.

Good Times for Lenders

Grading the Examiners: OCC’s Commercial Real Estate Lending Handbook gets a “C”

Posted in Good Times for Lenders, Guaranty Issues, Insurance & Environmental Risks, Remedies, Training, Workout Issues

Last month, the Office of the Comptroller of the Currency published the Commercial Real Estate Lending handbook (August 2013).  The 128 page handbook gives guidance to bank examiners and bankers on risks inherent in commercial real estate (“CRE”) lending.  It replaces a 95 page version published in 1995 (and revised in 1998).

For this new school year and since commerical real estae lending is increasing in the “recovering” economy, I expected the OCC’s CRE lending handbook to grade-out with an “A+.”

Instead, it is a solid, gentleman’s “C.”

Make that a fraternity “C.”

Your Company is in this picture, too!

And probably make that a “C” for your company, too.   Like the OCC’s handbook, in many companies there is a disconnect or chasm between the business platform and legal issues undergirding the platform.  The “C” grade is NOT limited to the OCC and the banking sector.

The OCC’s Commercial Real Estate Lending handbook takes an inconsistent approach in the role or importance of basic legal issues as a subset of risk management.  The approach swings from:

  • “legal light”: a few topics list legal issues and mention lawyers, but the topics are limited in number -
    • in the context of environmental risks,  handbook lists specific legal issues (p. 71)
    • the term “counsel” appears 5 times:
      • in the review of (ground) lease documents  (p. 53)
      • in assessing environmental risks (p. 70)
      • in the review of loan docs and other agreements “to determine if the improvement” comply with applicable laws and restriction (p. 104)
      • in the review of takeout agreements (p.107)
      • in the review of completion insurance bonds (p. 108)
  • “I know it when I see it – but you have to guess what I see”: some topics include the use of the phrases “legally bound” and “legally enforceable,” but with no guidance on “how” an examiner or banker is to verify or arrive at these legal conclusion (assuming the examiner or banker is not an experienced commercial real estate lawyer) -
    • what do these phrases mean or require?  They are not defined in the Glossary (Appendix C). Are legal opinions required? Does this require hiring a lawyer? If “yes,” this sidesteps the reality that most Companies are seeking ways to spend LESS money on lawyers.
    • similarly, the handbook contains references to “appropriate” loan documentation and “loan documentation policies.”  Again, what do these phrases mean or require?  Broad generalizations give no guidance on loan document provisions, and are not helpful in addressing or mitigating risk.
  • neglect: most topics simply do not include any reference to anything legal -
    • maybe for purposes of the OCC handbook, legal issues simply are outside the scope of the OCC handbook.  If this is the OCC’s approach, then legal issues should be disclaimed, with no mention of legal issues.
    • one of my problems with this “neglect” approach is that it denies reality.  Legal issues are part of the DNA of safe and sound lending, and risk management.  Banks and the OCC acknowledtge this by spending millions of dollars on legal services.  Indeed, guidance might even help to control legal fees.

My expectation was that the handbook would give lists of “no” change provisions, or a list of legal topics that need to be addressed (with the ability of a bank to explain any deviation from the provisions or list).

Clearly, either I misunderstand the uses of the handbook, or the OCC missed an opportunity to give more meaningful guidance.

Perhaps the gentleman’s “C” is too gentle.

In future posts, I’ll describe a few of my favorite “no-no change” provision, and give an overview on current legal topics covered at several recent seminars.

Please post your comments and perspectives below.

Good Times for Lenders

A Familiar Shadow: Anticipating CFPB’s Impact On Commercial Lending

Posted in Articles, Good Times for Lenders, Market Trends, Technology (including Green Buildings)

The July 2013 issue of the “Mortgage Banking” magazine focuses on the Consumer Financial Protection Bureau (or “CFPB”).  The coverline  is this: “CFPB – A Powerful New Overseer.”

Why my interest in this issue and coverline?

In the past, commercial lenders (and their lawyers) blissfully ignored anything involving consumer lending.  We quickly distanced ourselves from any meeting involving discussions of consumer loan documentation, compliance audits, data collection (and access), and the byzantine consumer lending regulations.

Residential lending was . . . but not really . . . but really . . . the “other side” of the lending family.

This is changing.

The residential obsession (on rules, lending policies, data collection and compliance inquiries) will radically change commercial lending.  It is more than a shadow on the wall.

In every industry meeting attended by me in the past year, anticipating the impact of the CFPB upon commercial lending is a top-tier topic.  Although not a formal agenda item, the discussions are not “if” this will occur – the discussions are “when?”

Leaders (on the commercial lending side) are anticipating the need to adopt some of, if not mirror, the CFPB requirements.  This will require new lending rules and lending policies, with requirements for expansive loan level data, rich data  mining and new compliance policies and procedures – with the ability to alter procedures and generate “new” reports upon demand (or at least quickly).

Here are some of the drivers behind extending CFPB principals to commercial lending:

  • Other governmental authorities and industry regulators will perceive value in the CFPB approach (“since they’re digging into this on the consumer side, why aren’t we doing the same on the commercial side?”)
  • Investors will demand similar treatment (“why can’t the commercial side have the same focus on policies, rules, loan level transparency, and all that stuff – which we’re paying for”)
  • Supporting technology tools already are available (“what’s so hard about modifying these new tech tools for commercial investments?”)

No one questions whether the shadow is real.

The focus is “when” will the shadow push the residential table into the same room as the commercial table. (Or maybe it’ll be the other way around.)

No more distancing ourselves from Cousin Eddy – we’re going to eat a lot of meals together.

Please post your comments below.

 

Good Times for Lenders

Real Estate Title Review: Don’t Miss These Stealth Restrictions

Posted in Good Times for Lenders, Insurance & Environmental Risks, Training

In many cities, urban growth now fills the farmland that once surrounded Navy and Air Force airfields.  Real estate development and finance near Navy and Air Force runways, however, requires special attention to a special set of restrictions called “AICUZ.”  These Department of Defense regulations severely restrict land located near military runways.  It is easy to overlook (or overfly) them in your review of real estate title, because they sometimes are implemented as zoning restrictions – and typically not expressly listed in the real estate title commitment or report.

Think of AICUZ as “stealth” or hidden restrictions on the development and use of real property.

As an Air Force brat, I literally lived under the sights and sounds of the F-86 Sabre, the F-101 Vodoo, the F-4 Phantom and the B-52 Stratofortress, with an occasional U-2.

They were LOUD, but as Air Force brats, we barely noticed them.  (Ok, you always stopped to watch the U-2s).  (And yes, since Dad worked in base ops, I did sit in the cockpit of a U-2.)

However, we did stop one day when the sound of an approaching F-101 didn’t have the usual rhythmic pulse.  The sound stopped us as the bird wobbled overhead, and then over the ridge line toward the runway.

Almost immediately after the plane disappeared (on what Dad called “final approach” to the runway), the pilot popped up over the ridgeline (sitting in his seat), his parachute deployed, he lifted off the seat, next came a muffled explosion, and then a black cloud.

 

 

In a few minutes, a helicopter raced toward the spot where the parachute disappeared.

We jumped up and down – we were part of the action!  Of course, no one believed any of this the next day at school.

Today, reviewing title as part of financing a project will never has us jumping up and down – unless you fail to discover the AICUZ restrictions associated with the neighboring military airbase.

Here’s how the City of Virginia Beach describes AICUZ:

“The purpose of the AICUZ (Air Installation Compatible Use Zone) Program is to protect the health, safety and welfare from noise and hazards through compatible development in the airport environment. The program was instituted by the Department of Defense to address the problem of land development surrounding military air installations. It provides for the development and implementation of a plan to determine those land areas for which development should be significantly influenced by the operation of the airfield. These land areas are then designated as the AICUZ for that installation.”

This depiction of the AICUZ south of the runway (at the Joint Reserve Base) in Fort Worth will help you understand the impact of an AICUZ:

Fort Worth AICUZ at Joint Reserve Base

(Thanks to Elizabeth Solender for bringing the Fort Worth AICUZ to my attention.)

Next time you’re dealing with real property located near a military airfield, don’t overlook AICUZ restrictions.

Missing AICUZ restrictions could be a “hard landing” for the profitability of your project.

It could even turn the investment into a ball of smoke.

If you have experience in dealing with AICUZ restriction, please comment below.

Tough Times for Lenders

Foreclosure Tip #1: Inspections – Do It Before You Own It

Posted in Remedies, Tough Times for Lenders, Training

In some parts of the country, a recovering local economy means the special asset (or problem loan) groups are reducing staff, as loan production groups come back to life.  Leaving the special asset group under-staffed could be a mistake if the staff is not able to properly complete basic foreclosure tasks.  One basic task is inspecting the property prior to taking title to the property (whether through foreclosure or a deed in lieu of foreclosure [FAQ series for information on deeds in lieu]).  Here’s a decision tree that might help you in deciding if an inspection “really” is needed, and a recent example that should energize you to look before you leap (into ownership of the collateral).

 

Decision tree: verify that your mortgage loan documents give you the right to enter the property, then

  • Current Inspection Report: ask yourself this question: “when was the last time that someone looked at every part of the property?” If the answer is “more than a few months” then a current inspection should be a priority
  • Court Ordered Entry: if the borrower does not allow you to inspect the property, then investigate (with your lawyer) the available court orders that could give you access to the property (in order to inspect it)
  • Extraordinary Situations:  of course, there are situations where inspecting the property just is not possible, with the result that -
    • Foreclosure is the only option (for example, the lien itself is about to lapse or expire) (I’m having a tough time thinking of other justifications to not inspect)
    • Receivership is the better option (for example, you already know of problems and your presence on the property [during an inspection] could cause you problems)

Still not convinced that an inspection should be a top-shelf priority item?

Once Upon a Time . . .

The phone rings and you’re called to meet with City officials at the police precinct office near your “new” apartment project (shortly after you foreclosed on what seemed like just another project).

At the meeting, you’re introduced to the Chief of Police and representatives from the Mayor’s office, the zoning department, the City health department and a lawyer from the local District Attorney’s office.   They vaporize you with a list of alarming health and safety issues at the apartments.

The bottom-line message was simple: you have 30 days to show some “progress” on the issues or the City would take enforcement actions.

Their list included the following:

  • an active farm growing illegal plants
  • sewage flowing into one of the units
  • on unit has a 50 foot hole in it, with dirt piled up to the window
  • organized dog fighting

As always, it is the basic stuff that jumps up to bite you.  (And gets the immediate attention of your insurance group.)

Please share your comments below.

 

Good Times for Lenders

Refresh Your Mortgage Loan Documents with these Tech Topics

Posted in Good Times for Lenders, Technology (including Green Buildings)

Most commercial real estate loan documents give meaning to the phrase “real estate is old as dirt.”  Why? Because just as dirt doesn’t change, commercial mortgage loan documents largely ignore the impact of technology on the physical attributes, use and operations of the property.

 

Take another look at your mortgage loan forms with these questions in mind, and ask yourself if the forms are “as old as dirt.”

My bet is that you won’t like the answers to the question.  (Yes, it’s even embarrassing.)

Do your mortgage loan documents cover:

  • third party (or “cloud”) documents storage?
  • require lender consent to any use of electronic (eSign) documents with tenants and vendors?
  • address use or surrender of internet or social media tools (such as websites, Facebook, etc.) upon a loan default?
  • turnover of hardware and data used in the operation of the property?
  • due diligence (check list items) on technology contracts used in the operations, marketing or leasing of the property?
  • continuation of these contracts following foreclosure (or deed in lieu)?
  • what kind of new defaults and remedies are needed?
  • annual listing of technology contracts and third-party services?
  • using e-mail as a permitted method of giving “notice?”
  • require a borrower to cooperate if and when lender implements new technology tools (such as online reporting)?

Of course, this is not an exhaustive list.  My list seems to grow every few weeks.

I recently spoke on this topic at the Texas Bar Advanced Real Estate Drafting Course, and later this summer, I plan to do a webinar series on this topic.

If you have questions to “add,” please comment on them below.

Technology Notes

Business Focus on Connections & Information Ignores . . . Lawyers

Posted in Market Trends, Technology (including Green Buildings)

As I look around the business landscape, much of the focus of company growth seems to center on leveraging the internet for greater connections (with their trading partners) and for more information (“big data”).

It’s a party.

My perspective is that lawyers soon will be invited to participate in the party.

But right now – despite all of the hype of lawyers as being “important business partner and advisers” –  lawyers are sitting out the dance.

Left behind at the curb.

Think about all of the investment and energy on this topic, yet so little of it is directed at using technology (what seems to now be a fundamental tool) to achieve greater connection and more information from company lawyers (whether in-house counsel or outside law firms).

In the last month, I”ve talked with two significant companies about ways to include lawyers in this fundamental topic.

Here is a screen shot of my “mindmap” overview.

Questions for you:

  • are you seeing this, too?
  • where is this going?

My perspective is that lawyers soon will be joining the party, and will no longer be left behind at the curb.

Please give share your comments below.

Tough Times for Lenders

Distressed Commercial Real Estate: Lessons from 2012 and Predictions for 2013

Posted in Tough Times for Lenders

In 2012, distressed commercial real estate . . . looked a lot like 2011 . . . and 2010 . . . and 2009.

Here are my observations on distressed commercial real estate in 2012:

Lessons from 2012:

  • Realistic Expectations:  Borrowers no longer dreamed of a magical workout leading to a better day – a day when the white knight (i.e. the dream tenant or the long-forgotten millionaire Aunt) would show up and instantly transform the project from pauperville to profit city.   Investors no longer expected lenders to increase the pace of resolving distressed commercial loans.
  • Regulators in No Big Hurry:  From life insurance companies to banks, regulators continued the course traveled the year before (and the years before) – pushing lenders to resolve loans with an eye toward avoiding pushing the lender into failure.  Prudence won over pushy.  Interestingly, I didn’t hear a lot of complaining about this approach.
  • Loan Originators Paying Attention:  For the loan originators who returned to the “positive” side of the ledger (and now are origination commercial real estate loans), they are much more knowledgable and attentive to issues that are problematic when a deal goes bad.  Issues are spotted, evaluated and handled.    Sure, this point is difficult to quantify.  (Who would ever admit it?)  And the conversations are handled discretely.  It is refreshing.

Predictions for 2013:

 

  •  Better in Job Growth Markets:  generally, 2013 will look a lot like 2012 with this exception – job growth markets will allow the “marginally” distressed deal to escape the death spiral.
  • The Same . . Just Less of It:  for all other markets, the slow-mo approach will continue.  It is progress in that the bad-deal inventory is being moved off the books of lenders. So, in 2013 we’ll see . . .
  • The New Jobless:  New loan production will not be healthy enough to employ all of the talented professionals who no longer are needed to handle distressed commercial real estate loans.  This one really hurts.

Please post your comments below.

Next up: lessons on technology from 2012 and predictions for 2013.

 

Good Times for Lenders

Commercial Real Estate Lending: Lessons from 2012 and Predictions for 2013

Posted in Articles, Good Times for Lenders, Market Trends

The combination of 4 speaking engagements and working on 4 new (or revived) lending products buried me during the last several months.  Fortunately, I’ve navigated the course, and it is a new year.  It is time to take a look back at 2012, and step out with some comments on 2013.

New commercial real estate lending started to come back in 2012.  Finally.

Here are my observations on the distinctive attributes of this come back, and my prediction of what it will look like in 2013:

Lessons from 2012:

 

  • Tough Love: Loan documents are longer, and tougher.  Lessons learned from the tough times now are included in many base commercial real estate forms.  (I’ll comment on these in the future.)
  • Rose Colored Glasses: Unfortunately, the “return” of lenders (and liquidity) to the market and the expectation of borrowers looks like this – a train wreck.  Parked in the workout group during the tough times, loan originators return to loan production with fresh memories of tough loans characterized by inadequate underwriting, bad documents and inadequate personal liability.  On the other hand, the strongest borrowers are flush with cash and are willing to place it into the project, with the expectation that the lender will reward the wise decision with reasonable terms and limited personal liability.  These different perspectives collide during negotiations of the loan documents.  It is not pretty.
  • Fewer and Newer:  In comparison to 2007, there are fewer lenders in the market.  However, many “new” lenders are entering into new commercial real estate finance markets.
  • Something for Almost Everybody:  Yes, some real estate products remain tough to finance (office, retail); but over the last half of 2012 I worked on a broad range of commercial real estate -

- unsecured (registered) notes to a regional grocery chain
- forms for a new (production) single family builder program (multiple states)
- construction loans for senior living projects (multiple states)
- permanent loans (multiple states) (office and retail)

Prediction for 2013

 

  • More of the same.  Not flood waters more; but a steady, gradual improvement.

Over the next week, I’ll comment on my 2012 experience with distressed commercial real estate, and then the growing (and latent) impact of technology on investing in (and working with) commercial real estate.

I hope that 2012 found you improved over 2011.

Happy New Year.