I’m keeping a list of "lessons" learned about loan documents, as I deal with all of these distressed commercial real estate loans.  It is a topic sometimes covered in various conferences.

One danger in adding all of the "lessons learned" from these dark days into the the loan documents is this: loan documents will be long, long and longer – resulting in even tougher negotiations and slowing the closing process.  And this same remark applies to implementing changes to loan documents if a defaulted loan is modified, or a matured loan is reinstated.

So, you have to exercise some judgment, which I’m NOT doing as I add onto my list.

My list is a list.  Sitting by itself, it is deal neutral.  It is a resource for use as appropriate for the deal.

With those caveats behind us, here is my current list of possible, new recourse carve-outs:

  • What is a recourse carve-out?

    A recourse carve-out event is an event that if it occurs, than a party will be liable for either lender’s actual damages or for the entire the loan (or portion of the loan) (so, there are two types of recourse events) (examples of issues)
     

  • What new or additional recourse carve-outs could be added into loan documents (as a loan is closed, or as a loan is modified or reinstated)?
    • leases: breach of leasing covenants (& reporting of same), including tender of lease termination fees; if single tenant collateral – breach of covenants to not modify nor consent to assignment of the lease, etc.
    • violate cash management documents or lock box agreements (blog entry on receivables & lock boxes – same structure used for lease rental payments)
    • failure to deliver or turnover ownership of technology (data, software, hardware, license agreements, etc.); and failure to furnish unrestricted access to same
    • if a green building or smart building, violation of green building laws or lease provisions relating to these features
    • breach of property maintenance covenants
    • breach of reporting covenants (including failure to furnish new information or information in a new format) (recall the movement to require more loan level information in securitized loans)
    • failure to cooperate in efforts by lender to contest the tax valuation of the collateral

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

  • With the additions of these carveouts, I see more deal stagnation. Banks already are not lending for a variety of reasons. And, I believe the irrationality of borrowers is continuing which means they are holding out for favored or favorable terms. The continuance of these thought processes should lead to stagnation. Just my observations. The experts may feel different.
    Todd Weiss
    Document Conversion Services, Inc.

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