Buying a commercial mortgage loan is NOT rocket science. There are, however, some very basic aspects of a mortgage loan that should be included or addressed in the purchase of the loan. I list a few of them below. But before we get to them, ask yourself  the question that scientists ask all the time: “what do I need to learn about this?” Rocket science draws thousands of people just to watch it happen – because of the wonder, awe and even respect for the event.  

Atlantis Shuttle Launch (YouTube)

The tips below should encourage you to have a little wonder, awe and even respect for this topic.  And to even investigate and understand some of the key functions and tasks involved in the servicing of commercial mortgage loans. Increasingly, loan sale agreements simply list the loan documents, the outstanding balance and confirm that the seller can legally sell the loan.  Often they do not address these basic topics:

  • Environmental reports:  a commercial mortgage lender needs a “clean” report (prepared by an expert) in order to guard against certain types of environmental liability.  Getting the ability to rely upon the report is important.
  • Insurance: obtaining copies of the insurance policies or certificates (required under the loan documents to be maintained by the borrower) will be very, very important if . . . a weather event or other insurable something occurs.
  • Ongoing Lawsuits:  stepping into an ongoing lawsuit will be costly.  Costly.
  • Loan Servicing History: get the data tape.  Avoid the “he said, she said” situation; and the costly headache in having to sue the seller because you need the information.

Ask yourself this question: if the loan seller’s servicing group would be fired if, in servicing the loan, they neglected to track and monitor an item, then shouldn’t I at least look into these items as part of my decision to buy the loan? And even ask the loan seller to include the item as part of the sale? Embrace your inner geek.  Be a mortgage scientist. Please share your own tips and perspectives below.

The topics of "stopping the foreclosure" or "voiding the loan" have a life of their own, and many in reality simply are urban myths.

They are good examples of "when" and "why" a lawyer should be consulted.

I hear these topics all the time – in the context of both consumer debt and commercial debt:

  • "If you do XXX, then you can stop the foreclosure and the lender will never be able to foreclose; AND, you won’t owe a dime."

Here are a few of those topics (but remember: talk to a lawyer to understand "if" or "how" these mightnot apply to your situation – all of this will vary depending upon your state, the property securing the debt and the facts of the situation):

  • Statute of Limitations on a Foreclosure and the Obligation to Pay: generally, states have time periods that require a lender to foreclose on the loan collateral, and once the period expires, then the lender can not foreclosure.  But this is separate from the obligation to repay the loan.
    • Myth: once this period expires, you no longer owe any money on the loan
  • Foreclosure and Separate Court Case:  once a loan is in default, typically there are multiple things happening.  For example, a nonjudicial process could start, a receiver could be appointed or a divorce proceeding could be filed.  But note that any court proceeding could stop a foreclosure – it all depends upon the applicable proceeding and law.
    • Myth: once the foreclosure process starts, it can not be stopped
  • Death of the Borrower or Guarantor:  while the borrower or guarantor will leave this world, the ability of a lender to foreclosure typically remains unchanged – although in some states the administrator of the deceased estate might be able to revoke or halt the foreclosure process or sale.
    • Myth: death automatically stops or prevents foreclosure
  • Insanity:  this might sound crazy, but the soundness of the borrower’s (or guarantor’s) mind, at the time of the foreclosure, typically will not be a basis to stop it.  Generally, the common law rule allows an insane person to escape the burden of a contract (such as making loan payments), but the person will not receive the benefits of the contract (such as retaining possession or use of the loan collateral).
    • Myth: if you’re insane, then the lender can not foreclose on you

The take away of all this: get legal advice from an experienced lawyer in your state; and don’t look to urban myths for sound legal advice.

If you have heard of other urban myths, please share them with us.

Here’s part two (link to part one) on what can be an very, very uncomfortable experience (remember, parts of litigation seem personal) .  

Before the deposition, show this list to your lawyer as (perhaps) a helpful tool. Your lawyer will have specific advice for you and your case.  

You don’t want to prep for the deposition with a lawyer? Then be sure to lug this in and place this on  the table in front of you, for use by the other side’s lawyer during the deposition:

 

More from my discussion with Yasmin Atasi

  • Tell the truth
  • Listen carefully:  Do not interrupt
  • If you do not know the answer, or do not remember, say so
  • Answer only the question asked
  • Once you have answered the question, stop talking
  • Do not –
    • try to assist the deposing attorney
    • lose your composure if the deposing attorney is combative
    • let the deposing attorney put words in your mouth
    • answer any question that asks for content of discussions with your attorney
    • expect to testify without deposing counsel scoring points
    • be afraid to ask for break to speak to your attorney
  • Reject –
    • questions that are misleading or only partially true
    • inaccurate summaries of the facts or your testimony
  • Beware of –
    • repetitive questions
    • hypothetical questions
    • questions that try to "lock in" or "freeze" your testimony
  • Speak clearly
  • If you realize you have misspoken, correct the mistake after speaking with your attorney
  • If fatigued, ask for a break
  • Avoid superlatives in your answers

If you have something to add, or a war story, please post it below.


 

This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ). 

The phrase "Chapter 11 bankruptcy proceeding" is NOT a lender friendly phrase.  Chapter 11 is a bankruptcy where the borrowerdebtor intends to reorganize itself, right-size its balance sheet and then emerge from bankruptcy as a viable business.  For the secured lender, this means danger, danger, danger: watch out, because one of the primary objectives of the borrowerdebtor in a Chapter 11 is to shed itself of the loan, or to modify the terms of the loan.

FAQ #47 – What should I consider if the borrower files a Chapter 11 bankruptcy?

  • Chapter 11 requires a secured creditor to diligently monitor all aspects of the case because the Chapter 11 process can involve many different challenges and options to the secured creditor. The secured creditor will need to analyze many factors depending on what the debtor seeks to accomplish in Chapter 11.
  • The Chapter 11 case can involve a reorganization through the plan process or a sale of some or substantially all of the debtor’s assets. Depending on the facts and circumstances involved, the secured creditor will need to evaluate its options and seek to exert as much leverage as possible to maximize its recovery.
  • The debtor in possession ("DIP") financing process can provide an opportunity for the secured creditor to exert leverage and gain a position of control in the Chapter 11 process.
  • Collateral valuation issues can also play an important role in the secured creditor’s position and strategy in the Chapter 11 process.
  • Additionally, depending on the circumstances, a secured creditor can also seek to exert pressure in the Chapter 11 process by seeking stay relief, dismissal, or conversion of the case to a liquidation case under Chapter 7, or the appointment of a Chapter 11 Trustee or examiner.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ).

When a borrower files for bankruptcy, all creditors are automatically prohibited from exercising any remedies against the borrower or its property.  This is called the "automatic stay."  

Consequently, one initial focus of a creditor or servicer (upon the bankruptcy filing) is getting rid of the automatic stay.  This is called "lifting" the automatic stay.  (Remember: in an earlier blog, I posted a list of workout and bankruptcy terms.)

FAQ #46 – What is required for the court to lift (or get rid of) the “automatic stay”?

  • Bankruptcy courts will grant a secured creditor’s motion to lift stay unless the borrower can prove “adequate protection."
  • The Bankruptcy Code does not define "adequate protection," but gives non-exclusive examples.  Adequate protection is provided when a secured creditor receives cash payments to the extent that the debtor’s use of collateral results in a decrease in the value of the secured creditor’s interest in the collateral.
  • Adequate protection can also include replacement liens or additional liens on unencumbered assets.
  • Adequate protection is required:
    • in order for a debtor to successfully defend against a secured creditor’s lift-stay motion  under 11 U.S.C. § 362(d)(1);
    • upon request of a secured creditor with an interest in collateral that is being sold or proposed to be sold under 11 U.S.C. § 363;
    • when the secured creditor’s lien is primed under 11 U.S.C. § 364(d)(1).
  • A secured creditor faces certain risks if its collateral is under-valued or over-valued.  If the collateral is over-valued, the court may incorrectly conclude that the creditor is adequately protected by an equity cushion and inadvertently inflict a loss on the creditor.  If the collateral is under-valued, the creditor will not recover interest and reasonable fees and costs that it might have otherwise been able to recover under 11 U.S.C. § 506(b).

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ).

The last several blogs in this FAQ series have focused on bankruptcy issues.  

While bankruptcy has many unique rules, and as a "court of equity" a bankruptcy court is positioned to deal "creatively" with legal issues and business terms, the commercial leases are just as important during a bankruptcy as they are to a solvent party outside of bankruptcy.

What happens if tenants of the borrower (but not the borrower) file for bankruptcy?

One of the advantages of restructuring (for the debtorborrower) under the Bankruptcy Code is the ability of the debtor to reject burdensome contracts and leases, and assume the profitable ones.

While a secured creditor’s loan documents are not contracts that can be assumed or rejected under the Bankruptcy Code, the assumption and rejection of leases and contracts can affect secured lenders in other ways.  So, this is a topic that receives much attention and scrutiny of secured creditor’s (lender’s) legal counsel during a bankruptcy – and this attention should extend to situations where the bankrupt debtor is the tenant (and not simply the borrower).

A secured lender whose borrower is a landlord of a commercial development can be greatly impacted by the rejection of leases in the bankruptcy case of one of its borrower’s tenants.

A Chapter 11 debtor has until the confirmation of its Plan of Reorganization to assume or reject executory contracts.  On the other hand, a Chapter 11 debtor has 120 days from the bankruptcy petition date to assume or reject an unexpired lease of non-residential property, unless that period of time has been extended by order of the bankruptcy court.

Action item:  if a tenant at your collateral files for bankruptcy, hire a knowledgeable bankruptcy counsel and be active ASAP in the case.  You may not have much time to influence the case and the decision.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions, questions or war stories on this topic, please post a comment below.

This is a series of blog entries in which we provide some quick answers to frequently asked questions (FAQ).

After seeing very little of it from the early ’90s until now, we’re seeing a growing number of bankruptcy filings by owners of commercial property.  And it doesn’t seem to be letting up.

Since CMBS loans typically (almost always) make the loan fully recourse to a key principal of the borrower upon a bankruptcy of the borrower, we are not seeing bankruptcies involving CMBS loans.  Instead, most of these bankruptcy filings involve bridge or portfolio loans, with banks or life insurance companies as the lenders – and with loan terms where the bankruptcy filing does not trigger recourse against a key principal.

One key concept in bankruptcy is the phrase "fraudulent transfer."  It is important to understand this basic bankruptcy term.

FAQ #44 – What is “fraudulent transfer” under the Bankruptcy Code and how does it affect me?

  • The Bankruptcy Code provides for two kinds of fraudulent transfers. The first kind is a transfer made by the debtor with the actual intent to hinder, delay, or defraud a creditor.
  • The second kind of fraudulent transfer is a transfer made without actual fraudulent intent, but in making the transfer, the debtor gave away an asset and did not receive fair value in return for that asset. The amount of value transferred that was not given in return constitutes a fraudulent transfer.
  • A trustee, debtor, or creditors committee may either seek to recover the property transferred, or the value of the property. The transfer must generally occur within 2 years before the bankruptcy and while the debtor was insolvent.

And if you missed this earlier posting, here is a posting where I give you a glossary of bankruptcy and other terms.  It was an extremely popular posting.

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

Recently the IRS corrected a mistake inadvertently created by it in September 2009, when it made changes to the REMIC rules governing changes to CMBS loans.  One result of the 2009 change was that partial releases, expressly contemplated in the CMBS loan document, must pass the “principally secured by real estate” test for qualified mortgages at the time of the partial release (see Section 860G(a)(3)(A) of the Internal Revenue Code and Section 1.860G-2(a)(8) of the Income Tax Regulations).

Failing this test could result in the CMBS pool losing its status as a REMIC, which would have horrible consequences to the tax-free status of the CMBS trust.

Thus, the loan servicer was placed in a no-win situation: the borrower had a right to a partial lien release under the loan documents; yet doing so would violate REMIC rules and the servicer’s agreement (in the servicing agreement) to comply with REMIC rules.  (Loss of tax-free status for the trust = heads roll at the loan servicer).

The borrower, of course, was not interested in the loan servicer’s problem; it simply wanted the benefit of the bargain (see CMBS gripes of borrowers).  (Sounds like a personal problem of the loan servicer.)

The IRS’ new Revenue Procedure 2010-30 gives guidance on this problem and details how the IRS will provide relief for loan modifications of CMBS loans that are “grandfathered qualified mortgages” and “qualified pay-down transactions.”

The Revenue Procedure provides that a partial lien release will be a "grandfathered modification" if:

  • it occurs by operation of the terms of the debt instrument, and
  • the terms providing for the lien release are contained in a contract that was executed no later than December 6, 2010.

The Revenue Procedure defines a "qualified pay-down transaction" as a transaction in which a lien is released on an interest in real property and which includes a payment by the borrower resulting in a reduction in the adjusted issue price of the loan by a qualified amount.

So, if the CMBS loan expressly permits a partial release of a portion of the property upon the payment of a partial release price (all as expressly specified in the loan documents), then the CMBS loan servicer may go forward with the partial release.

This is good news.

Nice to have good news.

It is interesting that the IRS does not address this request: dropping the requirement for a  retesting of collateral released when a loan is in default.  This request was made by industry organizations in order to give CMBS special servicers additional flexibility as they deal with defaulted CMBS loans.

If you have a war story on this topic, or simply want to comment, please post it below.

 

This is a series of blog entries in which we provide some quick answers to lenders’ frequently asked questions (FAQ).

Although I can NOT quantify this statement, we’re seeing more and more commercial real estate go into bankruptcy.  Of course, these typically do NOT involve CMBS loans; probably because those loans typically have a "non-recourse carveout" that brings personal liability to the individual sponsor, key principal or owner of the borrower, if the borrower files for bankruptcy.  So, unless that person’s financial condition is independently insolvent, the individual owners "behind" commercial property (that is financed with a CMBS loan) generally strive to avoid bankruptcy. 

But then, during the ’04 to ’07 "hot" production years, there seemed to have been a tendency to even NOT require an individual to be personally liable for this topic.  Instead, the non-recourse carveout party was an entity (such as the operating company).  So, these types of CMBS loans will be like bank loans to entities, or any loan that doesn’t have an individual with liability upon a bankruptcy filing: bankruptcy is a viable option.   (I know, I know:  . . . then there is the General Growth Properties bankruptcy filing – but that case is a topic beyond the scope of this posting.)

In any event, we’re seeing an up-tick in bankruptcy filings involving commercial real estate owners. So, our FAQ series will focus on some common bankruptcy questions.

FAQ #42 –  What happens if the borrower files bankruptcy?

  • Upon a borrower’s filing of bankruptcy, an automatic “stay” immediately takes effect. The automatic stay prohibits all actions that may be taken against a borrower or its assets. This effect increases the costs and fees and dramatically delays a lender from foreclosing on the loan’s collateral.
  • Here is a glossary of helpful terms used in bankruptcy.

FAQ #43 – How can Lender (servicer) proceed in spite of the “automatic stay”?

  • The lender as a secured creditor, may file a request with the court for relief from the prohibition of the automatic “stay”.
  • In a Chapter 7 case (look at the glossary [above] for a definition), a secured creditor will likely want to file a lift stay motion as early case as possible in order to obtain stay relief as quickly as possible.  A stay relief motion may require at least twelve to thirty days’ notice.  Therefore, if a secured creditor wants to obtain stay relief to pursue repossession or foreclosure, it is important that it file a motion for stay relief as early as possible to avoid any further delay.
  • Occasionally, a secured creditor is able to negotiate with the Chapter 7 Trustee to reach an agreement whereby the Trustee will administer the secured creditors’ collateral in exchange for a portion of the proceeds of such collateral to be distributed to unsecured creditors. 

To read the entire Tough Times FAQ series, please click here.

Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

If you have thoughts, war stories, suggestions or questions on this topic, please post a comment below.
 

Dealing with distressed debt takes a special skill set (see our FAQ series) and demeanor – and almost a new vocabulary.

To give you a jump start in it, or maybe simply a helpful resource, here is a short list or glossary of common workout, remedies, bankruptcy and securtization terms.

If you know of a term that is missing from the list, please comment on it below.