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Lenders 360

Good Times for Lenders

Hide and Seek: Service of Process as a New Loan Provision

By Keith Mullen on Posted in Good Times for Lenders, Remedies, Training, Workout Issues

Lenders are refreshing their mortgage loan documents with provisions based on the “lessons learned” during the recent (continuing?) economic experience.  One change is to add a service of process provision.

The change is based on this basic lesson learned: when the tough times hit, borrowers and guarantors sometimes are hard to find.

A few simply disappear behind gated communities, on yachts, or regularly move from one remote estates to another – maybe intending to make it difficult for the lender to give them required legal notices of litigation or foreclosure (referred to as “service of process“).

Hide and Seek – in style

Or maybe this simply is a desire to get away from the stress of it all – leave the train wreck (1913 State Fair Trains Collide) for the lawyers.  Or perhaps just a final surrender to the wanderlust whisper.

In response, many lenders now bake into their loan documents a provision where the borrower (and the guarantor) agree that legal notices (or service of process) will be given to a designated person (or company), who will accept those notices.

So far, I haven’t had a borrower object to the provision.

If you’re tired of spending money and wasting time in an adult version of hide and seek (or simply not wanting someone to do what you can’t do), then consider adding a service of process provision in your standard forms of documents for:

For other “lessons learned,” click this link (or use another search term).

If you have comments, or your own suggestions, please comment below – then board your yacht or follow your wanderlust.

Technology Notes

List of Favorite iPad Apps Keeps Changing (previewing my legal tech talk)

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

Next month, I’ll be speaking on legal technology topics (with a real estate finance focus) at the University of Texas School of Law Mortgage Lending Institute.  The MLI is “the” annual gathering of outside and in-house counsel on mortgage lending in Texas.

The presentation will be a real scramble – too much to hit during 50 minutes.

The portion of the tech presentation on my favorite iPad apps, used by me as I work work in mortgage finance, always keeps everyone’s attention.

Here’s a link to the PDF  (MLI 2012 Tech Presentation iPad (Sept 10 v3)) of the iPad portion of the presentation.  (This is a the “short” version.)

The list of apps and presentation changes every few months.

If you’ll be attending any of the two “live” presentations, please contact me.  I’ll enjoy meeting you.

And, please tell us about your favorite apps in in the comment section below.

Technology Notes

Email Killing You? Survival Tips for Managing Email

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

Email is killing us all. At our desks. Following us. 24/7.

To survive, I try to manage myself and my e-mail with this approach:

  • watch the clock
  • use folders
  • automatically keep copies of sent e-mail in correct folder
  • when typing is talking . . . talk


Each of us needs to improve our use of the software on our desktops.  Better uses of it will improve our process – returning to us some time to actually think and effectively work.

The main culprit or point of pain for many of us is email.  Email is killing us:

  • too much of it
  • wrong uses of it (example: people use it in “conversational” style, forcing us to waste time simply trying to understand it)
  • it is distracting (example: pulling us away from important tasks, and chopping up our time into inefficient pieces)
  • thought leaders sum it up: email is dead
  • it is our shared experience

Each of us learns to cope with email.  Email shapes our process, and often our attitude about our work.

With our companies spending more and more on technology, and less and less on training us to use it, the “help desk” on using e-mail now is  a community effort: it takes place in our work groups and with others around our work stations – guerrilla style warfare.

  • we need email survival training
  • we need to share our favorite tips with each other

[Training & Sharing: In the mid-'60s, my Father went through a jungle training course in the Philippines on his way to what he still calls "Southeast Asia."  (One survival school trick not offered up by the instructor: when the local kid finds you in the field [and they did], give the kid a battery from your flash light, and the kid won’t tell the instructor that he found you.)  He never refers to the Vietnam War, probably because  his helicopter unit abruptly left its in-country base when it “fell off the map” (it was over run).   The balance of his “tour” was based in Thailand – but after his unit officially  ”disbanded” – giving him the opportunity to “covertly” visit neighboring countries (and the other one up “up north”), with added off-the-record benefits of wearing whatever clothes he wanted (but never a dog tag) for an extra $1,000 a month.  Sometimes is was “hot.”  Although he was trained going in, the most valuable lessons came from within the unit and from their very experienced passengers.]

  • is email changing you? slowing you down?
  • would your day improve if you improved your use of email?
  • what would you trade to become better at using email?  (30 minutes next Saturday, as you look for more tips on the internet?)

Here are a few email tips:

  • Watch the clock (not the email folder): only look at your e-mail for 5 minutes at the beginning of each hour
  • Email options: set up your email to automatically “save” a copy of each sent email in the folder from which the email is generated
  • Use folders
    • Create a folder system
    • After you read an email, then:
      • delete it, or
      • move it to your “Action needed” folder (if appropriate), or
      • move it to the deal or other folder
    • IMPORTANT: if you need to “reply” to an email, FIRST move the e-mail to the appropriate folder; and then send the “reply” e-mail (from that folder).  If you use my “email options” tips (above), then a copy of your reply email will automatically be saved in this folder.  No more lost time in dragging your email replies from your inbox (or from sent folder) into the appropriate folder.
  • Talk, Don’t Type:  if your use of email starts to look like a conversation, STOP the email exchange and call the person.
  • Other tips: search the internet for other e-mail tips.  BE AGGRESSIVE in becoming better at improving your use of e-mail.
Confession: I need to be better at all of this.
This fall, I’ll be speaking on technology topics at three different legal conferences (ACMA annual meeting; UT Law Mortgage Lending Institute; Texas State Bar Advanced Real Estate Strategies Course)  Portions of each presentation will focus on tips like these.  I’ll be sharing some of the tips here, too.
(If you’ll attend any of these conferences, let’s get together at the conference.)
If you have other email tips to share, please do so below.
Good Times for Lenders

Even More Bad Boy Liability Events: My List of Liability for Lender’s Losses or Damages

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

In addition to the events that create “full recourse” liability (for the entire loan), bad boy liability also includes losses or damages incurred by the Lender based upon another list of “bad” events or triggers.  I’m sure that Jim Wallenstein will cover this at his presentation during the University of Texas Mortgage Lending Institute.

Like the “full recourse” list, this second type of “bad boy” liability (for Lender’s “loss or damages”) has grown significantly “longer” during this great downturn.

Combine full recourse liability with the list below (loss or damages liability), and the “no liability” deal looks like this:

 

 

 

 

 

Here’s my current version of the list of bad boy recourse events that trigger liability for Lender’s losses or damages (but NOT for liability for the entire loan) due to the following:

  • any mechanic’s or materialman’s lien
  • failure of Borrower to pay any of the property taxes
  • failure of Borrower to maintain the insurance (and reimburse Lender for forced placed insurance)
  • any fraud or material misrepresentation, gross negligence or willful misconduct by Borrower or any employee, contractor, agent, or person in control of Borrower in connection with the ownership or operation of the property or any aspect of the loan
  • misapplication, misappropriation or conversion of (i) any insurance proceeds paid by reason of any loss, damage or destruction, (ii) any condemnation awards, or (iii) any rents following a default or (iv) any lease security deposits, lease advance deposits or rents collected in advance (including lease credit enhancements, such as a letter of credit)
  •  any collateral taken from the property by or on behalf of Borrower, and not replaced with collateral of the same utility and of the same of greater value
  • following foreclosure, any loss or damages incurred by Lender resulting from the failure of Borrower to deliver or surrender the property to the foreclosure sale purchaser
  • any loss or damage from (i) waste to the property caused by intentional acts or intentional omissions of Borrower, or the removal or disposal of any collateral after a default, (ii) any act of arson by borrower or any person affiliated with or in control of Borrower; or (iii) the seizure or forfeiture of the property, or any portion thereof, or Borrower’s interest therein, resulting from criminal wrongdoing by Borrower or person  affiliated with or in control of Borrower
  •  any fees or commissions paid by Borrower (or on behalf of Borrower) after the occurrence of a default to any person (directly or indirectly) affiliated with or in control of Borrower
  • from any failure by Borrower to permit on-site inspections of the property
  • from any litigation or other legal proceeding related to the loan filed by Borrower, or any person (directly or indirectly) affiliated with or in control of Borrower (after a default), that delays, opposes, impedes, obstructs, hinders, enjoins or otherwise interferes with or frustrates the efforts of Lender to exercise any rights and remedies available to Lender under the loan
  • from the failure of Borrower to fully perform any of the Borrower’s indemnification of Lender under the loan
  • Borrower contests, delays or otherwise hinders or opposes (following a default) any of Lender’s enforcement actions or remedies
  • my new favorite: failure to furnish access to on-line services (as a co-admininstrator), and then after a default, to relinquish full control to Lender

And, of course, under both the full recourse events and the loss or damages events, Borrower is liable for Lender’s enforcement costs.

So, back to my point: at what point does all of this simply equate (on a practical level), to a full recourse (but dressed like non-recoruse) loan?

Please share your perspective or experience below.

Enforcement Costs” means all costs, reasonable attorneys’ fees, legal expenses and other costs incurred or expended by Lender in collecting or enforcing any of the Guaranteed Obligations or due to any default in the performance of the Guaranteed Obligations or in enforcing any right granted hereunder or under the Loan Documents.

Good Times for Lenders

The List of “Bad Boy” Recourse Liability Events Keeps Growing: My “Roll Up” Version

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

Several months ago, I mused that, due to the conservative trending of commercial real estate lending, the list of “bad boy” exceptions (to a “no personal liability” deal) could be viewed as a full recourse deal.  In other words, the exceptions to “no liability” could be so expansive or long, the practical reality equates to full liability.

Now you have it (no personal liability); now you don’t.

 

Take a look at my current list of “bad boy” carve outs:

  • Unauthorized transfer (note: transfer of voting rights in borrower [or a controlling party of borrower] is an unauthorized transfer)
  • Unauthorized liens
  • Change in entity constituency or control
  • Violation of hedge agreements, letters of credit or other contracts covering additional collateral or debt enhancement
  • Failure to maintain the collateral
  • Violation of key operating licenses or permits
  • Breach of financial covenants & reporting covenants
  • Breach of single or special purpose entity covenants
  • Breach by the property manager of terms covering turnover of property and operating information
  • Voluntary or involuntary Federal or state bankruptcy or insolvency proceedings, including an application for the appointment of a custodian, receiver, trustee, or examiner
  • Borrower makes an assignment for the benefit of creditors, or admits, in writing or in any legal proceeding, its insolvency or inability to pay its debts as they become due
  • Borrower (or any person owning [directly or indirectly] an interest in Borrower) solicits, facilitates or arranges debtor-in-possession financing to Borrower in anticipation of a bankruptcy or insolvency proceeding
  • Breach of cash management provisions
  • Breach of insurance coverages (and failure to reimburse Lender for its cost of forced placed coverage)
  • Failure to turn over tenant letters of credit, lease termination payments and space contraction payments
  • Failure to deliver access and ownership of technology used in building\project\collateral operations, marketing, leasing and communication
  • Failure to cooperate with Lender in any efforts to contest tax valuation
  • _____________ (I’m sure that I’m missing something here)

The topic of bad boy liability will be covered by Jim Wallenstein at the up-coming University of Texas Law School’s Mortgage Lending Institute (I’ll be talking on technology issues – more on that later).  I can’t wait to hear Jim’s spin on all of this.

Give us your spin by commenting below.  (And yes, I’m back from a short break.)

Good Times for Lenders

List & Links to “HOTTEST” Topics on L360 Point To: new lending, bad loans & iPad tips

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

My latest resolution is to be better at giving lists of the “hottest” or top topics on L360 – as selected by you.

It gives me a rough sense of the direction we’re heading.

The summer 2012 list now has several topics on “positive” lending issues, which reflects the general up-tick that I’m seeing in “new” commercial real estate lending.  (I file or tag the new loans under my “new” economy mantra: “real money – for real people.”)

Several of the posts are 2+ years old – yet they remain “hot” topics.

Here’s the list:

Compare the nature of these topics to earlier lists:

Looks like we’re SLOWLY changing our focus.
Slowly.  Just not enough real people, with real money (i.e., equity).
I hope L360 is valuable resource for you (and others at your Company).
Please give your perspective by commenting below.
Good Times for Lenders

Construction to Permanent Loan on the Return: Tips on Due Diligence and Loan Documents (part 1)

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

Credit seems to be more available for commercial real estate.  For example, I know of one commercial real estate lender working on a construction to permanent loan program.  This type of lending blends two types of loans: a construction loan to build the project and a term loan to finance it once the project hits certain targets.

If implemented correctly, a lender literally will capture market share.  And a borrower can save time and money by closing two loans at one time.  However, it has unique due diligence and documentation provisions, which are different from a construction to perm loan covering a home.

In this post and in future posts, we’ll look at a few of these elements and provisions.  Understanding these should help you as you jump into offering or accepting a construction to permanent loan.  And, don’t forget to address or include the “lessons learned” over the past 4 years into the equation!

 

 

Some of the unique elements of a construction to perm loan:

  • Survey requirements
    • initial survey
    • foundation survey during construction
    • as-built survey as a conversion (and/or as a final advance condition)
  • Title insurance requirements, such as:
    • mechanics and material mans coverage
    • pending disbursement or down dates on draws
  • Casualty and liability insurance requirements
    • builders risk coverage
    • evidence of coverage by contractor(s)
  • Credit enhancement covering construction risk, such as:
    • Full liability of borrower until rental, loan to value and\or debt service coverage thresholds
    • Guaranty of sponsor: full payment\performance v. completion; and then merely bad-boy events; (one issue: does completion guaranty include merely shell or also tenant improvements?) (another issue: what are the requirements or conditions to migrating the guaranty from a 100% of the loan and project to merely covering bad-boy events?)
    • Letter of credit until rental, loan to value and\or debt service coverage thresholds (another issue: how to handle letters of credit from tenants?)

I’ll cover more in future posts.

If you have any comments on any of this, please do so below.

Good Times for Lenders

Credit Availability Increasing? . . . “Yes” for Employee Stock Ownership Plans (part 2)

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

Credit availability seems to be improving in the commercial markets.  One common (and obvious) test for new commercial lending is “how will the borrower fare in the tough times, or a stress test?”  Generally, loans to employee stock ownership plans (called an”ESOP”) do well.  So, loans to ESOPs will have access to credit.

Starting about 9 months ago, I started to see a resurgence in commercial lending.

One sign of the good times for lenders took me last week into the ring (not a WBA sanctioned event) with Lori Oliphant.  We discussed the topic of ESOP loans.  My opening combination ended with the stress test question:

  •  how do loans to ESOP companies fare when the company comes under stress?

The stress test concept is not new – it was just nudged out from the ring-side seats in the “old” economy.

Lori’s answer was simple: the nature of the borrower, amd the typical collateral structure and credit enhancement, combine to make loans to ESOP companies a capable contender, even when tested with the stress of tough times.

Here is her scorecard:

 

  • the transaction is generally structured to have the plan sponsor lend money to the ESOP, in exchange for a promissory note
  • the bank lends money to the plan sponsor, in exchange for a promissory note
  • the loan from the plan sponsor to the ESOP is secured by the shares purchased by the ESOP (with the proceeds of that loan)
  • the bank loan cannot be directly secured by the shares purchased by the ESOP, so  . . .
  • bank secures its note with other collateral from the plan sponsor (and sometimes from the selling shareholders)
  • other “soft” factors supporting the loan: employee ownership culture fostered by the plan, and the tax-deductible nature of the contributions to the ESOP that are used to allow the ESOP to repay the plan sponsor (or selling shareholder) loan

Generally, ESOP loans go the distance.

If you have comments, please post them below.

 

Good Times for Lenders

Prospecting for a Niche Commercial Borrower? An ESOP Loan Might Be Your Punch

By Keith Mullen on Posted in Good Times for Lenders

“ESOP” loans can be both an “exit” strategy for a company in distress (and its lenders), and an “entrance” opportunity for lenders targeting the right prospect.  Lending to an ESOP company can hit the mark coming (good times) and going (tough times): a one-two combination.

The formula behind high-level statement, however, includes a deadly work: taxes.

So, I reached out to Lori Oliphant for some guidance.  (The residual value of my four tax courses in law school [yes, four] is summed up in the recognition of what I no longer know.)

Lori’s first words for me weren’t the knock-out combination of tax slang expected by me.  Instead, her first comment lulled me in, and then her follow up question got me to lean in further - yes, I fell for  the “rope-a-dope” -

  • As a lender, you are constantly scrutinizing whether loans to certain parties are economically feasible; right?
  • But, what lender can resist a borrower with increased debt capacity and a lower default rate; right?

Right on.

Here is Lori’s explaination:

An employee stock ownership plan, or ESOP, is, first and foremost, a tax-qualified retirement plan. However, it is often regarded as a vehicle of corporate finance.

This is due to the fact that the plan sponsor or other interested parties (such as selling shareholders) may lend money directly to the plan or may guarantee a loan made by a third party (such as a bank) to purchase shares of company stock.   In turn, this has at least these two attractive features:

  •  The contributions made by the plan sponsor to the ESOP are made on a tax-deductible basis and are used to repay the loan. 
  • In addition, if the shares being sold to the ESOP are shares of C corporation stock and other requirements are satisfied, then the selling shareholder may elect to defer his or her taxable gain on the sale. 

Both of these features will likely become more enticing to employers in the event of a future increase in income tax rates.

Lori makes it simple: ESOPs loans could be a good niche to target.

 Next round with Lori: but how do loans to ESOP companies fare in the tough times?

If you have comments of your own, or examples to share, please comment below.

Good Times for Lenders

Construction Lending: Trend toward Guaranty “burn off” brings new list of hot conditions

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

Credit enhancement of commercial construction lending has a new, important twist to the traditional (full) payment and performance guaranty: the burn-off events go beyond valuation and debt service thresholds to also include many of the check list items utilized by permanent lenders.  The burn off has a new price.

 

Finally, construction loans are bubbling up for the  ”right” real estate developer in the “right” market, with the “right” product, with the “right” tenants in tow, and with the “right” amount of cash to bake into the project (before the first substantial draw on the construction loan).  And the competition among the lenders often gives the developer (or the key sponsor) the ability to back away from the full payment and performance guaranty – a staple of construction lenders who require it until the project is built, occupied and cash flowing (link to Federal banking materials).

In the “old” economy (pre-2007), the burn-off triggers or bench marks were simple: show a specified appraised value and a healthy debt service coverage.

In the “new” economy, what may project by a construction lender (at the closing of the construction loan) to be an attractive project for a take-out lender might miss the mark, as those lenders move on to a more favored asset class (not commercial real estate), or to a more favored type of commercial real estate – or to a different region of the country.  (GASP)

So, what is a construction lender to do?

Add items typically found on the take-out lender’s check list as “new” burn-off triggers or bench marks.

Why?

Make it easier to quickly close the take-out loan, so that the construction lender can book the profit.  Sure, the  construction lender makes a good return on the loan during construction.  But it does NOT want the project as the ultimate return.  It wants the money back.

Here are a few check list items showing up as burn-off conditions:

  • project and tenant certificates of occupancy
  • tenant estoppels and subordination agreements (running for the benefit of any future project-secured lender)
  • as-built survey
  • down-dated title policy, with endorsements typically required by permanent lenders (including any assignee of the loan as an insured)
  • copies of all operating permits
  • copies of evidence of utility service
  • as-built plans (with approvals by applicable third-parties, such as an architectural control committee)
  •  . . .

Of course, this can cause some heart-burn or angst on the part of the developer.

One reply is this: how is this really different from the “one-time” close programs (in the old economy), where a bank and a life insurance company teamed up to do exactly this same thing (close the construction loan and then agree that if the specified check list requirements are met, then the life company would take over the loan, but modified with a new interest rate and a new maturity date)?

The only difference is the economy: life companies don’t need to team up with a construction lender to source new loans.

With the CMBS market “challenged”  and few banks or mortgage REITs active in the long-term finance market, life companies are . . . enjoying it.

If you have any thoughts or comments, please post them below.