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Good Times for Lenders

Proposed Rules Could Change Penalty Box for Life Company Lenders

Posted in Articles, Good Times for Lenders, MEAF

As commercial real estate lenders, life insurance companies have a unique approach on dealing with potential losses or loan loss reserves in their mortgage loans holdings.  Unlike bank mortgage lenders, who apply their risk based capital requirements on a loan level basis, life insurance companies use an approach that applies at the portfolio level (called the “mortgage experience adjustment factor” or “MEAF”).   In 2013, this probably will change – and life insurance companies will use a “loan level” approach.  This should give more liquidity to the commercial real estate market.

Bad loans go to the penalty box

MEAF takes a mind-bending approach in determining the amount of capital that must be set aside (as a loan loss reserve) for a bad commercial real estate loan.  Under MEAF, loss reserves are based on a formula that “includes a moving eight month moving ratio of company to industry experience with minimum to maximum limits.”  (Instructions for Life Risk Based Capital Formula (MEAF) risk based capital).  This comparison of company losses to the industry means that a few of bad loans could generate (via the formula) a total loss reserve well in excess of the actual losses from those few bad loans.

This plays out as follows (and has been the story for life company holdings of commercial mortgages over the past few years):

  • they avoid recognizing defaulted commercial real estate loans
  • they hyper monitor loans in tough markets and over the last couple of years prior to maturity
  • for loans that could go into default, or be tough to refinance at maturity, life companies will sell the loan PRIOR to either event – even if the sale is at a loss (i.e., not at par)
  • recognizing that the MEAF approach has a draconian effect, the NAIC set floors and ceilings on the MEAF formula during 2009-2012

Why the incredible low number of defaulted loans on the part of life insurance companies in recent years?  MEAF is part of the answer.

The suggested approach will be similar to the process used to assign capital charges to corporate bonds.

With cost of funds for banks at an all-time low (i.e., zero and almost zero), it will be interesting to see  whether this change (if it is passed by the NAIC and adopted by the states) will at least partially level the playing field for life insurance companies, as they compete with banks for the best commercial loans.  At the very least, it could level the playing field at the investment committee in a life insurance company (as mortgage lending competes with corporate bonds for investment allocations).  And it could mean more liquidity for the commercial real estate market.

It also will mean the “end” of the “deals” for those who have been buying these loans from life insurance companies.

Please share your comments and perspective below.

 

 

Technology Notes

Practical Technology: Office Layout & Desktop Designed for Collaboration

Posted in Technology (including Green Buildings)

Smart uses of technology in our work go beyond mastering the most essential software, or using the coolest hardware.  Smart use of technology includes an “old school” focus on one benefit of technology that is grounded in a thoughtful layout of your office and of your desktop: collaboration.

Here are some observations on how I foster collaboration by the layout of my new office and the hardware on my desktop.  The goal, of course, is to be better, smarter and faster.

 

For those who follow me here at L360, you’re probably asking: “what’s going on this month? Why so few posts?

The answer is two-fold: in the last 3 weeks -

  • I’ve given two presentations on (i) “how” lawyers should better use technology and (ii) the technology trends that will impact lawyers.  Each presentation was for a different audience (the annual meeting of the American College of Mortgage Attorneys and at the University of Texas Law School’s Mortgage Lending Institute [MLI]).  This Friday, I’ll give the MLI presentation a second time, but in Austin.  These presentations are a great opportunity for me to sharpen my vision on the ways technology will allow lawyers to work more efficiently, to bring more value to their clients and to collaborate with clients and each other.
  • My law firm (the Dallas office) moved out of one building and into another one.  This is my first move into another building since 1989.  Of course, “how” we work has changed immensely in the 23 years since 1989.  This is an opportunity for me to change the physical attributes and layout of my office and my desktop, in order to be better, smarter and faster.

Today is the third day after the move.   A walk around the floors, and peeks into the other offices,  clearly shows that my brain works . . . differently . . .  than . . . anyone.  (Or at least my office looks very different from the other offices.)

My new office focuses on collaboration as the path to better, smarter & faster. (read Tom Mighell and Dennis Kennedy’s book).  Some of this might work for you:

  • No desk.  Instead, I have a small, round table with chairs (4 chairs – once we “find” the wayward fourth chair).  The table will be kept clean and used for team meetings.  It gives us a place to meet, independent of other meeting rooms.  I use an elevated (electric) computer table as my “stand up desk.”   I still can sit on a stool at the elevated computer table, or use the small table.  However, I never write down information; instead, I’m typing notes, e-mails, document changes, etc.  It is 100% electronic.
  • Stand up work “desk.”  The elevated work “desk” allows 2 or 3 of us to look at documents, maps, plats, and other resource materials (online).  This results in “real time” discussions, decisions and work product.
  • Two large (19″) computer monitors on the stand up work space.  Now we can have multiple items in front of us.  For example, when I review work, no one hands me a piece of paper.  Instead, we pull it up and black line it to show the suggested changes.  On the 2nd screen we make any modifications to the document.  No passing documents with hand written markups.  This is ”real time learning” followed by quick execution.
  • Separate notebook computer.  The “stand up” work space is large enough to allow me to also use my MacBook Air, which now gives us yet another tool to access documents, maps, plats and other resource materials.
  • Small projector & larger meetings.  If needed (larger groups or simply needing a larger screen or viewing area), I have a small (2oo lumens) Acer K-11 projector, which allows us to all look at the same content (documents, maps, plats and other materials).  I’ll connect my small projector to my MacBook Air, which will throw the desktop onto the wall.

This layout should achieve my goal: an office where the team, as a whole, will be more efficient and with better collaboration, our work product will be enriched.

If you have any suggestions, please comment below.

 

 

 

Technology Notes

RE Finance Lawyers & Legal Technology? Rule of Three Requires Change

Posted in Technology (including Green Buildings)

As I’ve commented on in the past, legal technology is a tough subject for commercial real estate lawyers. Using the “rule of three“, I will offer up a short, historical perspective, in order to merit their attention on Friday of this week, when I’ll be speaking on legal technology at the University of Texas School of Law Mortgage Lending Institute.

Three Defining Points.

The first defining point burdens all lawyers.  The second continues to divide them from their clients or customers.  And the third is simmering and heading to a boil.

Let’s see if you can identify them.

1.  Who said this?  First thing we’ll do, we’ll kill all of the lawyers.”

With this line, the Bard captured the hostility of the underclasses toward those who understand, and perhaps manipulated, the law; and in turn enriched themselves. It is spoken from the perspective of those powerless to effectuate change.  The next defining point triggered a change that transformed this perspective to almost all buyers of legal services.

2.  Name the Gang of 9 who doomed the legal profession to the billable hour?

They know it when they see it, and they didn’t like what they saw.  This ruling in 1975 began the slippery slope of the hourly rate, alternative fee arrangements and most importantly, increasing friction between the legal profession and clients. In time, Shakespeare’s line returned, but now with a new focal point by a broad cross section of buyers: legal fees, legal fees, legal fees.

3.  Rock, Paper, Scissors: which one has 2 of these?

   

Rock (1):  The August 5, 2012 soft landing of Curiosity on Mars joined technology with hard rock – foreshadowing a significant decision by the American Bar Ass’n on the next day.  This decision will impact commercial real estate finance lawyers.

Scissors, Paper (2):  On August 6, 2012, the ABA added technology as a topic expressly included in the competency requirement of Model Rule 1.1 (and other ethical rules).  Scissors cutting apart the sole reliance on paper by lawyers.

These three promise to change “how” commercial real estate finance lawyers go about their work.

Please join me at the MLI later this week for more on this, or please comment below.

Good Times for Lenders

What Law to “Choose” in Commercial Mortgage Loan Docs? Simple.

Posted in 1 Guest Writers, Good Times for Lenders, Training, Workout Issues

Provisions in commercial mortgage loan documents,  where a particular state law is “selected” as the governing law, can drive a deal into a ditch, and take a good (or growing) lending relationship into the emergency room.  In many situations, this topic is a good example of over-thinking, and perhaps over-lawyering.

  • Simply stated, which of these two thinkers gets it right on using (or not using) choice of law provisions in a typical commercial mortgage loan?

 

The choice of law topic is a very intellectually rich subject for lawyers.  Much is written about it.  Entire books.  It is a class topic for an entire semester in law schools.  It is a wonderful topic for lawyers.  It “invites” debate and discussion.  And confusion.

However, lawyers who go to war over the “choice of law” provision (in commercial mortgage loan documents) are the poster child for those who argue for simplicity in contracts, and who view lawyers as deal inhibitors, and as creators of all things complicated.

My perspective is that in the typical mortgage loan, there is no legitimate reason for this provision to be the subject of discussion.  There is no “choice” in choice of law.  The approach should be simple -

  • the mortgage loan documents should be governed by the law of the state where the project (the loan collateral) is located

Here are a few reasons supporting the two perspectives on this:

Choice of Law Should NOT be the Law of the State Where the Project is Located

  • Quality Control: Mortgage lenders need to know that their loan portfolio has consistent terms (subject to the exception below).  Thus, all of the loans should apply the laws of a single state.
  • Easier to Manage: Using the laws of a single state makes it easier for loan servicing to make decisions.
  • Exceptions (creation & enforcement):  Of course, local state law must govern the creation of liens and the enforcement of remedies.  So, the choice of law must always have this exception.
  • He (She) Who Has the Gold Makes the Rules:  The loan is the lender’s money, and if a borrower wants to use it, then the borrower simply needs to do as told – accept this approach and close the loan.  The lender must be obeyed (if the borrower wants the money).
Choice of Law SHOULD be the Law of the State where the Project is Located
  • Quality Control:  In our age of technology, surely “quality” can be controlled by smarter uses of technology (for collaboration, reporting, etc).  Keep a list.  Share it.  Also, legal opinions on choice of law provisions (that select the law of another state) can be very expensive.  Let’s not lose track of this important point: the lender needs to lend money; and if the choice of law provision inhibits the deal, or increases legal fees or mucks up the closing process and experience, then the result could negatively impact the Lender’s ability to handle future loans from the borrower, or from others in the local market.
  • Easier to Manage:  Again, we’re well into the information age.  Access to laws of the 50 states is not difficult.  Collecting and sharing information about state law should not be a problem.  Again, let’s not get side tracked . . . the lender needs to lend money.
  • Exceptions: if and when the loan goes bad, taking the “exceptions” approach (where one state’s law governs some topics and another state’s law govern other topics) injects a level of complexity into an “already” bad situation.  Dealing with a troubled loan is difficult, and now it becomes even more challenging because the lender, the borrower and then the courts must become experts at implementing the choice of law provision.  Indeed, how is injecting this complexity a “good” thing?   Will a court handling the case correctly apply the law (as selected under the loan documents)?
  • He (She) Might Have the Gold But . . . No One Wants It:  Again . . . the lender needs to lend money.  Also the market understands that our system of governance allows States to have differing laws.  So, “why” should a lender try to “unify” them in a lending platform?  Does the market actually reward a lender for doing so?
Selecting the laws of the state (for all topics) where the project is located just makes sense.  And cents.
A simple thought.
Please share your thoughts below.

 

 

 

 

Tough Times for Lenders

Sell the Company as the “Exit” Strategy? Tips on the Forbearance Agreement

Posted in Tough Times for Lenders

The “forbearance” agreement between a lender and a borrower is an important piece of an orderly sale of a company (as it sells all of its assets and pays creditors).  Whether you’re the creditor or the company, a thoughtful forbearance agreement (balanced with key interests of both sides) must be in place to begin the sale process.  Striking the “balance” between the interests of the company and the first lien lender in the forbearance agreement is not easy.  Below are some tips on the perspectives of the company  and the first lien lender, as they discuss terms of the forbearance agreement.

 

Background.  In a struggling economy, with liquidity issues, loan covenant failures, and no up-tick in company performance in sight, many companies turn to the ultimate solution: sell the company.  Restructuring the company simply is not an option because new capital is not available (to pay-down company debt and fund operations), and existing lenders will not increase credit availability.  The only “option” for the company maybe to sell, which means the company needs both time to find buyers, and cooperation from the first lien lender(s).

Time and cooperation.

If these two intersect or balance, then an understanding the perspectives (of the company and the first lien lender) becomes a key in crafting the forbearance agreement – so the tight rope walk can begin.

Here are some of the tips presented at a recent seminar by Houlihan and Lokey (Adam Dunayer, Brett Lowry and Michael Boone) and by Winstead (Eli Columbus, Phil Lamberson and Frasher Murphy):

The Company Perspective:

  • how much will the lender charge for the forbearance? (and “who” funds it?)
  • what are the third party costs in putting the forbearance in place, and then in keeping it in place (legal, accounting and others)? (and “who” funds these?)
  • what time line milestones (of sales) will the lender require; and are they realistic (in the current market)?
  • once the sales milestones are achieved, what will be the extensions of the forbearance period (and on what terms)?
  • what will be the deferral of principal payments on first lien debt?
  • what about an increase in the advance rate on first lien debt (creating liquidity)?

The First Lien Lender Perspective:

  • pro forma budget of short term cash flow: is it realistic?
  • what new or additional covenants are needed; and what current covenants should be put on the shelf?
  • what time line milestones should be imposed for sales?
  • what sales information should be provided; how will sales be sourced; and what are the costs associated with the sales?
  • is a delay penalty or fee realistic; and what amount?  (and “how” should it be structured?)
  • how should any “credit enhanced” components of the existing debt be handled?

If you have suggestions or comments, please share them below.

 

Good Times for Lenders

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

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)

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

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

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

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.)