If you are anything like me, you enjoy discussing bankruptcy and litigation issues at social gatherings.  It’s basically like being the Most Interesting Man in the World , except the opposite of that.  Or, at the very least it will end a conversation with someone you didn’t want to speak with. With that in mind, below I have compiled the first annual Cocktail Party Talking Points.  Please use them as you see fit.


The Energy Bubble.  With the Saudis keeping the pedal to the metal on production while the US is in the midst of an energy boom, the cost of oil and gas has tanked.  With margins burning off, the E&P firms who had been surviving of cheap liquidity may be in for a correction.  Read about it on Bloomberg.

Radio Shack is still Kicking Along.  The beleaguered tech retailer Radio Shack continues its attempt to not default on its various lines of credit and stave off bankruptcy.  As it attempts to cut $400MM annually from the budget, the retailer must obtain lender consent to close stores.  Meanwhile, the company’s credit default swap spread is at 144%.  Read about it on CNBC.

East Cleveland Considers Bankruptcy.  The city of East Cleveland, which is a suburb of Cleveland, is “on the verge of collapse” according to the Ohio state auditor.  While the city is relatively small, the emergence of another municipality on the brink of bankruptcy is a reminder that municipalities are still in trouble and the economy has been slow to work through their financial issues.  The city will decide whether to file bankruptcy in Q1 2015.  Read more about it on Reuters.

The Fed Ups the Capital Requirement for 8 Largest Banks.  Under the new Fed guidelines, “the eight largest U.S. banks would need to have an additional capital buffer of between 1% and 4.5% of their risk-weighted assets, based on the relative threat a bank poses to the financial system as calculated by the Fed.”  According to Janet Yellen, this rule “would encourage such firms to reduce their systemic footprint and lessen the treat that their failure could pose to overall financial stability.”  The biggest impact is expected to be on JP Morgan which faces an apparent shortfall of $21B.  Read more about it on the Wall Street Journal.

That Argentina thing is Still Going on.  Earlier this year, Argentine defaulted on bonds governed under US law and has been embroiled in lawsuits both before and after.  It’s still going on.  To further its troubles, Argentina made a bond offering under is local laws and raised about 10% of the $3B being offered.  Notwithstanding, the Argentina Economy Minister presented the participation as evidence of investors’ confidence in Argentina.  Read more about it on Bloomberg.

And finally, a palette cleanser…

California Family Judge gets mean.  In California, ex-state family law judge Healy was admonished (which is a sever finger-wagging at in legal speak) for telling a mother accused of drunk driving that she didn’t “understand the beatdown that was coming…”.  After discussing the drug and alcohol use by the husband and wife, the Judge wondered aloud if “they’re trying out for Jersey Shore.”  The Judge summed up the wife as a “total human disaster”.  Finally, in another hearing, the Judge informed the mother that her daughter would no doubt end up as a “hooker” based on the mother’s attitude.  Formal document is here.

Have a happy and safe holiday.  Look for my next post in January 2015.

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.                

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.

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.  

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.  

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.    

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.

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.

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.  

Answer: badly. The Federal Reserve’s new rule on regulatory capital requirements for banks will be announced in the next couple of days.  It probably will mean less money for commercial real estate. The scope of this new rule will help the banks (by requiring them to hold more in reserve) but it could hurt the commercial real estate community:

  • less money will be available for investing in CMBS bonds, which will . . .
  • impact the demand for CMBS bonds, which will  . . .
  • mean fewer CMBS deals and  thus
  • less money available for borrowing in the commercial real estate sector

  This new rule comes from Section 939A of the Dodd-Frank Act. Clearly, lending secured by commercial real estate now is all about the equity: ownership will to have even more money in the project pocket.  And not borrowed money.  Real money. If you view it differently, or have a comment, please post it below.