Tough Times for Lenders

Challenges in Commercial Leases During Workouts - Must a Landlord Exercise Remedies and/or Mitigate Damages FAQ

Keith H. Mullen — Thu, 11 Mar 2010 06:30:22 -0600

Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, 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 secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Is Landlord required to exercise its remedies and/or mitigate damages immediately once a default is declared under a commercial lease?

No, Landlord is not required to immediately exercise its remedies under a commercial lease.

Assuming the original demand letter protected Landlord's rights with respect to exercise of remedies, Landlord is entitled to the immediate exercise of all available remedies or, at its election, to delay the exercise of some or all remedies until a later, more suitable date.

In rough economic times, Landlords may have concerns that compete with the traditional process of repossession or termination of the lease (or terminating the Tenant's right of possession without terminating the lease itself).

For instance, where a mixed-use or retail development is still within its initial lease-up phase, it might be prudent for Landlord to allow a Tenant occupying a prominent location within the development to remain in operation, particularly through a holiday or other critical period, notwithstanding the existence of an event of default. (Note the discussion of a forbearance agreement below.)
Even in an office context, where "dark space" is less of an immediate concern, a Landlord might still be inclined to delay termination of a lease in favor of repossession or even to delay taking any action in order to avoid negative press coverage surrounding the exercise of remedies.

For a commercial lease in Texas, under applicable Texas law and absent an express agreement to the contrary, a declaration of a default does not give rise to an obligation for Landlord to mitigate damages. A duty to mitigate arises (in Texas) only when Tenant has abandoned the premises and ceased the timely payment of rent or the Lease provides otherwise.

As such, Landlord is not triggering any additional burdens by completing the process for establishing an event of default and Landlord may, within reason, delay further action pending resolution of competing factors.

Even if termination or repossession are delayed, Landlord should make prompt inspection of the premises and address any immediate repair or maintenance concerns. Application can also be made of the security deposit to cover current deficiencies or Landlord expenses, subject to the specific terms of the lease.

Also, if the the relationship with the defaulting Tenant permits this approach and in the appropriate circumstances, the Landlord should consider entering into a forbearance agreement with the Tenant. This agreement will expressly recognize the default, it will set forth the Landlord's agreement to NOT exercise remedies for a specified time, and it will confirm the Tenant's agreement to perform (on a going-forward basis) the terms of the lease - again, for a specified time. After the time period ends, then the Landlord may exercise its remedies.

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

Challenges in Commercial Leases During Workouts - Risks in Delaying Remedies FAQ

Keith H. Mullen — Wed, 10 Mar 2010 06:00:00 -0600

Guest Writer, Laura P. Sims, Winstead PC

(CAVEAT: if this blog seems familiar, it probably is because after we posted it last week, it "mysteriously" dropped off our site - after I messed up on the posting of March 7. And I apologize. So, here it is again!)

This is a series of blog entries [link] in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, 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 secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What are the risks involved in delaying the exercise of remedies?

A period of delay between declaration of default and exercise of remedies increases the chance that some action or omission by Landlord or its representatives will be claimed by Tenant as evidence that:

Landlord has waived the default or
Tenant reasonably believed (and relied on its belief) that Landlord did not intend to strictly enforce the Lease.

Either one is a bad, bad result.

So, what should you do during any time period when landlord remedies are being deferred (or not exercised)?

Here are some tips:

avoid sending e-mail correspondence involving discussions of modification of the Lease
avoid in-person meetings involving discussions of modification of the Lease
don't accept partial or late cure
don't promise to forgo exercise of remedies (in other words, don't say "we won't exercise remedies")

Ideally, if rent failure is the issue, then monthly notices of failure to timely pay and demand for payment in full can and should continue during the period of delay - in order to combat any suggestion that Landlord will not strictly enforce its rights.

One final word of warning: at some point, the Landlord will need to get off the stump and act - or waive the default.

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

Understanding Differences Between a Syndicated Loan & Participated Loan is Crucial When It Turns Bad

Keith H. Mullen — Sun, 07 Mar 2010 18:30:00 -0600

As I've noted previously [link to due diligence topics], one big difference between the current commercial real estate melt down and the last big one (in the late 80s) is the amount or level of “structure” in the deals. Like the last time, the debtor\borrower side is “structured” (with a multi-tier borrower and perhaps even a “single purpose” entity); however, unlike the last time, the creditor\lender side also is structured.

A multi-creditor structure greatly complicates decisions covering a possible workout, the remedies to be invoked, and the management, leasing and eventual sale of the collateral (after foreclosure).

Indeed, co-lender disagreements are the most difficult part of this process. (And one lesson learned is to NOT do co-lender deals in the future; or do them only with similar lenders having similar balance sheets, ownership, investment objectives and criteria, etc.)

Part of the difficulty flows from some confusion, or misunderstanding, on the part of all of us on the technical terms and attributes of the co-lender structure. Since the typical co-lender structure either is a syndication or a participation, I've identified some of the basic terms for those two structures:

Nature of the creditor’s interest
Recover of taxes & funding losses; gross up for reserves
Common law rights
Insolvency of originator/agent
Legal opinions
Assignments
Enforcement actions
Amendment (workout) rights
Waiver rights
REO decisions (management, leasing & sales)

To help you better understand the difference between (i) a loan that has been syndicated (typically where each lender has its own note and all lenders share the collateral) and (ii) a loan that has been participated (where there is a single, lead lender, and the other lenders only participate without their own notes), here is list of some of the major topics of interest.

(For postings on other co-lender topics, such as A\B Note structures and lender v lender litigation, search the site using the term "co-lender.")

(Click on "continue reading" for a table detailing differences on these terms)

Issue or Provision	Participation	Syndications (Agented/Multi-Lender Credit Facility)
Nature of property interest	Participant is not a direct creditor of borrower. Generally, structured as a sale of undivided interest in the rights of the originator.	Each lender is direct creditor of borrower.
Recover of taxes & funding losses; gross up for reserves	Loan documents generally do not permit participant to recover taxes and funding losses and gross up for reserve requirements and similar capital guidelines based on its actual exposure. Originator may have right to collect these amounts, but its exposure may not be the same as participant.	Loan documents generally provide that each lender can recover taxes and funding losses and gross up for reserve requirements and similar capital guidelines based on its actual exposure.
Common law rights	No debtor-creditor relationship between participant and borrower, so no common law rights of setoff held by participant. However, loan documents may provide for specific rights of the participants.	Each lender has traditional debtor-creditor relationship with borrower.
Insolvency of originator/agent	Depending on participation agreement, rights of participant may be impaired in insolvency of originator. If originator is a regulated entity (insured bank, insurance company, etc) and has not complied with statutory or regulatory requirements as to documentation for the participation, the receiver of the insolvent originator may have defenses to enforcement of participation agreement.	Insolvency of administrative agent should not affect interest of each lender with respect to obligations of borrower to lender.
Legal opinions	Participant may not be able to rely on legal opinion (of borrower’s counsel) if the opinion either is not addressed to participant or does not state that participant can rely on it.	Generally, the opinion is for the express benefit of all lenders (in addition to the agent) and all lenders can rely on legal opinions.
Assignments	Generally, participant cannot assign, sub-participate or encumber its interest.	Subject to any eligible assignee requirements, lender’s interest is generally assignable and can be participated and encumbered.
Enforcement actions	Generally, participant has no right to cause the originator to enforce remedies (although this can be addressed in the participation/servicing agreement).	Generally, lender (either alone or with other “required lenders”) can cause agent to enforce remedies; subject, of course, to an limitations of the documents.
Amendment (workout) rights	Most participation agreements allow participant to only prevent amendments that affect certain “sacred rights,” such as interest rate and payment dates.	Generally, lender (either alone or with other “required lenders”) can cause or prevent amendments to any provision of loan documents.
Waiver rights	Most participation agreements allow participant to only prevent waiver of material rights, such as payment defaults.	Generally, lender (either alone or with other “required lenders”) consent is required for any waiver.
REO decisions	Many participation agreements are silent on participant rights relating to REO decisions. The participation agreement needs to be closely reviewed for this issue	Generally, the agent has authority (under the co-lender provisions) to manage, lease & complete REO; however, “major” decisions (such as large leases and sales) typically require the consent of the “required lenders.”

Of course, all of these topics should be covered by the co-lender agreements; and the list is not exhaustive, nor it is all-inclusive. So, read the co-lender provisions or agreement.

If you have a “war story” about co-lender deals, or other provisions to add to my list, please post a comment.

CMSA & Key Industry Groups Push Congress To Avoid "Looming Commercial Real Estate Crisis"

Keith H. Mullen — Tue, 02 Mar 2010 08:06:31 -0600

As I noted previously [link], the mid-term elections significantly limit the time period for Congress to pass a meaningful financial reform bill. The “window” for this closes in August – five months from now – when the fall election campaigns kick into high gear.

With this short-course in mind, the CMSA and other key industry groups (listed below) are peppering Congress with this message: restoring lending for commercial real estate, and the capital markets supporting this lending, are critical elements for the nation’s recovery from this great “recession.” AND action needs to be taken now.

Here are three examples (with a few comments by me) of action taken over a recent Thursday through Monday:

1. Thursday, Feb. 25 Letter: The organizations include those listed in a letter [download\link] sent on Thursday (Feb. 25) to Committee Chairman Chris Dodd and Ranking Member Richard Selby of the Senate Banking Committee. It is an impressive list:

American Hotel & Lodging Association

American Land Title Association

American Resort Development Association

Associated General Contractors of America

Building Owners and Managers Association International

CCIM Institute

Commercial Mortgage Securities Association

Institute of Real Estate Management

International Council of Shopping Centers

NAIOP, Commercial Real Estate Development Association

National Apartment Association

National Association of REALTORS®

National Association of Real Estate Investment Managers
National Multi Housing Council

Briefly, this letter argues that the “risk retention” requirements (also known as “skin in the game”) for CMBS 2.0 issuances need to allow a third party (known as the “B-piece” buyer) to hold that risk.

Comment: one lesson learned from CMBS 1.0 that this third party will undergo greater financial scrutiny and underwriting by the initial investors, AND by potential buyers in the secondary trading market. And, I believe, investors will look for ways both to monitor the “skin in the game” party and to receiver better loan level information if\when a workout or default arises under a specific loan. Underwrite this third party? Sure. Better information from this third party? Bet on it.

2. Joint Panel Hearing on Friday, Feb. 26: The House Financial Services Committee (chaired by Barney Frank, D-Mass) and the House Small Business Committee (chaired by Nydia Velazquez, D-NY) held a hearing to discuss commercial real estate and issues facing small businesses.

Questions:

How many people attended this hearing? (Hopefully more people than the handful who attended the Dec. 15 hearing on covered bonds.) [link to my two postings on that meeting]
What kind of media coverage did the Feb. 26 hearing generate? Was it “lost” in the health care debate and other issues?

3. Monday, March 1 position paper: The CMSA issued a paper titled “A Framework for a Sustainable Commercial Real Estate Recovery” [download\link]. This is a must read. The paper gives a succinct description of the current state of the CRE market, a listing of “unique” features of the CMBS product and market, and a framework for CRE recovery.

A few comments:

There is no mention of CDOs [link] – thankfully.
The paper states that one unique feature of CMBS is “most CBMS loans have 5- to10- year terms with 20- to 30-year amortization schedules.” Question: no mention of all of the interest only (“IO”) loans? What percentage of the loans currently in special servicing loans are IO loans? When people discuss implementing “standard underwriting” standards, are they really talking about banning IO loans?
The paper states that the structure of CMBS allows investors the ability to gather detailed, loan level information; and that the information available to investors is “tremendous.” While this is the message in the front entry hall, the pillow talk in the bedroom between investors and special servicers is all about the need for MORE loan level information. Greater loan level transparency is a late night topic certain to bubble up in the CMSA's new Investor Forum.
The paper points to a recent European ruling that requires credit agencies to implement new ratings for certain US securitized products. Putting aside the merits of the argument, it is alarming that the investment community appears at odds with industry organizations on this basic issue – or at least the EU sees it differently. Can this get any more complicated? (Remember: the window slams shut in August.)
Finally, I’m pleased to read that covered bonds remain on the list. Covered bonds [link] are a favorite topic of mine - as the best, long-term capital market product for commercial real estate.

If you have any questions or comments, or some observations of your own, please post a comment.

Challenges in Commercial Leases During Workouts - Defaults & Lease Termination FAQ

Keith H. Mullen — Mon, 01 Mar 2010 12:20:35 -0600

Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, 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 secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What kinds of default will support termination of the Lease or repossession of the premises?

Most Texas courts (and courts in other states as well) are reluctant to enforce a Landlord's right to terminate a lease or repossess a Tenant's premises in the absence of a specifically negotiated or egregious non-monetary default, if the Tenant is otherwise in compliance with the lease.

By contrast, even a relatively small monetary delinquency will be enforced per the plain language of the lease.

Accordingly, where the lease provides Landlord the right to cure non-monetary defaults and obtain reimbursement of such costs from Tenant as additional rent, it may be expedient for Landlord to exercise such right to cure, so that if and when Tenant fails to reimburse such costs, Landlord can proceed on a claim of monetary default.

However, at least in Texas, non-monetary defaults such as abandonment, voluntary bankruptcy, failure to pay utilities to third parties, and allowing the attachment of liens have provided a basis for exercise of Landlord's more aggressive remedies.

Furthermore, if the lease sets forth termination or repossession as the specific remedy for a given non-monetary failure (such that Landlord is not relying on "catch-all" non-monetary default language), a court is more likely to enforce the parties' negotiated remedy.

For instance, where Landlord and Tenant have negotiated an obligation for Tenant to open for business by a certain, critical date, with a clearly stated and unique right of termination for failure to perform by such date, the declaration of default and exercise of such termination right should be enforced.
Conversely, even where a lease requires Tenant to take occupancy or open for business by a date certain, if no specific remedy is stated for that failure, it is unlikely that a Texas court would allow Landlord to terminate the Tenant's lease for such failure, particularly if Tenant occupies the premises or opens for business within a short period following the originally required date.

As a general rule for evaluating the strength of non-monetary defaults as a basis for termination or repossession consider:

Whether the breach affects the negotiated bargain between the parties
Whether the harm to Landlord is commensurate with the loss a termination or repossession would cause the Tenant
And further consider obtaining the opinion of an experienced litigator or real estate attorney before making a final decision about pursuit of remedies

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

Preparing for Conflict: Negotiating, Drafting & Litigating Loan or Workout Documents - Seminar on February 25

Keith H. Mullen — Wed, 24 Feb 2010 10:33:33 -0600

Have you checked your boilerplate lately? There is no longer anything standard about the "standard" language in financial services contracts. Whether you are drafting or litigating origination documents, workouts or settlement agreements, you won’t want to miss this seminar (on Thursday, February 25, in our Dallas office)! Otherwise, you could be litigating in an unfriendly forum, fighting over representations made before the loan documents were signed, or find yourself without adequate remedies when the other side defaults. Learn how to minimize your risks and strengthen your position by effective negotiation and drafting.

The seminar brochure [download] is attached. And here's a short version of the agenda and session topics:

11:30 - 12:15: registration and lunch
arbitration clauses
forum selection clauses; venue and choice of law provisions
indemnity clauses
remedy provisions
jury waiver provisions
merger clauses
panel discussion: The View From 10,000 Feet (I'm "on" this panel.)
4:30 - 5:30p: reception

We know that these topics are "hot" ones - we're dealing with them as we handle distressed investments.

Our seminar speakers include a former Texas Supreme Court Judge, litigators currently handling CRE finance litigation, and workout lawyers.

Who should attend? This seminar is for any professional who regularly negotiates, drafts or litigates financial services contracts, including in-house counsel, transactional lawyers, special assets and workout professionals and litigators. If you deal with contracts on the front end or after the fighting starts, this program is for you.

I know that this blog announcement is late; but since space is limited (and we're paying for the food at lunch and then drinks at the closing reception), we first offered this one to clients.

However, we have a limited number of "extra" spaces. And you're invited.

If you'd like to attend, please send (ASAP) an e-mail with your contact information to:

mlee@winstead.com

Directions to our offices, and parking instructions, are on the brochure.

If you're in Fort Worth\Dallas tomorrow, please consider coming.

I'll enjoy the opportunity to meet you.

CMBS 2.0 & Financial Reform: Industry Comments on FDIC 'Safe Harbor' Provisions For Securitization

Keith H. Mullen — Tue, 23 Feb 2010 07:11:42 -0600

Yesterday, the Commercial Mortgage Securities Association (CMSA) submitted a comment letter [download] to the FDIC concerning the FDIC's 'Safe Harbor' rule [down load the FDIC's Advanced Notice of Proposed Rulemaking] covering the securitization of commercial real estate loans.

Of course, the CMSA is not the only industry organization to comment on the FDIC's proposed rule. For example, Housing Wire [link] describes comments to the proposed rule raised by the American Securitization Forum, the Mortgage Bankers Association and the Securities Industry and Financial Markets Association.

The FDIC's proposed rule is designed to isolate, from the failure of a bank, the underlying assets of securities held by the bank. The treatment by the FDIC of assets transferred by a bank in connection with a securitization, and the subsequent failure of the bank, is an underlying building block for securitization - simply because investors will NOT buy CMBS bonds if the underlying loans may be stripped from the CMBS pool, if the bank that originated the loan goes into FDIC conservatorship or receivership.

Under the proposed new rule, the safe harbor would be amended to include numerous preconditions regarding a transaction’s capital structure, disclosure, documentation, origination and compensation.

I really don't have anything to "add" to the pointed comments made by these organizations . If you want the "detail" on their perspectives, I've furnished you the links (above). (They contain some very, very interesting points.)

My focus is on the following statement in the CMSA' e-mail announcing its comment letter:

"[The] CMSA suggests that the FDIC work in concert with Congress, the Obama Administration and the other agencies that are developing securitization reforms to ensure that FDIC's safe-harbor efforts do not lead to a regulatory framework of conflicting or overlapping requirements that may impede the restoration of functioning credit markets."

My read of the situation remains unchanged:

unlike at the creation of the CMBS model in the early '90s, the financial crisis and the role of CMBS 2.0 in it is a political process - which means a large number of parties have a voice in the process
the changes needed to restart the CMBS model (referred to as "CMBS 2.0") are not easy
mid-term elections mean that Congress will NOT address this critical component of the credit crisis once the heavy campaigning begins (in August) . . .
. . . which leads to the conclusion that in 2010, we will NOT see a return to a meaningful CMBS market. In other words, no CMBS 2.0 for the small commercial real estate borrower. Sure, single sponsor deals with the best DSC, LTV and other uber-credit criteria will be launched (good for Wall Street). But a multiple borrower pool of small loans (help for Main Street)? I say not in 2010.

I hope that I'm wrong.

If you view it differently, please comment below.

Shared Message From The CMSA, MBA-CREF & ULI Meetings: Rough Times Ahead for Commercial Real Estate

Keith H. Mullen — Mon, 22 Feb 2010 06:00:00 -0600

Significant industry organizations and participants all agree that commercial real estate is heading into a very, very rough time period - and it will be lengthy.

In the past month I have blogged from the Commercial Mortgage Securities Association (CMSA) January Conference [link includes links to prior entries] and the Mortgage Bankers Association’s Commercial Real Estate Finance (MBA-CREF) Convention [link includes link to prior entry].

My blog entries from the CMSA conference summarize the meeting content and the market perspectives of the capital market lenders (and the speakers selected by the CMSA).
My blog entries from the MBA-CREF convention do the same, but with a focus on life insurance companies and their mortgage bankers.

While the perspectives from these major commercial mortgage lending organizations are interesting, they are one-sided: they focus on the credit side of commercial real estate.

it is interesting to contrast and compare them to a summary of the 2009 annual meeting of the Urban Land Institute [link to ULI home page]. The meeting was this past November in San Francisco.

In contrast to the CMSA and the MBA, the ULI has an owner, developer and user focus on commercial real estate - what I call the equity side of commercial real estate.

When we combine the credit-side perspective (from the CMSA & MBA-CREF meeting) with the equity-side perspective (from the ULI meeting), we get a much more complete picture.

The ULI summary (below) is part of an e-mail received by a friend, who forwarded it to me.

Was the general tone, tenor or perspective of the ULI meeting different from the CMSA conference or the MBA-CREF convention?

The short answer: Yes and no.

“Yes” in the sense that the ULI attendees and speakers agree on the major challenges in the commercial real estate market.
“No” in the sense that the ULI meeting (based upon this summary) had a much, much tougher view on the future of the commercial real estate market.

Why the difference in their views?

The equity side of commercial real estate (the ULI) lives on the development of commercial estate. In contrast, the credit side of commercial real estate (the CMSA and the MBA) lives on stabilized, income producing properties. While they both agree that development of new commercial real estate will be slow (or even non-existent) over the next 3-5 years, the fundamental focus of each side takes them onto two different paths from this common perspective: the credit side still has opportunity in financing the existing stock of commercial real estate; in contrast, the developer is forced to the side line with no work (other than perhaps finding opportunity in asset management. work).
I know that this is not a popular idea, but I'll say it anyway: just like the residential sector, commercial real estate operated under the mantra of "other people's money" for the last 15 years. The result was what I call "subprime commercial." Now we're in the de-leveraging portion of the cycle. Consequently, the equity side of commercial real estate goes on a severe diet (read: no development and a focus on asset management); and the credit side focuses on "real people with real money" and tends its distressed portfolio.

Here is the ULI meeting summary (emphasis added by me), which includes wonderful detail on specific CRE niches and challenges. Click on the "continue reading" link below . . . .

It is very, very interesting.

If you have any comments, questions or observations, please add them below.

"This week I attended the Urban Land fall conference. ULI is the top real estate industry group in the world. All the most senior people in the industry.

Not one expert was willing to predict what things will look like in 3 years other than they think it will be better
One top economist said if you are a developer find another career for the next 3 years-there is nothing to do and it may be 5 years
Recovery will be slow. Unemployment will not drop back to more normal levels until 2014. First they will bring back people on 4 day weeks to 5 days, then they will increase hours form the average 33 hours now, then part timers will become more full time, then they will start to hire.
Real estate values are down generally 40% and there is a huge need for value reset to occur
Nobody knows what debt will look like when it returns other than it will be far more conservative. Nobody knows what securitization will be when it does return.
The rating agencies will operate differently. There is a discussion among some of us that there needs to be an agency probably of Treasury that collects fees of some sort from issuers each time there is an issuance of debt to be rated and that agency will then hire a rating agency to be a analyst firm to determine the quality of the issue. There will definitely not be a continuation of investment bankers hiring the raters and paying them directly. There needs to be a rule that the I bankers cannot talk to the raters. There was far to much threats of withholding fees, and other inducements to the raters before making ratings about as accurate as appraisals which were also paid for by I bankers who needed high appraisals to justify the over leveraging.
7. Housing in some bad markets is still bad and the first time buyer credit is making it a somewhat phony market. Phoenix has 45,000 housing lots so there is a literal lifetime supply of lots. Land prices in Phoenix, S CA and other markets are 50% of the cost of the infrastructure installed on finished lots. The land has zero or negative value. In most areas it will be at least 5 years before any of this land will get built out in any quantity. There are still 2-3 million too many houses in the US.
8. This time is really very different than any recession in the past
9. The US is no longer the world economic leader and will not lead the world out of this mess.
10.   Real estate will once again be an investment and not the trading vehicle it became which is what led to this crisis.
11. We will go back to financing real estate with long term debt, and not the short term floating rate debt used to all a quick flip.
12. The Internet completely changed unemployment trends. Instead of just pumping up the US economy and bringing back production jobs, the Internet has caused the entire world to be competitors for many jobs in the US. It ranges from call centers to research, financial analysis, medical research, and on and on. This may be one of the most historic changes in history and one everyone needs to be aware of. It likely means wages in the US will be reduced below where they might have been were it not for this competition. As several economists put it, the young in China and India and other Asian countries are hungry to get ahead and enjoy the good life, while US kids feel entitled and poorly educated. Those of us who built businesses were very hungry. Today there are still some like us, but many are too comfortable and unwilling to really sacrifice to make it like we were. The Asians want to learn. Our young people think they already know it- whatever it happens to be.
13. The 3rd Q GDP number is inflated by clunkers home buyer subsidy etc. Growth next year will be more like 1%-2% in the first part of the year.
14 Inflation will return in 3-4 years
15. US corporations are sitting on record cash balances way beyond any they ever had. They will be doing more acquisitions.
16. The best market in the US is Washington DC. For obvious reasons
17. Investors fled real estate completely fled real estate in the early 90's. This time they see the long tern opportunity to create wealth and will be back as soon as the opportunity to buy appears
18 There is an enormous amount of cash on the sidelines
19. The Fed is intentionally holding rates at zero to try to force investors to invest in longer term riskier assets instead of collecting nothing on money market or CD's.
20 The banks are still weak.
21 All values are still dropping and we have only gotten to 80% of the drop so far. Office and retail are only 80% there, industrial is only 60% and will be hurt by further inventory liquidation and lower levels carried going forward. Rents are only 75% of the way to the bottom.
22. In the 90's it was easier to fix the problem because the damage was much more confined to a small number of large new buildings which were revalued and then rerented. Now the damage is widespread and covers a lot of older buildings so it will take a lot longer to solve. Quality really matter now.   The best buildings will return, a lot of others will struggle.
23. Office vacancy will hit 18.6% nationally, retail 23%, and multifamily 8%.
24. The unwind of the massive Fed stimulus is critical to how it goes.   Everyone thinks Bernanke is great but nobody ever did this before -it is truly uncharted waters. Then there is the politics and what will the rest of the world do.
25. As you will read below there will not be the massive foreclosure and asset disposal we all expected. The lenders are going to hold on. When assets do come to market prices will be higher than they should be due to very few deals being chased by massive dollars. There is already evidence of this in the multifamily market.
26. Mobile phones, and other devices are now becoming all sorts of tools and multiple use devices. Social networking is growing faster than anything anyone can imagine. The growth rates are beyond comprehension. This is where everything in the world is going from ordering food or reserving a car on Zip Car, to reading the news or anything. If you are over 30 you can't grasp what is happening and how fast. The growth in usage is by tens of millions in months, and it is worldwide. You can't get your mind around this. There has never been anything in modern times that even is remotely like this. The growth rate makes the growth in TV usage look like it was glacial. This is the biggest transformation of how the world functions in maybe hundreds of years. You need to learn all about this or get run over.

Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever. [Link to the Federal Financial Institutions Examination Council (FFIEC) issued a policy statement that was adopted by the OCC, the Fed, the FDIC and the Office of Thrift Supervision as Guidance on Prudent Commercial Real Estate Loan Workouts (FFIEC's Guidance under the OCC Bulletin 2009-32)] [Link to our summary of the FFIEC policy statement] Just NOT principal reduction. This is just like they are doing in housing.

Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can't reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on. When I pressed the issue of political interference she said -what do you want us to do, bankrupt all the banks.

That is the choice.

What does this tell you?
        A. The problem is going to take much longer to solve than it should,
        B. The banks are still very weak, so lending will not return anytime soon,
        C. A massive refi problem is getting deferred to 2013-2015.
        D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.

I think I captured a lot of what was said in various panels and conversations. We have a long way to go and the government is making it harder to fix the problem."

Challenges in Commercial Leases During Workouts - Default Notice FAQ

Keith H. Mullen — Thu, 18 Feb 2010 16:35:42 -0600

FAQ - Is Landlord required to give notice of all defaults at the same time?

No.

Where multiple defaults exist, some discretion may be used in listing the individual failures, with clear emphasis on monetary defaults and material non-monetary defaults.

A default and demand letter that identifies

defaults of a . . .
nature and materiality that would support termination of the lease, or the exercise of rights of repossession if not cured, should suffice . . .
so long as suitable language (which has been either developed or reviewed by counsel) is also included in the letter to reserve any and all Landlord rights with respect to other defaults, known or unknown, and to disclaim any intent to waive any such defaults.

The third bullet point is very, very important.

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

Congressional Oversight Panel Weighs In: "Treasury and bank supervisors must address . . . the threats" facing CRE

Keith H. Mullen — Thu, 11 Feb 2010 15:51:07 -0600

On Thursday, Feb. 11, the Congressional Oversight Panel issued its report (dated Feb. 10) addressing "commercial real estate losses and the risk of financial stability." The report highlights the possibility of commercial mortgage failures over the next four years, with the potential to cause banks to lose as much as $300 billion. (Now that is big - but are you really surprised?)

The Panel is responsible for overseeing Treasury's TARP program and reporting to Congress with the results.

The report is long (189 pages) (download it here). And it is scholarly,

I have not thoroughly digested the entire report; however, I offer up these highlights and observations (both from the report and from other sources):

The New York Times begins its summary of the report this way: "A huge wave of mortgage failures on commercial real estate could hit next year, causing banks to lose as much as $300 billion, imperiling lending for small businesses and hindering the economic recovery, a Congressional panel is warning." (Right. We know this. In fact, I'd put the number much, much higher given all of the "maturity defaults" on the 3-4 year horizon.)
If you want to read the "best" or most relevant portion of the report, read Section One, Part G. It focuses on regulatory, accounting and workout issues.
The report asks policy makers, bankers and servicers to honestly evaluate "the components of the crisis and to try to moderate them" (p. 103). It then notes that while non-viable banks (due to the poor quality of their commercial real estate loans) should not be allowed to operate, it does not mean that banks "that engaged in relatively prudent lending, but were undercut by the depth of the recession," should be closed (p. 103).
The Panel notes that "not all banks should be treated the same way" and that there are "reasons not to force all potential losses to be recognized immediately' (p. 102).
The executive summary of the report (p. 3) concludes with this charge: "The Panel believes that Treasury and bank supervisors must address forthrightly and transparently the threats facing the commercial real estate markets. The coming trouble in commercial real estate could pose painful problems for the communities, small businesses, and American families already struggling to make ends meet in today's exceptionally difficult
economy." (Right. But it'll take more than a 189 page report to pull this topic to the top portion of the political agenda.)
Against this backdrop, the New York Times highlights the political in-fighting between the Panel and Treasury: "The panel’s chairwoman, Elizabeth Warren, has been pressing the Treasury to compel thousands of banks to undergo stress tests like the ones that the Federal Reserve required of 19 of the country’s biggest financial institutions early last year. The Treasury secretary, Timothy F. Geithner, has called that idea impractical."
And of course, Treasury and the FDIC have been squabbling on various financial reform issues. And did you note that even the U.S. Comptroller of the Currency has weighed in, warning that some of the proposed rules will hamper a healthy secruitization market [link]?

So, where does my quick read take me?

"Extend and pretend" will continue in order to avoid loss recognition for the (relatively) better banks.
This report is a must read - just like the October 31 regulatory announcement [link to prudent peace pipe blog posting].
Of course, will these broad philosophical approaches be implemented at the bank examiner level? (At the recent CMSA January conference [link], FDIC Chairman Sheila Bair answered "YES" - the examiners are being instructed to implement the Oct. 31 announcement.
The FDIC will continue to take down 4-8 banks every Friday. (Nibble, nibble, nibble - but for good reason: could the consumer really stomach a CRE debacle?.)
The commercial mortgage problem is attempting to claw up on the political agenda pecking order (fighting health care, Federal deficit, taxes, etc.)
Regardless of the relative order of importance or priority, it appears that the problem now is a political problem - and . . .
A complicated problem thus becomes all the more challenging given all of the industry and political players clamoring to be part of the solution (or the TV sound bite). Some of these players are promoting a different cause entirely. So, the podium is crowded with clashing perspectives: Congress (which has many voices); in-fighting within the Administration (FDIC v. Treasury v. Comptroller v. ______ [your pick]); industry groups such as the Real Estate Roundtable, the MBA and the CMSA; and a host of others promoting other (worthy) causes and agendas.

I do not have an answer for the pointed "where is" all of this going.

Only an observation: this is democracy at work.

It is noisy.

It is messy.

And we know that, when compared to other forms of governance, it works.

But there is no promise that it will be painless.

Painless was the "old economy."

If you have any comments or musings of your own, please post them below.

Challenges in Commercial Leases During Workouts - First Steps FAQ

Keith H. Mullen — Thu, 11 Feb 2010 10:30:57 -0600

Guest Writer, Laura P. Sims, Winstead PC
This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property - and this series is pointed to the simple goal of helping you protect the basic value builidng block of your collateral - which are the leases. Of course, 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 secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ - What lease provisions are most important when determining the existence of a default and/or providing notice of a default?

In addition to the specific provision(s) which is the basis for the default, a thorough review should be made of provisions regarding events of default, remedies and notices, as well as all correspondence for purposes of determining if waiver or modification allegations may exist or if notice requirements or addresses have changed.

Be aware that certain operational defaults may be addressed in provisions of the lease other than the default and remedies section, such as continuous operation clauses and surrender obligations, and the remedies for breach may appear with the operative language rather than being mentioned by name in the list of events of default.

In order to avoid any alleged defense against claims for payment or performance, and to give the guarantor an opportunity to cure the default, copies of all default correspondence should be delivered to any lease guarantor (even if not required under the terms of the guaranty or the Lease notice provision).

Also, requirements to provide notice to lenders and other third parties may appear in ancillary documents, such as Subordination, Non-Disturbance and Attornment Agreements, and thus a review of the entire Lease file is strongly recommended.

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

ALTA 21 Creditors Rights Endorsement: List Grows of Companies NOT Issuing It

Keith H. Mullen — Mon, 08 Feb 2010 15:32:08 -0600

As noted in my posting this morning [link], the ALTA Board of Governors voted to withdraw and de-certify the use of the ALT 21endorsement form. It removes creditors rights issues from certain title insurance policies.

So, what is the next step?

The title companies seize the opportunity, and stop issuing it. (You're not surprised.)

Here's the list of title companies (by my count) that have done so since the ALTA announcement:

Stewart Title
Chicago Title*
Fidelity National Title*
Ticor Title*
Lawyers Title*
Commonwealth Land Title*
Security Union Title*
Alamo *

*= all part of the Fidelity National Title Group underwriters

More title insurance companies will follow, lenders will accept the change, and this endorsement will be fondly remembered - as a unique attribute of the "old economy."

If you can add to this list, please add it by posting a comment below.

Title Insurance Ticking Sound Blows UP: ALTA 21 Creditors' Rights Coverage Ends

Keith H. Mullen — Mon, 08 Feb 2010 06:01:01 -0600

Last Tuesday (Feb 2), the ALTA Board of Governors met to review and discuss the creditor rights issue in light of various recent court rulings.

The outcome is no surprise: they voted (unanimously) to withdraw and de-certify the ALTA 21 endorsement (commonly referred to as creditors' rights coverage). This change will be effective on March 8th.

Briefly, this endorsement removes creditors rights issues from coverage of the policy – such as fraudulent preferential transfers.

We've addressed the ALTA 21 as part of your file review process (link)

As you might suspect, money is the root of this decision. The title insurance industry has been experiencing significant losses through this endorsement (although it is not available in all states - for example, it is not available in Texas). Many underwriters had begun to decline to give this endorsement, or were imposing onerous conditions to issuing the endorsement. And it was beginning to increase premium rates.

I agree with ALTA's decision. The financial viability of the company covered by the endorsement is NOT a title record matter that the title insurer can protect itself against through examination. Indeed, it was a business decision or risk, and of a nature that the lender should independently assess and address. Why should a lender depend upon another party to assess the financial viability of a party to a transaction? Isn't the lender ultimately responsible for this underwriting risk? Do we really want lenders to lay-off that assessment to a title company? And if it is duplicate or "belts and suspenders" to the lender's process and assessment, it is an additional cost that we want to load up on to a transaction?

At least one very, very significant lending client of ours sees it the same way: one of the largest apartment lenders will NO longer require the ALTA 21.

are other lenders taking this same approach?

No doubt, this approach will be adopted by non-ALTA jurisdictions.

Please post your information, questions or comments below.

MBA-CREF Convention (day 3): Special Servicing TIPS; Life Co. Allocation TARGETS; and Real Money For Real People

Keith H. Mullen — Thu, 04 Feb 2010 08:00:00 -0600

(This is the last in a series covering the MBA-CREF convention. In contrast to the first two days [link Day 1] [link Day 2] and our convention "preview" [link], this last posting focuses on the two polar extremes of the convention, and the industry.)

For Chris Nixon [link to bio] and myself, day 3 of the MBA-CREF convention (yesterday, Weds.) was filled with meetings with significant industry players from two distinct groups: special servicing and life insurance companies.

We listened for the answer to one specific question from each group, which for us (and perhaps for you) is “the” question.

Special servicing: what tips or advice can you give a borrower in 2010?
Life insurance company: will your loan allocations differ from your 2009 performance? (Read: will we see any “improvement” over 2009?)

Here is our summary of the answers given to us.

Special Servicing Tips

Not surprisingly, the tips were very similar to those articulated at the recent CMSA January Conference [link to 2nd day posting]. However, we heard enough “new” or different answers to craft an expanded list of tips.

True, the answers vary depending upon the particular servicer, the project, the carveout sponsor, the tenants, etc.

But putting it all together, here are the tips:

Do This:

be nice
send all information in; be open and transparent
sign a pre-negotiations agreement
keep paying cash flow
have a reasonable, cogent plan BEFORE you contact the lender or servicer (show us that you are in a good city\market, with good tenants, good DSC, etc.)
show up with $ (to right size the loan) when you ask for a debt restructure
default with dignity (i.e., have a "real" default and then be truthful)

Do NOT Do This:

tell lender or servicer that you're "partners"
show up with a sham balance sheet
stiff or abuse your other lenders and the expect us to expect otherwise
tell lender or servicer that you're a good borrower
"fish" for information or for terms of a plan that will be acceptable
cry
hold lender or servicer hostage
ask for any of the cash flow (nor a cash flow mortgage)
fly in on a private jet
offer a bribe
rob Peter to pay Paul
launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
ask for any return on the new equity infusion made in borrower

(For our other postings on CMBS special servicing, use the “search” function on the right side – and search terms such as “special servicing.’)

Life Company Loan Allocations for 2010 (& comparison to 2009)

The message generally was consistent from all our life insurance company contacts:

in 2009, roughly 30%-45% of the allocation was utilized to refinance the “best” loans\relationships in the portfolio
in 2009, not all of the allocation was utilized . . .
but since corporate spread have dramatically dropped in the last 6 months, mortgages are a relative good investment; so . . .
there is hope that the mortgage allocation will be fully funded in 2010 . . .
however, probably the same percentage of the allocation (30%-45%) will be utilized to refinance the “best” loans\relationships in the portfolio . . .
and, the allocation amount is not near the level seen during recent years
the limited funds available for new loans will target the narrow bandwidth of the best projects and sponsors (high Debt Service Coverage or DSC; good Loan to Value or LTV; good balance sheet of the sponsor; good tenants; good market position; etc.)
since large loans to single-sponsor borrowers (and not multiple loans to different sponsors) typically fit this narrow bandwidth, 2010 could be the year of the large loan for many life insurance companies

Add all of this up, and it is clear that with a muted allocation amount and the commitment to utilize a significant part of it to refinance the current portfolio, the total amount of credit available for 2010 from life companies is small (relative to demand).

The story here reminds me of the message from the CMSA January Conference: the recent CMBS issuances are good news for Wall Street but “no” news (i.e., no help) for Main Street.

The same should be said of the Life Insurance Company mortgage loan allocations: it sounds good, but really?

So, the message from both the CMBS Conference and the MBA-CREF Convention sync very nicely. (As predicted in my earlier posting?) [link]

If the mantra during the ‘90s and ‘00s was “other people’s money” (or “commercial subprime”), the mantra for the new economy is “show me the hard equity” (or “real money for real people”).

Yes, we’re returning to real estate fundamentals.

And since a large percentage of CRE is over-leveraged (a condition that I call "subprime commercial"), we circle back to the tips on special servicing . . .

If you see it differently, or have something to add, please post a comment below.

MBA-CREF Convention (Day 2): Three Perspectives; Wish List Points to a Slow 2010

Keith H. Mullen — Wed, 03 Feb 2010 08:36:27 -0600

One take-away for me from the second day of the convention is this: while the three different perspectives (below) point to 2010 being a better or different year than 2009, it will be far from “normal” (when compared to 1994-2004).

The Mortgage Banker: relieved

The general sense or mood of the mortgage bankers is that 2010 will be much, much, better than the train wreck of 2009 – a year of almost no new financings closed. Finally, some mortgage production. And a sense that “we made it.” And thankful for the possibility of having some meaningful work.

The Life Company Lender: guarded

On the other hand, the message from the life company lenders is that since corporate spreads are so low (when compared to the spreads of a year ago), they will be lending this year. Their target, however, is the best borrowers and on the best property (with great DSC, LTV, etc.). And they admit that some percentage of their 2010 loan origination will be devoted to refinancing (extending) loans currently in their portfolio.

The MBA Staffer: focused on the Hill

The MBA is focused on better serving its members, as evidenced by a reorganization of its committees into various “councils” centered on its membership. But more importantly, it is focused on the US Congress and the Obama Administration.

It seems that the discussion in almost every panel returns to public policy, or financial reform.

Take a look at the MBA’s 2010 public policy priorities:

Financial crisis responsibility fee
Risk retention (“CMBS 2.0”)
REMIC rule reform (“CMBS 2.0”)
Rating agency reform (“CMBS 2.0”)
Risk-based capital for CMBS under FAS 166 & 167 ("CMBS 2.0")
TALF CMBS extension
FDIC legacy loan program
GSE restructuring (the “new” Freddie & Fannie Mae)
FHA modernization
FHA multi-family loan limits
Low Income Housing Tax Credit
Funding for rental assistance
Life Insurance Company risk-based capital
Covered Bonds
Carried interest

NOT a short list!

The “real” focus on the MBA is as it should be – on the Hill. Unfortunately, the mid-term Congressional elections effectively will inhibit the passage of new legislation starting this August. So, the window for addressing these priorities is quickly closing.

The next time you hear the phrase “financial reform,” think of this long list – and the August finish line.

My Bottom Line: low expectations

No doubt, a lasting recovery for the credit market will hinge on jobs and consumer confidence.

However, just looking at the long, long, long list of public policy priorities tells me that we are a couple of years away from returning to the new “normal” – effectuating changes like this will take time. My prediction is that only a few items on this list will be realized in 2010.

Seriously, does that look like a “quick fix” list to you?

If you have any questions or comments, or your own perspective, please post a comment.

Capital Markets Scorecard: Committee & Council Meetings at MBA-CREF Convention - Spring Is In The Air!!

Keith H. Mullen — Tue, 02 Feb 2010 00:19:03 -0600

Unlike the CMSA January Conference (where the primary focus is on addressing substantive issues) [link], the MBA-CREF convention has a primary focus on relationships: mortgage bankers meet with lenders; and lenders meet with mortgage bankers.

However, the MBA does offer some very interesting Committee and Council meetings, where substantive issues are discussed.

But make no mistake about this: the focus is on the meetings.

Any way, here are my notes from two committee and council meetings that I found particularly interesting today: the Public Policy Committee; and the Investor & Originator Council.

As a general proposition, the general "atmosphere" is much, much more optimistic than the atmosphere at the CMSA January Conference.

Maybe the credit markets have radically changed in two weeks. (Or not.)

Public Policy Committee

Legislative climate: bad. "Hostile environment" for lenders. Lenders are "demonized" by the administration. No one wants to help Financial Services sector. With this background, here are MBA priorities: financial reform (big issue for CRE: risk retention provision - skin in the game; MBA try exempt multi-family & CRE); FHA role & mission (housing finance system); future of Freddie & Fannie (altho only briefly mentioned in comments to the proposed budget). Revenue raising tax issues are important to the Administration.
Financial reform: House bill passed. Action now in the Senate. Bi-partisan working groups at work in Senate since November. Senator Dodd is not under political pressure due to his announcement that he will not run for re-election. Risk retention is focus of MBA. Calendar constrained because no hope for bills after August (due to mid-term elections). Plus other regulator reform happening, such as the "Voelker bill" (which will severely restrict the activities of banks).
Need specifics on Administration's proposal to fund $30bill for community banks
The MBA has a long, long list of regulatory and legislative items
GSE: part of restructure of housing finance system; no "hard" direction from administration; the unlimited funding of Freddie & Fannie (per the Dec 10 announcement) will not continue forever
MBA will formally oppose the fee on regulated institutions (but caveat: no one loves bankers)

Investor & Originator Council

At the beginning of this meeting, the MBA's economist (Jamie Woodwell) discussed the MBA's 4thQ data (to be released on Tuesday, 2/2); CRE loan originations up 12% on average; caution - comparing to a low level (in 2008); CRE originations still at low volume; maturity volume survey - 13% of non-bank will mature in '10 and 7% in '11 (highest product is variable rate CMBS); all to be on MBA's website.

Next, a panel of speakers gave their perspectives on the following:

Buzz in market - things are getting better; what is your origination prediction for '10? Life Cos have almost normal funds (and spreads a good relative to corp bonds), but conservative underwriting will limit production volume; wild card is employment numbers
Trends in last 90 days: sentiment in market is improved, w/ people wanting to invest; but challenged by worsening CRE fundamentals; tale of two cities (intense competition for best deals and no $ for bad deals); several big banks have approval to take loan applications for multi-borrower loans for CMBS pools (but same challenge - the same tale of two cities); strong investor demand for GSE bonds (a lot of capital looking for a home); need to see job growth in order for lenders to believe rents have stabilize
Risk of double dip in '11: due to foreclosed properties hitting the market; at same time, some properties will attract investors if in good location or unique replacement cost (high quality asset); one panel member did not believe in "double dip" theory; good, performing loans are being sold at close/at par
Will rising employment save the "kick the can" lenders? Banks need to see an accruing loan, and thus A/B note structures will be attractive; but this will take time to implement
Rush to fix CRE is not the best strategy; lenders are taking the right approach in extending & restructuring (charge off the new B Note); average loss on foreclosure is 2x loss following smart restructure (if B motivated & doing the right thing, and a performing loan will be in place); however, this approach will affect price uncertainty; but lenders will foreclose (if B can not cure a $ default) and are motivated to sell REO
Risk Based Capital for life insurance companies: regulators have given concessions and are working for a long-term solution
FDIC: maybe considering keeping assets and working them out - as opposed to taking the "RTC" approach (from the late '80s)

This is a very different crowd, with a much more optimistic attitude, than the attendees at the CMSA January Conference.

If you have any comments, please post them below.

Capital Market Scorecard: 2010 Outlook for Corporate Credit? Commercial Mortgages?

Keith H. Mullen — Mon, 01 Feb 2010 08:12:08 -0600

Standard & Poors is having a half day "Leverage Credit and Recovery Conference" on February 25 in NYC. In S&P's announcement of the conference, they summarize their 2010 outlook for leveraged credit:

It is Standard & Poor's view that, at the outset of 2010, speculative grade corporate credits present a mixed picture. Although market prices for both bonds and loans have recovered from their record lows at the end of 2008 and beginning of 2009, we believe that credit risk remains a challenge. Borrowers face ongoing refinancing requirements and continue to concentrate at the lower end of the rating distribution at 'B' and 'CCC'. Ongoing growth in topline revenues and cash flow required for debt service remain elusive for many borrowers.

S&P definitely has at best a "guarded" outlook for corporate credit in 2010.

As to commercial mortgages, Chris Nixon and I are in Las Vegas for the Mortgage Bankers Association - Commercial Real Estate Finance convention. [link to conference book]

We'll see if the MBA has the same view of the CRE Capital Markets as we heard at the CMSA January Conference. [link to our 2nd day posting]

This I know already: our life insurance company contacts and mortgage banker contacts are sending fewer people to this event than last year, and have planned fewer, and much more "muted" parties and events.

Stay tuned over the next few days for our reports from Vegas.

If you have a particular comment, or question, for us to investigate as we attend the MBA-CREF conference, please post a comment.

Your Top 10 Posts Tell the Story For 2009

Keith H. Mullen — Fri, 29 Jan 2010 17:17:56 -0600

Each year, several of us write a news alert covering the "hot" legal topics for commercial real estate finance, with a focus on the prior year. Here's the news alert we did for 2004 [download it]

Wow, reading this old piece is a slap on the face.

What a mistake on our part.

The "story" is NOT what we (lawyers) think it is. Our thoughts might be good guesses; but they remain guesses.

As I wrote for you here at ToughTimes during the last 16 months, I've learned that you will show me the topics that interest you the most.

Sure, you won't show me by posting in the "comment" box below. Instead, you'll vote by reading what interests you.

So, the list below is your story for 2009. These are the blog posts that were most highly read by followers of Tough Times in 2009.

It is a very interesting story.

TOP 10 TOPICS AT TOUGHTIMES:

(Links to the posting are furnished - but be sure to "click" on links to earlier posts in a series.)

#1 New Federal Foreclosure Law Gives Residential Tenants 90 Days to Vacate (link)

#2 Lender Liability Returns: Sample Cases and Situations (link)

#3 Lender’s Top Frequently Asked Questions (link)

#4 Key Differences Between CMBS Loans & Portfolio Loans in the Loan Default Scenario (link)

#5 Uncertain Waters: Scorecard on the CMBS Market (link)

#6 Evaluating Material Adverse Change (MAC) Clauses in the Loan Default Context (link)

#7 Steering Through CMBS Waters: A Primer for Troubled Loans (link)

#8 SARE Cases Causing Big Stir in Bankruptcy Courts (link)

#9 Ticking Sound: Review Your Title Insurance - A Quick Checklist (link)

#10 More on That Ticking Sound: Don’t Forget to Obtain or Verify Insurance Coverage (link)

If clicking these links is just too much for you, here is a PDF collecting all of these blog posts - and bundled as our "2009 Year in Review." [download]

Lesson learned: it is about YOU.

If you have a favorite posting, please tell us about it below.

Covered Bonds: Still on the Agenda

Keith H. Mullen — Sun, 24 Jan 2010 21:42:41 -0600

Commentators note that one great attribute of the Internet, and the communities formed within and around it, is this: when someone wanders off (or climbs on a ledge), the community does a good job of nudging each other back to the group.

Yes, I was a little disappointed (OK, even upset) at the lack of focus by the CMSA on covered bonds at the January conference (see my comment regarding the session called "Lessons From CMBS 1.0").

However, my friends at the Covered Bond Investor (link) correctly note that the Mortgage Bankers Association lists covered bonds as part of "legislation among the organization's legislative and regulatory priorities for 2010." (posting on the MBA list)

My sense, however, is that covered bonds will NOT be a near-term reality.

But thank you, Covered Bond Investor, for talking me off the ledge.

If you have an interest in covered bonds, visit the Covered Bond Investor.

And if you have any questions or comments for me, please post them below.

Capital Market Scoreboard: Selected Topics from the CMSA January Conference

Keith H. Mullen — Fri, 22 Jan 2010 13:09:42 -0600

As noted in my lengthy postings summarizing the recent 2010 CMSA January Conference in DC [Day 1 link; Day 2 link], over 1,000 commercial real estate professionals attended the conference – roughly 2X more than expected.

Why this unexpected attendance? Answer: All of us are looking for answers amidst the continuing liquidity problems in the CRE Capital Markets. This topic was the sole focus at this conference. (And it even shows in the number of people "visiting" TTL blog since the Tuesday [Day 1] posting: we show over 1,000 total "hits", of which over 550 are "unique", as of this blog posting.)

I've received feedback asking for a summary covering a specified set of topics from the two (much, much longer) blogs covering days 1 and 2. (Keep that feedback coming!)

So, here is that subset of information from the 2010 CMSA January Conference:

INVESTORS FORUM

This forum is for a broad band of CRE debt investors (such as B note holders, mezzanine lenders).

The meeting time was devoted to a survey of the 250+ people in the room. Here are some of the responses:

45% of the voters believe that CRE values will continue to fall in 2010 with no recovery in CRE values until 2011 (this fall is in addition to the 44% fall from 2007 CRE pricing)
with respect to the 2005-2008 CMBS pools, 37% of the voters believe that the average losses will be in the 11%-15% range (these loses will wipe out bond holder through the "AJ" class)
43% of the voters believe that for CMBS loans liquidated in 2010, the average loss severity will be 40%-50% (and 27% believe that the average loss severity will be 50%-60%)
69% of the voters believe that annual new CMBS issuances will not exceed $100B until 2013
for new CMBS issuances in 2010: 50% of the voters believe that issuances will be single borrower transactions; and 33% of the voters believe that issuances will be multi-borrower and large loan structures (with only a few assets); and
58% of the voters believe that "old-school" multi-borrower, fixed rate deals will return no sooner than 2012 (or later)

REAL ESTATE FUNDAMENTALS: "THE FACTS OF LIFE"

If the focus on "CMBS 2.0" (which is the "hot" phrase used to describe the "new" CMBS model and market) is a bit too out of touch for me, this session just hammered on the current picture of the CRE market:

unemployment at historical highs (and still rising)
retail sales still stumbling
consumer confidence falling
"asking" commercial rents falling
commercial leasing activity (absorption) falling
CRE sales activity: stagnant
CRE values -43% from the high in 2007
huge amount of CRE loan maturities over the next three years, with inadequate sources of credit to pay-off those maturities
huge shortfall in CRE equity (such that it will not fill gap between the credit available and the looming CRE maturities)
over 75 funds have been formed to buy distressed CRE debt and properties; but little it has been deployed
very little CRE has been "re-priced" or "re-set" by lenders or servicers foreclosing or disposing of assets
we're still early in the CRE recover (perhaps only 25% into the process!) (One interesting comment: remember that valuation adjustment occurs early in the CRE recovery process; so we might be 75%-90% into the valuation adjustment process.)
importantly: no one on the panel, nor else where in the room, foresees an implementation by the Government of an "RTC style" approach (where the Federal government quickly closes large numbers of banks and thrifts, and then quickly sells the loans and assets at steep discounts – resulting in a "harsh pain" but quick re-pricing of CRE
unlike the late 80s & early 90s: this time there is no new industry (such at technology) to lead the recovery by increasing employment

BORROWER PANEL: "SURVIVOR"

This panel focused on "how" a borrower could make it through until CRE liquidity returns.

The panel has some advice for borrowers:

show up with $ if you want to restructure your debt
if you're in a good city, with good tenants and with DSC (get it?
Use $ to right-size the loan), then you'll probably survive

It was interesting that while reference was made to splitting up a CMBS loan into an A Note (with good DSC & LTV) and a B Note (representing the "bad" part of the original loan), no one gave any details on the structure (such as the terms of the B Note, the proceeds waterfall between the lender [under the B Note] and the "new" equity [that injected capital needed, in part, to right-size the Note A], the rate of return on the new equity, etc.)

SURVEILLANCE & WORKOUTS: "LET'S MAKE A DEAL'

This panel didn't give any real guidance on terms of workouts, other than to list some basic rules of the game:

Do This:

be nice
send all information in; be open and transparent
sign a pre-negotiations agreement
keep paying cash flow
have a reasonable, cogent plan BEFORE you contact the lender or servicer

Do NOT Do This:

tell lender or servicer that you're "partners"
tell lender or servicer that you're a good borrower
"fish" for information or for terms of a plan that will be acceptable
cry
hold lender or servicer hostage
ask for any of the cash flow (nor a cash flow mortgage)
fly in on a private jet
offer a bribe
rob Peter to pay Paul
launch off on a religious sermon (caveat: "the special servicer knows that it is going to Hell – every day is Hell")
ask for any return on the new equity infusion made in borrower

It was an interesting day. Much like our experience in Munich – very little clapping at the end of any session (yes, it reminded me a little of the sessions at the EU conference that we attended in October 2008) [link]

In a future posting, I'll cover comments made to us by several elected and appointed Federal officials.

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