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Buying distressed-real-estat

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Paul Hastings, February 9, 2009

Paul Hastings, February 9, 2009

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  • 1. Buying Distressed Real Estate Debt Page 1 of 9 Login or Signup Go Pro Email Favorite Download Embed Like 1 1 Related Morehttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 2. Buying Distressed Real Estate Debt Page 2 of 9  Foreclosure On Equity120308  Foreclosure On Equity120308  Abf Article Mezz Financing Pdf (2)  6th Western Borrowers N Investors Mezz L…  Download  Sortis Invest Presentation 20090912 En  Commercial Office Building Acquisition  Documents About [Lenders] Buying Distressed Real Estate Debt 6,344 views by Steve Berkman on Feb 09, 2009 Rent to Own Homes This presentation expalins the nuances of acquiring distressed debt secured by real estate or mezzanine debt secured by Search Rent to Own the ownership interests in an entity owning real property, including the process Listings For $1. Find A Home You Can Afford, Today! www.GetRentToOwn.com/Rent... 2 comments Free Foreclosure 1–2 of 2 comments Listings View All Foreclosures in Your Area. Search Homes by Zip - Its Free! guest4219d7 www.FreeForeclosuresListing.net In most states inventing in mortgages, that are in fact or can be considered securities are covered by the Blue Sky laws. Which are not addressed in this presentation. Free Foreclosure 3 years ago Listings View All Foreclosures in Your Area. Our Service is guest4219d7 Free. No Obligations Foreclosures.Reply.com We are in the entity formation business, so what is a special purpose entity? 3 years ago The Top REIT & REIT Fund Free Report: High-Yield Fund & REIT At Huge Write a comment... Discount to Net Asset Value www.soundadvice-newsletter.c...      Subscribe to comments 14 Favorites nbob45 2 days ago tcapolahttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 3. Buying Distressed Real Estate Debt Page 3 of 9 1 month ago shonleo 4 months ago AmericanREexchange 6 months ago Nic Tags distressed real estate 7 months ago Rod Medallon , Exec Vice President at Capital Source One 1 year ago tanoki 1 year ago wdballard 2 years ago SabryKCB 2 years ago mdmorri2 Tags real estate 2 years agoBuying Distressed Real Estate Debt — Presentation Transcript1. Buying Distressed Real Estate Debt Practical and Legal Issues Regarding the Acquisition and Sale ofDistressed Debt2. Mortgage vs. Mezzanine Debt3. History/Background A mortgage loan is a financing secured by a lien on the real estate granted by theborrower or owner of the real estate. By contrast, a mezzanine loan is a financing secured by a pledge of theownership interests in the borrower or real estate owning entity rather than security in the real property itself.Mezzanine financing was developed in the early 1990s as a response to the savings and loan crunch, whichhighlighted the threat posed by junior mortgages, which had been the traditional form of subordinate financing, tothe senior debt. Instead of through a mortgage foreclosure, enforcement of a mezzanine lender’s remedies isthrough a UCC foreclosure of the mezzanine lender’s interest: (i) in the mezzanine borrower’s ownershipinterests in the property owner or (ii) in the “securities” controlled or held by the mezzanine lender, if themezzanine collateral was “certificated.” Mezzanine financing typically has a lower lien priority, earns a higherinterest rate, amortizes more quickly, shares more of the risk of equity investment and is considered to be in the“first loss” position.4. Mortgage and Mezzanine Loan Components The standard components of a real estate loan include: LoanDocuments : The loan documents for mortgage loans and mezzanine loans are generally very similar, except asmodified to reflect the different form of collateral. Due Diligence : As the source of security’s value for both loanslies in the real estate, a thorough review of the real property is necessary. Special Purpose, Bankruptcy RemoteEntities : To avoid certain bankruptcy-related risks, senior borrowers and mezzanine borrowers should behttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 4. Buying Distressed Real Estate Debt Page 4 of 9structured as bankruptcy remote, special purpose entities, with independent directors/members. Mortgage Lien :A senior borrower must grant a mortgage lien on the real estate. The mortgage will also include an assignmentof borrower’s rights to enforce leases against and collect the rents from any tenants.5. Mortgage and Mezzanine Loan Components (continued) Membership Pledge : A mezzanine borrower mustpledge 100% of the beneficial ownership interests in the senior borrower as collateral pursuant to a pledgeagreement, so that any foreclosure of the mezzanine loan will result in a transfer of all of the equity interests inthe senior borrower/property owner. Cash Management : Often times, mezzanine lenders require the mezzanineborrower to implement a cash management system (such as a hard lockbox) to be in place, in which allproperty-related cash flow is deposited after payments required by the senior lender, to pay mezzanine debtservice and other related loan payments. Maturity : Rating agencies prefer that the maturity of a mezzanine loanbe coterminous with the maturity date of the senior loan. LTV : Coupled with the senior loan, the LTV mayincrease up to 90% (as compared to 40-70% LTV of senior loans). Interest Rate Caps : To mitigate the risks ofthe floating interest rate that is common in mezzanine loans, mezzanine lenders typically require that themezzanine borrower enter into an interest rate cap agreement and pledge the agreement to the mezzaninelender.6. Structuring Issues and Concerns7. Subordination of Mezzanine Debt to Mortgage Debt Since a mezzanine lender does not have a lien on thereal property in a transaction, the mezzanine loan is structurally subordinate to the senior loan. Foreclosure oracceptance of a deed in lieu of foreclosure by the senior lender will wipe out the mezzanine borrower’s direct orindirect interest in the real property. Similarly, in transactions involving multiple tiers of mezzanine debt, theforeclosure or acceptance of a deed in lieu by a senior mezzanine lender will wipe out a junior mezzanineborrower’s indirect interest in the real property. When buying a mezzanine loan (or an interest in a mezzanineloan) it will be important to review the transfer provisions in the loan documents and the non-recourse carveoutguaranty given in connection with the mezzanine loan to make sure it covers transfers of the property (and directand indirect interests therein) that are not made in accordance with the provisions of the mezzanine loandocuments. The senior lender and junior lender(s) will typically enter into an Intercreditor Agreement which willcontractually subordinate the junior loan(s) to the senior loan(s) and govern the rights and obligations of thelenders. When buying a mezzanine loan that is part of a structure involving multiple mezzanine loans it will beimportant to understand where the mezzanine loan sits in the capital stack and the rights and obligations of themezzanine lender with respect to the senior loan(s) and any subordinate loan(s). Today’s discussion focuses ona structure involving a mortgage loan and one mezzanine loan.8. Intercreditor Agreements Some key provisions to understand in an Intercreditor Agreement when buying adistressed mezzanine loan (or an interest in a distressed mezzanine loan) are discussed below TransferProvisions : Intercreditor Agreements typically contain restrictions on transfers of more than 49% of the interestsin the mezzanine loan unless the transferee is a “Qualified Transferee.” If the proposed buyer does not meet thedefinition of a “Qualified Transferee,” rating agency confirmation (if the senior loan has been securitized) or theconsent of the senior lender may have to be obtained. Notice and Cure Rights of Mezzanine Lender with respectto the Senior Loan : Intercreditor Agreements typically require the senior lender to give notice to the mezzaninelender of a default under the senior loan and provide the mezzanine lender an opportunity to cure the default.There is typically a limit on the number of times a mezzanine lender can cure a senior loan default unless themezzanine lender is exercising its enforcement rights with respect to its collateral.9. Intercreditor Agreements (continued) Option to Purchase Senior Loan : The mezzanine lender typically has anoption, exercisable upon the occurrence of certain events of default under the senior loan, to purchase thesenior loan at the “defaulted mortgage loan purchase price.” It is important to understand the mechanics of howthe purchase option works (i.e. what notices are required to be given by the senior lender to the junior lender,when the option terminates, etc) and the definition of “defaulted mortgage loan purchase price.” Restrictions onModification of the Senior Loan and Mezzanine Loan : Intercreditor Agreements typically contain restrictions onmodifications of the senior loan and the mezzanine loan without the consent of the other lender. It will beimportant to understand the consent rights of the senior lender in connection with a workout or other modificationof the mezzanine loan, as well as the consent rights of the mezzanine lender in connection with a workout orother modification of the mortgage loan.10. Intercreditor Agreements (continued) 5. Mezzanine Lender Enforcement Action : Intercreditor Agreementstypically permit the mezzanine lender to commence an enforcement action following a default under themezzanine loan, including, a foreclosure its equity collateral (in which event the mezzanine lender or its nomineewill become the indirect owner of the real estate) as long as the mezzanine lender complies with certainconditions. The conditions may include the following: (a) Transferee that takes title to the equity interest must bea "Qualified Transferee"; (b) Transferee or an affiliate may have to deliver replacement guaranteesand indemnities to the senior lender if the original guarantors under the senior loan are being released; (c)Mezzanine lender or the transferee will typically have to cure defaults under the senior loan (as a condition to theforeclosure) or as soon as reasonably practicable if it cannot effect a cure until it has foreclosed on the equitypledge; (d) Transferee may have to replace the property manager with a “qualified property manager”;11. Intercreditor Agreements (continued) (e) Transferee may have to institute certain cash managementprocedures if not already in place; (f) Transferee will have to cause the borrower to reaffirm its obligations underthe mortgage loan; (g) Transferee may have to deliver non-consolidation and other opinions; (h) Mezzaninelender or the transferee will be responsible for the payment of costs and expenses of senior lender and possiblyhttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 5. Buying Distressed Real Estate Debt Page 5 of 9a transfer or assumption fee set forth in the mortgage loan documents. The disposition of the mezzaninecollateral will be governed by the Uniform Commercial Code which provides that “every aspect of a disposition ofcollateral, including the method, manner, time, place, and other terms, must be commercially reasonable.”12. Perfection Perfection of a security interest in the mezzanine loan collateral Unlike perfection of a lien on realestate which is accomplished by recordation of a mortgage or deed of trust in the county (or in some cases city)where the real property is located, perfection of a security interest in a membership interest or partnershipinterest is accomplished under Article 8 or Article 9 of the Uniform Commercial Code, depending on whether thecollateral is a “general intangible” or a “security.” Article 9 of the Uniform Commercial Code : Perfection of asecurity interest in a “general intangible” under Article 9 is accomplished by filing a UCC financing statementagainst the pledgor of the pledged interest in the appropriate jurisdiction (i.e. where the pledgor is “located”).13. Perfection (continued) Article 8 of the Uniform Commercial Code : In order for a membership interest orpartnership interest to be a security for Article 8 purposes, the issuer of the interests must expressly provide thatits securities are to be governed by Article 8 of the UCC. An election to “opt-in,” to Article 8 must be made in theoperating agreement or limited partnership agreement of the issuer of the membership interests or partnershipinterests that are being pledged as collateral. Perfection of a security interest under Article 8 is accomplished by(i) filing a UCC financing statement against the pledgor of the pledged interest in the appropriate jurisdiction and(ii) obtaining “control.” Control is obtained by a control agreement or, if the interest is certificated, by takingpossession of the certificate evidencing the interest. The recent trend has been to require the issuer of themezzanine loan collateral to opt in to Article 8 and certificate its membership interests, and for the mezzaninelender to take possession of the certificate indorsed either to lender or in blank and file a UCC. Order UCCsearches to see if any other financing statements are filed against the collateral.14. Due Diligence Considerations for the Purchase of Debt15. Due Diligence Considerations for the Purchase of Debt It is critical to review the due diligence anddocumentation, particularly in times of possible distress. In today’s volatile real estate market, it is completelyunknown whether credit will be available in the near or long term or at the specific time a balloon payment maybe due. This outline addresses possible issues and strategies to consider when purchasing distressed debt,whether prior to or at a foreclosure sale. The goal is to anticipate problems before they ripen into defaults withother credit parties, and to try to prevent the problems from escalating. Many of these points are common sense“reminders” that will enable your ability to address them as quickly and efficiently as possible.16. Big Picture Issues Know the capital stack Who are the potential adverse interests? Expectations of what youare buying Construction loans, first liens, mezz loans Representations? Principal balance, paid to date, nounfunded amounts, no defenses, escrow balances, all loan documents17. Loan Documents Collect, Audit and Review All Loan Documents It is crucial to obtain all senior andmezzanine loan documents and any correspondence among the lenders and borrower provided in connectionwith the loan documents. Additional considerations include assessing: Default provisions, remedies notice andcure rights Intercreditor Agreement obligations and rights with respect to other lenders or credit providersincluding: Notice and cure rights of the lenders Mezzanine lender’s right to purchase senior loan (qualification asa “qualified transferee”) Requirement of replacement guaranties Requirements of replacement propertymanagers Delivery of legal opinions Consent rights of senior lenders to loan modifications Requirementsresulting from securitizations or participations SPE requirements18. Status of the Real Estate Assess Status of Collateral A potential purchaser of distressed debt must reviewthe existing real property due diligence. Depending on the date of the original close, some due diligence shouldbe updated: Collateral : Confirm senior lender’s collateral by reviewing and updating the senior lender’smortgagee title insurance policy and exception documents. An update should confirm the vesting information,that no additional encumbrances or liens exist and that property taxes have been timely paid. Confirmmezzanine lender’s collateral in terms of interests pledged, the existence of a UCC title insurance policy andwhether the interests were certificated or uncertificated. Lien Searches : Appropriate lien searches should beordered to confirm no judgment, tax or UCC liens or bankruptcy petitions have been filed. It is critical to confirmno additional parties claim a lien on either lender’s collateral.19. Status of the Real Estate (continued) Survey : A copy of any existing surveys should be reviewed to confirmno unsatisfactory encroachments or zoning issues. To the extent borrower recently constructed any materialimprovements, the survey should be updated to show such improvements. Third Party Reports : Existingenvironmental, engineering, property condition and appraisal reports should be reviewed, including the right torely on such reports. Insurance : Existing insurance policies should be reviewed to confirm appropriate coveragetypes and amounts.20. Entitlement Due Diligence – Development Deals Responsibilities of the Borrower as a Master Developer /Manager / Bond Obligations / Letters of Credit/Other Project-Specific Obligations: In development projects and inprojects that require sale and rehabilitation work, the borrower/developer is frequently one with the broadresponsibility for infrastructure – streets, sewers, utilities, landscaping and other public improvements. It iscritical to assess the progress of those public improvements so as to avoid litigation later with adjacentlandowners that are part of the development, home builders who have purchased part of the land tracts, orsubsequent owners or tenants.21. Entitlement Due Diligence – Development Deals (continued) These obligations are also frequently a part of ahttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 6. Buying Distressed Real Estate Debt Page 6 of 9development agreement with the local municipal government. All of these types of agreements should bereviewed. In addition, a project owner may have become liable to surety companies on bond obligations given tosecure performance of work required for the project. It is critical to be aware of and to gauge performance levelsunder such obligations on a regular basis. A project owner may also have paid significant deposits to utilitycompanies or may have given letters of credit to secure performance on any number of obligations. Borrowersmay not have kept adequate records of these obligations, but a default under them could result in significant lossand delay to the project.22. Borrower’s Financial Statements and Performance Borrower Reporting Obligations and FinancialPerformance: Lawyers take great pains to draft elaborate reporting obligations of the borrower/developer:regular balance sheets, financial statements, rent rolls, profit and loss statements, audits, etc. As part of the duediligence process, it is wise to review these provisions carefully, and determine if the existing lender requiredstrict conformance with these requirements. If the existing lender did not require strict compliance, upon anoccurrence of a default, the borrower may argue that the lender had modified the terms of the loan documentsby the lender’s actions simply through inadvertence or inattention to the reporting obligations. Of course, it isequally important to review the reports, and, once again, to ask the relevant questions. The review of the reportsshould also serve to highlight potential problems – tenant default rates, change orders, increasing maintenancecosts, overly generous tenant improvement allowances or brokerage commissions. An important consideration isthe cash on hand. That cash can be used later to fund a Chapter 11 filing. A potential purchaser should beasking why the cash is not being put to use – or why it isn’t being used to pay the existing lenders or to makedistributions to the equity.23. Borrower’s Financial Statements and Performance (continued) Although it may sound trivial, it is alsoimportant to confirm that the notice provisions of the loan documents are current and ensure that all notices werelegally proper during the course of the loan. Even though the borrower/developer may not be in default withrespect to the maintenance of debt service coverage ratios, loan to value ratios and, if applicable, EBITDA loancovenants, a periodic review of those numbers remains important. First, if the property’s performance hasdeclined, that is reason enough to be concerned, thus necessitating further discussion with the borrower/owner.The loan documents should be reviewed to specifically determine lender’s audit rights. Second, a decliningperformance might also make it difficult to refinance the existing debt in an era of strict lending standards. Thus,it is both a review of the numbers and an analysis of current or anticipated loan underwriting standards that areimportant measures to consider.24. Leases and Other Third Party Contracts Review All Material Third Party Contracts: A potential purchasershould review all material third party contracts in order to assess contingent and other liabilities in which theborrower/developer may become subject. With respect to leases, it is important to confirm compliance with theloan or joint venture document provisions on the approval of leases. A borrower/developer could become moredesperate as market conditions change, with overly generous tenant improvement packages and other rentconcessions. These could have a deleterious effect on market value. In addition, a review of the creditworthinessof the new and existing tenants on a continuing basis is important.25. Leases and Other Third Party Contracts In many states, if a lease is entered into after the date of therecordation of the mortgage or deed of trust, the lease could be terminated automatically, thus allowing thetenant to find space elsewhere. Confirming the existence of subordination, non-disturbance and attornmentagreements from each tenant is an essential part of insuring that the tenant will remain in place – and continueto pay rent – even after a foreclosure of the existing mortgage or deed of trust. With respect to propertymanagement agreements, it is essential to assess termination rights. Ideally, the borrower should have the rightto terminate the agreement upon 30 days notice without cause. As with leases, property managementagreements should be subordinate to the lien and rights of the existing lenders and their successors. Finally,potential purchasers should be wary of any “affiliate” transactions, in which the borrower/developer may have aninterest that would divert property-related funds for the borrower/developer’s separate purposes.26. Distressed Hotel Assets27. General Overview Current Hotel Financing Likely to combine mortgage loan financing with one or more tiersof mezzanine financing During the last cycle, hotels became one of the most highly leveraged asset classes, inpart due to industry innovation and sustained overall industry performance Hotels no longer stood alone, theywere combined with new products and new components: residential condominiums, luxury amenities such asspa and upscale retail, and "executive chef" food and beverage destination venues Due DiligenceThe keystone of hotel asset analysis for all parties Typically, hotels are managed by a third party manager whobrings brand expertise and support to the location such as a Hilton, Marriott, Starwood, or Wyndham The brandmanager is also likely, domestically, to employ all employees of the hotel and to hold all operating licenses, suchas liquor or in some cases, gaming28. General Overview (continued) Analyzing Analyzing the hotel asset requires a full understanding of theinteraction between all constituencies --- mortgage lender, mezzanine lender, third party manager, and ownerRestructuring a distressed hotel asset also requires full appreciation for performance projections, cost andinventory control, and financial reporting Restructuring or repositioning a hotel asset is effectively a restructuringof an operating business Cash is King A complete understanding of the places for entry of revenues into theoperating hotel business, its deployment by the initial party in control (the hotel manager or residentialcondominium sales machine), and the manner in which costs and expense are paid is an initial and paramountanalysis Secondly, the extent to which each of the parties in interest -- mortgage lender, mezzanine lenders,http://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 7. Buying Distressed Real Estate Debt Page 7 of 9hotel manager, and owner -- has agreed to direct payment of the amounts available to debt service, expense ordistribution through cash management agreements is essential29. The Troublesome Triangle – Hotel Manager, Lender, Potential Acquiror Three players triangulate any hotelrestructure: Hotel Manager, Lender, and Potential Acquiror The Hotel Manager Typically a national orinternational operator of hotels and resorts, commonly know by the name of the brand each has created andexploited: Hilton, Marriott, Wyndham, or in the case of Starwood, "W," St. Regis or Sheraton. Thesenational brand managers (for simplicity here, a "Brand Manager") share several characteristics. First,through a document known as the Management Agreement, executed between the Hotel Owner and the BrandManager, the Hotel Owner grants to the Brand Manager the authority to enter into possession of the hotel andoperate and manage the facility. The Management Agreement gives the Manager broad authority, as anindependent contractor, to undertake all activities necessary or appropriate to manage the hotel as a"Brand Manager" hotel, all at the sole cost and expense of the Hotel Owner, subject only to specific(but narrow) rights of the Hotel Owner to approve an annual budget and certain costs and expenses. Inexchange for these activities, the Brand Manager receives a base fee, typically 2-4% of gross revenues, and anincentive management fee, which is typically a percentage (10%-20%) of the hotel's adjusted grossoperating profit.30. Manager Issues The Hotel Manager through the base management fee, is compensated for running theHotel and permitting the use of its name, technology, reservation systems, and other practices and proprietaryexpertise which together create the signature of the Brand Manager. The incentive management fee is a profitsharing mechanism designed to incentivize the manager to achieve success on behalf of the Hotel Owner, andto share in the rewards. The Hotel Manager occupies a central but conflicted role in the triangle necessary tooperate and finance a hotel. While in theory the only party to whom they are legally obligated to respond is theHotel Owner, the counterparty to the Management Agreement, the practical world of financing (and the power ofthe golden rule) resulted in mortgage lenders and mezzanine lenders taking active interest in the review andperformance of the asset. The chief negotiated protection of mortgage lenders and the mezzanine lender is aperfected security interest in the revenues derived from the operation of the hotel. The chief objective of theHotel Manager is to limit the ability of a mortgage lender and any mezzanine lender from receiving any portion ofthe revenues generated from the hotel until all operating expenses, and the Hotel Manager's base fee,and in many cases, incentive management fees, are paid. This order of priority of payment naturallysubordinates the payment of debt service to the expenses of owning and operating the hotel and thecompensation of the Hotel Manager.31. Lender Objectives Objective: The Lender (or in most cases, a lender group consisting of a mortgage lenderand various senior and junior tiers of mezzanine lender) restructures the cash flow to create additional cashavailable for debt service throughout the capital stack First, the Lender will analyze the Hotel ManagementAgreement in conjunction with the mortgage loan documents and the mezzanine loan documents to determine:All sources of cash flow from the operation of the facility; Order of priority of payment of operating expenses, ifany, including lienable items, employee taxes and withholding, and payment of management fees; Determinationof reserve accounts mandated by Hotel Management Agreement, and Loan Documents, and any "crossover" or "duplication" that the documents may include; Steps to access amounts in excess ofoperating expenses; Location of the Hotel Manager's credit card deposit systems and location of cashpayments received through credit card providers (i.e., how are the individual unit and hotel accountsmaintained); Potential "leakage" of cash from system; and Elements of sell down, if applicable, ofresidential condominium units, or income stream, if any, from rental of hotel condominium units32. Lender Objectives (continued) Once the Lender has located all sources of revenue, it then looks todetermine if there are any steps that can be taken to revise and realign the expense of operating the hotel. Thisstep requires the collaboration of the Hotel Manager. The Hotel Manager is cautious on all steps relating to itscontrol of operating standards If successful, additional cash has been made available for the payment of debtservice. If cash is not available, then negotiations between the Lender, Owner, and Hotel Manager are requiredto determine if any revision to the payment of management fees, the injection of a capital contribution, or thedeferral or suspension of certain payments or fees can be made. If unsuccessful, the hotel may be the subject ofreceivership or foreclosure proceedings, or possibly a bankruptcy. In each instance, the Lender, Hotel Manager,and interested third parties have been reading the Subordination, NonDisturbance and Attornment Agreementexecuted by the Hotel Manager, Lender, and Hotel Owner at the time of the mortgage loan financing, andpossibly a "Recognition Agreement" benefiting one or more members of the additional tiers ofmezzanine financing33. Intersection: Lender and Acquiring Party A Subordination, NonDisturbance and Attornment Agreement("SNDA") with an existing Hotel Manager and the Lender may significantly affect the ability of theLender to deal with the hotel location, as a hotel asset or as an alternative use, following an unsuccessful cashrestructure. Depending upon the negotiating power of the Hotel Manager at the time of the closing of thefinancing, the SNDA may permit the Hotel Manager to remain in possession, operating the hotel withoutchallenge following the Lender's exercise of remedies with few contractual rights to terminate the HotelManager's services. The SNDA may also require parties accepting title to the location by or through theLender to respect the Hotel Management Agreement and permit the operation of the hotel in accordance withthe terms of the Management Agreement. This continuity of operation requires a careful review of operating costand expense risk allocation and liability, as in some cases a Lender will seek to limit its liability as to pastoperating deficits incurred during the Owner's period of ownership which may then be "tackedon" or assumed by a future owner. In some cases, the Lender may have reserved a right to acquire thehttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 8. Buying Distressed Real Estate Debt Page 8 of 9Hotel Property from the Borrower upon default of the Loan, or negotiated rights of first refusal with respect to theproperty (consensual deed in lieu provisions)34. Intersection: Lender and Acquiring Party (continued) In some cases, the Lender may have reserved a right toacquire the Hotel Property from the Borrower upon default of the Loan, or negotiated rights of first refusal withrespect to the property (consensual deed in lieu provisions) While the SNDA may be perceived as creatingstability as to the future operation of the Property following a foreclosure, the SNDA may be counterproductive tothe extent it restricts marketability of the property if the "highest and best use" is no longer a hotel Inthe current market, the facts are further complicated by the licensing agreement that may be in place with regardto the marketing and sale of condominium units at the hotel location. Typically the right to name and brand thecondominium units in the same family as the hotel brand requires the Hotel Management Agreement to remainin place35. Intersection: Lender and Acquiring Party (continued) Hotel Management Agreements and SNDA agreementswere traditionally regarded as executory agreement terminable in bankruptcy. Recent drafting provisions to theforms of SNDA and Hotel Management Agreements have attempted to circumvent this result by consensualagreements of the parties to refrain from treating the Hotel Management Agreements as executory. Unlike otherLoan Documents which terminate by operation of law or contract on the conclusion of a foreclosure orbankruptcy, the Hotel Management Agreement may prove in some circumstances the lone survivor. This fact islikely to create more legal and practical issues.36. Lawyer Biographies37. Charles Thornton concentrates his practice in matters related to real estate, including the negotiation of jointventures, the representation of institutional providers of funds for real estate investment and development, therepresentation of developers of office, housing, retail and industrial properties, and purchase and sale, financingand leasing transactions. He serves as outside general counsel for real estate companies, advising on issuesrelated to capital markets, governance and, working with tax, corporate and ERISA counsel in the Firm, thestructure of investment vehicles and funds. Mr. Thornton helped to found the Firm's San Francisco officein 1997, served as its first chair and is the chair of its real estate practice. He has been listed in The BestLawyers in America for over 20 years, is listed in Chambers USA as a California Leading Lawyer and isdesignated as a Northern California Super Lawyer by Law and Politics and San Francisco Magazine . He isactive in community affairs, currently serving as the Chair of the Board of the YMCA of San Francisco, amember of Lambda Alpha, active in fundraising for the Michigan Law School and a former member of theExecutive Committee of the United Way of Los Angeles. Current clients and selected recent transactionsinclude: The Morgan Stanley Real Estate Funds in their acquisition of the San Francisco office building portfolioof the Blackstone Group (formerly Equity Office Properties) (2007) The Morgan Stanley Real Estate Funds intheir acquisition of Glenborough Realty Trust (2006) Lennar Corporation in its development of the formerHunters Point Shipyard, and adjacent Candlestick Point, in San Francisco (ongoing) Rockwood Capital LLCaffiliates in the acquisition, development and disposition of office and retail properties, including the developmentof the Nut Tree Village in Vacaville, California Fairfield Residential LLC in financing, joint venture andgovernance matters Chileno Bay Development Partners in joint venture, capital market and governance mattersrelating to a resort property near Cabo San Lucas, Mexico (ongoing) Hines Interests in the acquisition,disposition and financing of office and development properties Spear Street Capital in the formation of its realestate funds and the acquisition and disposition of office properties IDS Realty in the formation, capitalizationand governance of two joint ventures with the California State Teachers Retirement System Attorney Photo Here2” height Charles V. Thornton Partner, San Francisco Office (415) 856-7001 charlesthornton@paulhastings.com38. Kevin Fisher advises financial institutions and companies in complex transactions with a focus onrestructuring, insolvency and leveraged finance. He has represented private equity firms and hedge funds instructuring joint ventures as investment vehicles, acquisition finance matters and restructuring portfoliocompanies. Mr. Fisher has extensive experience in acting for creditors and debtors in cross-border transactionsand restructuring matters. Honors & Peer Recognition Fellow, American College of Commercial FinanceLawyers Member, American Law Institute Leading Restructuring & Insolvency Lawyer, EuromoneyRecommended Banking & Finance Lawyer, PLC Which Lawyer Recommended Lawyer, PLC’s Cross-BorderFinance: Secured Lending Handbook Listed in The Best Lawyers in America Northern California Super LawyerRepresentative Engagements Restructuring Transactions Committee of Foreign Creditors in the SK Globalrestructuring - this matter was the first major case filed under Korea’s new insolvency regime and involvedancillary insolvency proceedings in the US, Japan and Europe Canadian subsidiary of US independent powerproducer in Canadian insolvency proceedings Rabobank as lender in the US and UK restructuring andinsolvency proceedings of a multi-national agribusiness company Agent bank in the restructuring of $700 millioncredit facility to a publicly traded company in the construction industry Wells Fargo Bank in the restructuring of$250 million in indebtedness of a large agribusiness company and the deed-in-lieu acquisition of over 5,000acres of farmland Largest West Coast grower cooperative in out-of-court restructuring of over $1 billion in debtThe Bank of New York, as indenture trustee for bondholders, in various restructuring transactions andinsolvency matters National developer of apartment and condominium projects in restructuring many of its jointventures and financings Real estate developer in restructuring its residential development projects and debtobligations Financing Transactions MSREF in the $2.4 billion financing for its acquisition from Blackstone ofEOP’s San Francisco office building portfolio MSREF in the $1.7 billion acquisition and financing of GlenboroughRealty Trust MSREF in the $575 million acquisition and financing of the Maui Prince Hotel & Resort CatholicHealthcare West in multiple loan and bond financings, including $1.2 billion credit facility to acquire its auctionrate securities UK-based hedge fund as borrower in a $750 million multi-currency credit facility Hedge fund ashttp://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012
  • 9. Buying Distressed Real Estate Debt Page 9 of 9lender in $130 million secured loan facility to gaming company Hedge fund as mezzanine lender in real estateprojects Agent bank in $500 million secured acquisition finance facility to a timber company Agent bank in $500million secured multi-currency credit facility to a technology company Agent bank in $375 million securedacquisition finance facility to a technology company Attorney Photo Here 2” height Kevin B. Fisher Partner, SanFrancisco Office (415) 856-7219 kevinfisher@paulhastings.com39. Stephen I. Berkman is a partner in the real estate practice of Paul Hastings’ San Francisco office. Hispractice primarily consists of representing institutional owners, investors and users of various types of real estateassets, both nationally and internationally. Mr. Berkman has extensive experience representing buyers andsellers of major office, retail, apartment, industrial, gaming and hospitality projects, whether in single asset orportfolio transactions. He also spends significant time representing major corporate users of real estate, advisingon headquarters and other facilities leasing, sale/leaseback transactions and disposition of excess property. Aspart of his real estate practice, Mr. Berkman has developed a specialty representing both major Internetcompanies and real estate developers with respect to the development, leasing and operation of data centers.Representative clients include Alexandria Real Estate Equities, Citigroup, Harrah’s, IAC/InterActiveCorp, TheMcGraw-Hill Companies, Salesforce.com and Yahoo! Mr. Berkman has been named one of the leading lawyersin real estate by Chambers USA (2008). Prior to joining Paul Hastings, Mr. Berkman was named one of the"Top 20 Under 40" lawyers in California by both the San Francisco Daily Journal and the LosAngeles Daily Journal . Mr. Berkman received his J.D. from the UCLA School of Law in 1992 and a B.S. inbusiness administration, with honors, from the University of California at Berkeley in 1987. Mr. Berkman is amember of the State Bar of California. Attorney Photo Here 2” height Stephen I. Berkman Partner, SanFrancisco Office (415) 856-7215 stephenberkman@paulhastings.com40. Our Global Reach 195 Real Estate Lawyers Los Angeles Orange County Atlanta New York Tokyo LondonHong Kong Shanghai Paris San Diego San Francisco Washington Brussels Beijing Palo Alto Milan ChicagoFrankfurt41. Our Offices For further information , you may visit our home page at www.paulhastings.com or email us at[email_address] . Brussels Avenue Louise 480 Boîte 5B 1050 Brussels, Belgium Telephone: +32 2 641 7460Facsimile: +32 2 641 7461 Frankfurt Siesmayerstrasse 21 D-60323 Frankfurt am Main, Germany Telephone:+49 69 907485 0 Facsimile: +49 69 907485 499 London Ten Bishops Square, 8th Floor London E1 6EG UnitedKingdom Telephone: +44 203 023 5100 Facsimile: +44 203 023 5109 Milan Via Palestro, 24 20122 Milan, ItalyTelephone: +39 02 30414 000 Facsimile: +39 02 30414 005 Paris 96, boulevard Haussmann 75008 Paris,France Telephone: +33 1 42 99 04 50 Facsimile: +33 1 45 63 91 49 Beijing 19/F, Yintai Center Office Tower 2Jianguomenwai Avenue Chaoyang District Beijing, 100022 China Telephone: +86 10 8567 5300 Facsimile: +8610 8567 5400 Hong Kong 22/F, Bank of China Tower 1 Garden Road Hong Kong Telephone: +852 2867 1288Facsimile: +852 2526 2119 Shanghai 35/F Park Place 1601 Nanjing West Road Shanghai, 200040 ChinaTelephone: +86 21 6103 2900 Facsimile: +86 21 6103 2990 Tokyo Ark Mori Building – 34F 12-32 Akasaka 1-chome Minato-Ku, Tokyo 107-6034, Japan Telephone: +81 3 6229 6100 Facsimile: +81 3 6229 7100 Palo Alto1117 S. California Avenue Palo Alto, CA 94304 Telephone: +1 650 320 1800 Facsimile : +1 650 320 1900 SanDiego 4747 Executive Drive, 12th floor San Diego, CA 92121 Telephone: +1 858 458 3000 Facsimile: +1 858458 3005 San Francisco 55 Second Street, 24th Floor San Francisco, CA 94105 Telephone: +1 415 856 7000Facsimile: +1 415 856 7100 Washington, D.C. 875 15th Street, N.W. Washington, DC 20005 Telephone: +1 202551 1700 Facsimile: +1 202 551 1705 Atlanta 600 Peachtree Street, N.E. 24th Floor Atlanta, GA 30308Telephone: +1 404 815 2400 Facsimile: +1 404 815 2424 Chicago 191 North Wacker Drive 30th Floor Chicago,IL 60606 Telephone: +1 312 499 6000 Facsimile: +1 312 499 6100 Los Angeles 515 S. Flower Street 25th FloorLos Angeles, CA 90071 Telephone: +1 213 683 6000 Facsimile: +1 213 627 0705 New York Park AvenueTower 75 East 55th Street, 1st Floor New York, NY 10022 Telephone: +1 212 318 6000 Facsimile: +1 212 3194090 Orange County 695 Town Center Drive, 17th Floor Costa Mesa, CA 92626 Telephone: +1 714 668 6200Facsimile: +1 714 979 1921 EUROPE ASIA NORTH AMERICA LEARN ABOUT US USING SLIDESHARE PRO & MORE DEVELOPERS & API About SlideShare 101 Go PRO new Developers Section SlideShare Follow us on Careers Terms of Use Business Solutions Developers Group on mobile Twitter Find us on Connect on Our Blog Privacy Policy Advertise on Engineering Blog Facebook LinkedIn SlideShare Press Copyright & DMCA Blog Widgets Contact us Community Guidelines Help & Support© 2012 SlideShare Inc. All rights reserved.http://www.slideshare.net/sberkman/Buying-Distressed-Real-Estate-Debt?from=share_email 4/12/2012

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