Commercial Real Estate Loan Workouts- A Basic Overview


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Article presented at the Practising Law Institute November 2010

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Commercial Real Estate Loan Workouts- A Basic Overview

  1. 1. COMMERCIAL REAL ESTATE LOAN WORKOUTS – A BASIC OVERVIEW Practising Law Institute Twelfth Annual Commercial Real Estate Institute Chicago, Illinois November 1-2, 2010 Carmen H. Lonstein Baker & McKenzie LLP
  2. 2. Introduction As of the end of the third quarter of 2010, a debate is still underway as to the nature and extent of a potential commercial lending crisis that could further derail a tenuous U.S. economic recovery. Similar to the residential mortgage lending industry, the commercial mortgage lending industry participated in exuberant lending practices over the past decade in order to meet Wall Street’s appetite for commercial mortgage backed securities (“CMBS”) and related products. According to Commercial Mortgage Alert, the peak years of 2005 through 2007 saw more than 600 billion of CMBS securities issued, almost half of the total CMBS securities issued in the past twenty years. Many of the commercial real estate loans underlying these structures are heading toward higher and higher default rates. The optimists, however, contend that the highest rated tranches of CMBS structures are in no danger of value impairment. However, few CMBS structures have been able to maintain their initial credit ratings as billions of dollars of CMBS portfolios have been downgraded in 2010. Without doubt, the lower tranches of CMBS structures, rated triple B or lower, are clearly in line to be the biggest victims of a relaxed underwriting era in commercial real estate as loans mature or default over the next two to three years in the midst of a chilled lending environment that has persisted since the Fall of 2008. The current chilled lending environment in turn is contributing to many commercial borrowers undergoing a liquidity crisis that increases their risk of a payment default or renders them unlikely to obtain loans to take out funded construction loans or to refinance upcoming loan maturities. An increase in commercial vacancy rates in most commercial real estate markets across the country is further complicating borrower’s ability to refinance balloon notes that are now maturing. As an example, General Growth Properties (GGP), one of the largest owners and developers of malls and shopping centers in the United States, filed a petition for relief under chapter 11 for itself and approximately 387 subsidiaries in April of 2009 to avoid the consequences of multiple defaults on maturing commercial real estate loans that could not be readily refinanced. In an August 2009 ruling, discussed further below, the bankruptcy court denied several motions to dismiss the chapter 11 cases of several project-level debtor subsidiaries of GGP, noting that it was standard industry practice for many years to structure commercial real estate loans with three- to seven-year maturities, essentially premised on a business plan that assumed the borrower would be able to refinance at maturity.1 This assumption was decimated as the crisis in the credit markets has spread to commercial real estate finance.2 The factors contributing to a potential commercial real estate lending crisis were explained by Jon Greenlee, Associate Director, Division of Banking Supervision and Regulation, in his testimony before the Federal Reserve on July 9, 2009: “The decline in the Commercial Real Estate (CRE) market has been aggravated by two additional factors. First, the values of commercial real estate increased significantly between 2005 and 2007, driven by many of the same factors behind the residential housing bubble, resulting in many properties either purchased or refinanced at inflated values. Prices have declined about 24 percent since their peak in the fall of 2007 and market participants expect significant further 1 In re General Growth Properties, Inc., 2009 Bankr. LEXIS 2127, *24 (Bankr. S.D.N.Y. August 11, 2009). 2 Id. at *25.
  3. 3. declines. Second, the market for securitized commercial mortgages (CMBS), which accounts for roughly one-fourth of outstanding commercial mortgages, has been largely dormant since early 2008 while many banks have substantially tightened credit. The decline in property values and higher underwriting standards in place at banks will increase the potential that borrowers will find it difficult to refinance their maturing outstanding debt, which often includes substantial balloon payments. The higher vacancy levels and significant decline in value of existing properties has also placed pressure on new construction projects. As a result, the construction market has experienced sharp declines in both the demand for and the supply of new construction loans since peaking in 2007. The negative fundamentals in the commercial real estate property markets have broadly affected the credit performance of loans in banks’ portfolios and loans in commercial mortgage backed securities. At the end of the first quarter of 2009, there was approximately $3.5 trillion of outstanding debt associated with commercial real estate. Of this, $1.8 trillion was held on the books of banks, and an additional $900 billion represented collateral for CMBS. At the end of the first quarter, about seven percent of commercial real estate loans on banks’ books were considered delinquent. This was almost double from the level a year earlier. The loan performance problems were the most striking for construction and land development loans, especially for those that finance residential development. Notably, a high proportion of small and medium-sized institutions continue to have sizable exposure to commercial real estate, including land development and construction loans, built up earlier this decade, with some having concentrations equal to several multiples of their capital.” According to a February 2010 report by the Congressional Oversight Panel, a total of $1.4 trillion in commercial real estate loans will require refinancing in the next four years as more than half of those loans are already underwater, written for properties whose value has plummeted. The expected losses when the loans are defaulted upon could range between $200 billion to $300 billion and threaten 3,000 small and mid-size banks with a disproportionate share of commercial real estate assets on their books. The effects could potentially be catastrophic. Meanwhile, a prolonged economic slow down has resulted in increasing vacancy rates and cash flow pressures affecting the credit ratings of most CMBS. As of September, 2010 Fitch Ratings Agency reported it had down graded more than $71 billion of CMBS and expects to continue downgrades on CMBS throughout the next one to two years. Managing director Mary MacNeill has stated, "Future downgrades will be predicated on updated valuations as many highly leveraged loans move closer toward maturity." Similarly, Moody’s Investor Service has downgraded billions of dollars in CMBS and is reviewing whether or not to adjust ratings downward on tens of billions of dollars more CMBS to account for increased losses from specially serviced and troubled loans. These include CMBS issued in 2005 and 2006 by JPMorgan Chase Commercial Services, Morgan Stanley Capital Trust, Wachovia Bank Commercial Mortgage Trust , Lehman Brothers-UBS Commercial Mortgage, Citigroup Commercial Mortgage Trust and Merrill Lynch. 2
  4. 4. In the interim, the Board of Governors of the Federal Reserve System (FRB) has issued an October 30, 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts (the “CRE White Paper”) ostensibly to provide guidance to “financial institutions facing significant challenges when working with commercial real estate (CRE) borrowers that are experiencing diminished operating cash flows, depreciated collateral values, or prolonged sales and rental absorption periods.” The CRE White Paper clarifies that, among other things, it is a “prudent lending practice,” not requiring a loan to be classified as a “Troubled Debt Restructuring (TDR),” when a financial institution restructures or renews a maturing commercial real estate loan, even where the value of the collateral has declined to less than the loan balance and there is no immediate ability to refinance, so long as the borrower has the ability to make debt service payments during the extended term. In view of this imprimatur, it should not be surprising that most FRB supervised financial institutions have engaged in a nation-wide boom of “extend and pretend” or “delay and pray” restructurings during the past year. Regardless of whether one subscribes to the doomsday scenarios in commercial real estate over the next few years, it seems more probable than not that commercial real estate loan defaults will rise in the near-term and both lenders and borrowers will be brushing up on the strategies and tools available to ride out a commercial real estate lending storm that has not been seen since the early ‘90’s. It is important to note that notwithstanding common patterns, every distressed commercial loan is distinct as the result of numerous varying factors, including the type and value of the collateral, the extent of cash flows from the collateral, the existence of other liens/debt on the same collateral, geographic and industry factors, the relative experience and trustworthiness of management of the borrower, and whether there is a realistic prospect for a near-term turnaround of the factors causing economic distress. Indeed, loan workouts can take many forms, including a renewal or extension of loan terms, extension of additional credit, or a restructuring with or without concessions relative to market terms at the time of the workout. The following is a general overview of some of the primary issues and concerns that arise in the context of commercial real estate workouts from a creditor/lender perspective. It is not intended as comprehensive legal advice on any specific situation or for any specific jurisdiction, and further consultation with experienced counsel is recommended. I. The Default Typically, a commercial real estate loan is comprised of a promissory note and security documentation that contains obligations of the borrower related to: (i) making timely interest and principal payments; (ii) warranties and representations made at the time the original loan was made, and that may be continuing during the pendency of the loan; (iii) financial, operating and/or maintenance covenants of the borrower; and (iv) external events such as changes of control, bankruptcy or insolvency of the borrower, violations of federal law or material adverse changes. The failure of the borrower to meet any one of these types of obligations may constitute an “Event of Default” under the loan documentation sufficient to permit acceleration of the loan and the exercise of collection remedies available under applicable law. A prudent lender should be careful to identify the exact nature of the default and whether the loan documentation permits an immediate default and acceleration of indebtedness to be 3
  5. 5. declared or requires notice of the default to the borrower and an opportunity to cure the default before an Event of Default can be declared. In most cases a default at maturity of the loan is cause for immediate declaration of an Event of Default; whereas, a missed payment requires notice and a prescribed opportunity to cure that default. A carefully documented default is an important predicate to the lender’s ability to exercise its legal remedies quickly and efficiently and to the elimination of potential borrower allegations of an improper or premature declaration of default. Excessive delay in notifying a borrower of a default may lead to claims of waiver from the borrower. Prompt default and acceleration of the debt is typically desirable because it permits the accrual of a default rate of interest. Accordingly, it is important for the lender to ascertain the nature and extent of a default and notify the borrower in writing promptly. The lender should ensure that the notice of default is sent in the manner and to the parties and addresses specified in the loan documentation, including any third party guarantees. It may be appropriate in some circumstances to notify tenants of a default in connection with the exercise of rights under an assignment of rents. In the context of CMBS loans, the servicer would typically be notified of the default in addition to the borrower. In sum, the following factors should be considered related to declaring an Event of Default which typically: • Triggers the right to receive rents to an existing or springing lockbox under an Assignment of Rents • Terminates the borrower’s right to make further draws on any unfunded portion of the loan • Triggers accrual of default interest • Triggers the right to sue guarantors (assuming guaranty of payment) • Triggers rights against any reserves or cash held in bank accounts at the same lending institution • Triggers the right to commence foreclosure action II. Assessing Options Post-Default A. Obtain Reliable and Complete Information As noted above, each commercial loan is distinct and unique, and one of the most important foundations for the effective implementation of any option or strategy is the need for reliable and complete information. Therefore, a prudent lender of a distressed commercial real estate loan should immediately assess the quality of available financial and operational information from the borrower. Where information is outdated, inconsistent or incomplete, the lender should consider recommending that the borrower retain an experienced workout consultant to assist the borrower with timely preparation of complete information to the lender, as a pre-condition to the lender’s consideration of any options other than immediate commencement and prosecution of a foreclosure. 4
  6. 6. An experienced workout consultant providing can help create an environment of trust and reliability with respect to the information provided by the borrower. Another alternative, frequently used by lenders experienced with distressed commercial real estate, is to assign the distressed loan to a new loan officer with experience in handling workouts and foreclosures. The assignment of a new workout loan officer typically results obtain and analyze information with a more impartial view of the borrower’s current distress, and a clearer focus on the best options to address the situation, rather than undue focus on the prior history of the loan or the parties. Both approaches can lead to more productive negotiations and a more meaningful opportunity for the lender to neutrally assess the desirability of the various options that may be available to the lender post-default, including: • Refinancing • Forbearance Agreement (to a Sale, Refinancing or Deed in Lieu) • Consensual Restructuring / Loan Modification • Receivership • Judicial or Non-Judicial Foreclosure • Enforcement Against Guarantors III. Documentation & Valuation Analysis A. Perfection Analysis Prior to proceeding with any of the potential options, a prudent lender should undertake, with the assistance of counsel, a complete overview of the loan documentation and perfection of collateral. This includes a review of : 1. all original security and loan agreement documentation signed at closing, any side letters, post-closing modifications and all correspondence prior to the default; 2. an updated title search, Uniform Commercial Code (UCC) search, tax lien and judgment lien search (any liens, including potential mechanics’ liens and unpaid taxes, should be identified at the outset); 3. all guarantees and recourse carve-outs; 4. all landlord and tenant waivers (confirm in place for all current tenants); 5. intercreditor agreements; 6. any deposit control agreements; agreement related to funded reserves or tenant improvement accounts; 7. any special collateral such as patents, trademarks or other intellectual property and confirmation of perfection of same; and 8. good standing and formation of borrower/guarantor entities. 5
  7. 7. If the loan is a construction loan, the lender should ascertain all of the following: 1. the stage of construction and the extent of funding under the existing construction loan; 2. the cost to complete the project; 3. the extent of any funded reserves; and 4. the extent of any funded tenant improvements and the allowance per square foot contemplated at closing (versus any change in the current market for tenant improvement funding) to determine if there are shortfalls in tenant improvement funding. The identification of flaws in the perfection of the collateral, if any, is of critical importance before any workout discussions. Any flaws in perfection should be corrected as part of the consideration to the lender for any concessions made as part of a workout. Of course, the lender should consult with bankruptcy counsel to assess whether there is any potential exposure on account of deficiencies in perfection of collateral that may be corrected as part of the workout or consensual restructuring. B. Valuation of Collateral The preparation of a current appraisal is indispensable for the meaningful assessment of options available to the lender. In essence, the lender should understand from the outset the potential range of values for the collateral versus the amount of the outstanding debt, including any prepayment premiums or special charges due under the loan agreement. It is also critical to consult with counsel to assess the lender’s exposure in a potential bankruptcy of the borrower. The lenders should also arrange for a site visit of the collateral in order to better understand the appraisal value and to visually verify information provided by the borrower on vacancies, deferred maintenance and maintenance of the collateral. It may also be appropriate to order updated environmental reports for properties that have some risk of environmental issues or claims. The perceived value and marketability of the collateral will likely be the most heavily weighed factor by the lender in choosing a strategy for dealing with a distressed commercial real estate loan. Collateral that is worth more than the indebtedness and is easily liquidated will make a foreclosure option seem more plausible and attractive (and also motivates the borrower to file a bankruptcy case if necessary to preserve equity in the property). In contrast, collateral that is deteriorating in value and cannot be sold readily (i.e. “icebergs”) will tend to push the lender (and the borrower) toward a workout or restructuring strategy that alleviates the current economic burden of non-payment in some acceptable form and defers the realization of steeper losses. The appraisal should be prepared assuming a going-concern value and full marketing period as well as an orderly liquidation. Any appraisers hired should be retained by lender’s 6
  8. 8. counsel in order to potentially protect the reports, as material prepared by non-testifying consulting experts for counsel, under the attorney work-product doctrine. IV. Control of Cash Flow Pending a Workout Depending upon loan documentation, the lender may choose to direct all rents to a lock- box upon the occurrence of an Event of Default and immediately commence foreclosure proceedings. Thereafter, unless the lender agrees to permit the borrower’s use or access to the rents for approved, budgeted expenses pending the lender’s foreclosure action, the borrower may immediately file for bankruptcy in order to obtain the same results with bankruptcy court approval. Amendments to sections 552 and 363 of the Bankruptcy Code have eliminated much of the ‘90s era litigation regarding whether assignment of rents were absolute or intended as security by recognizing a lender’s lien on rents as cash collateral. Nevertheless, most bankruptcy courts will permit a debtor to use the cash generated from the collateral postpetition in order to preserve the collateral in accordance with a reasonable budget. A prudent lender should review the borrower’s proposed budget carefully and object to any expenses that are duplicative, wasteful, or not necessary to the preservation of the collateral. Among the options that may be considered by a lender are: (i) requiring all rents to be deposited into a lockbox but permitting the debtor to withdraw an approved monthly amount for use in accordance with an agreed upon budget; (ii) requiring all excess cash above a budgeted amount to be deposited into a lockbox; or (iii) not requiring a lockbox to be implemented but monitoring cash flow and expenses weekly as provided in a 13-week budget prepared by the borrower. V. Pre-Negotiation Letter Prior to commencing any workout discussions, a prudent lender should require the borrower and all guarantors to execute a “pre-negotiation letter.” Typically, a pre-negotiation letter sets the ground rules for the workout discussions, preserves the lender’s rights with respect to an existing default. It may also serve to eliminate the ability of the borrower to later raise frivolous claims based on alleged improper conduct, verbal agreements or waivers by the lender with respect to the defaulted loan. The letter should confirm that all settlement discussions are inadmissible in any later proceedings and are in the nature of settlement discussions, and that any preliminary agreements that may be reached must be the subject of final documentation executed by all of the parties. A sample pre-negotiation letter is attached as Exhibit A. As noted in Exhibit A, typical provisions in a pre-negotiation letter include: • Identification of the governing loan documents. Ideally, the lender should strive for the borrower to acknowledge the loan documents are in full force and effect, subject to any modifications in writing that the parties may agree upon; • Identification of the project related to the loan; • Identification of the principal amount of the loan at issue; 7
  9. 9. • Acknowledgement of the existing default (ideal); or at a minimum, acknowledgement that default notices have been sent by the lender and received by the borrower and the guarantors; • If the loan is not in default, the letter may acknowledge that borrower and lender are not aware of any existing defaults, but that lender reserves the right to declare any default which may subsequently occur or otherwise comes to the attention of the lender notwithstanding the pendency of ongoing discussions; • Acknowledgement that workout discussions are voluntary and in the nature of settlement discussions and can be terminated at either time by any party; • Acknowledgment that lender is not agreeing to forbear from the exercise of its rights and remedies and that borrower shall continue to pursue any opportunities to refinance or restructure the defaulted loan during the pendency of discussions; • If a standstill agreement by the lender is a pre-requisite to the pre-negotiation letter, the letter should specifically set forth any standstill agreement, and the lender’s ability to terminate at any time, as well as that borrower shall continue to pursue any opportunities to refinance or restructure the defaulted loan during the pendency of discussions; VI. The Borrower’s Options A prudent lender should analyze the borrower’s options and discuss with its advisors the potential impact of each of those options on the lender’s collateral on a case by case basis, particularly in light of the documentation and valuation analysis that is completed at the outset of the workout. A borrower’s options typically include: • Consent to foreclosure/receiver; • Out of court, consensual restructuring of loan terms; • Assignment for the benefit of creditors (orderly contractual liquidation under state law where an independent, third party trustee selected by the borrower receives title to all assets of the borrower and then liquidates those assets for the benefit of all creditors, distributing proceeds in accordance with state law priorities); • Dissolution under state law and corresponding non-judicial liquidation; and • Bankruptcy filing: chapter 11 reorganization vs. chapter 7 liquidation. VII. Forbearance Agreement Basics A forbearance agreement is typically an agreement by the lender to refrain from exercising its foreclosure and collection remedies on account of an existing default or pending maturity for a specified period of time in exchange for certain consideration. It typically serves 8
  10. 10. as a written modification of specified loan terms (i.e. altered payment schedule, and/or accrual/capitalization of interest) and can also provide for: • acknowledgement of all amounts due lender for principal, interest, legal fees and providing for payment of lenders’ future fees, including professional fees and costs; • acknowledgem ent that each party is represented by and has received the advice of counsel; • the correction of any deficiencies in the perfection of existing collateral; • new covenants or covenant waivers; • new or supplemental security interests; • additional representations and warranties; • a fixed standstill period and set termination date, subject to earlier termination on default under the agreement; • scope of forbearance (identify specific actions not to be taken by the lender during the standstill period, as well as actions that may be taken (to perfect collateral, defend actions from third parties and/or sue non-parties); • payment of a forbearance fee (typically . 25% to 2 % but higher in tight credit markets), with provisions that fee is fully earned on execution of the agreement; • address exit strategy and remedies on default (i.e. refinance by x date or transfer of property/consent to foreclosure); • payment of administrative and/or forbearance fees; • new escrows/indemnity if appropriate; 9
  11. 11. • acknowledgement of the nature and extent of an existing default or pending maturity date; • forum selection, waiver of jury trial; and • transaction or general releases (typically mutual) of all claims prior to execution of agreement, including any lender liability claims; • events of default under the agreement. Ideally, a forbearance agreement will also address cash management issues. This can be done by incorporating a cash sweep and lockbox even if it was not part of the original loan documentation. Typically, a borrower proposes a fixed budget with some nominal variances allowed, with all excess cash to remain in a lockbox. The agreement can also provide for periodic supplemental payments from excess cash to be made to reduce the loan balance. Although forbearance agreements can provide for absolute title to rent to pass to the lender and for deeds in lieu of foreclosure to be deposited into escrow, such arrangement are typically found to be in the nature of intended security interests absent completion of the foreclosure process required under state law. Therefore, it may be more effective to provide for a stipulated consent to the foreclosure process (and a receiver) subject to an option to repurchase the property in favor of the borrower that is expires at a fixed date in the future. Of course, in some circumstances, foreclosure is not the most desirable lender option and therefore confirmation of the lender’s first lien security interest in the property and the underlying rents is sufficient consideration for the lender pending the expiration of the contemplated time frame for the borrower to sell or refinance the property. VIII. Basic Bankruptcy Considerations / Lender Strategies A prudent lender considering a workout strategy should seek to understand the possible motivations of the borrower with respect to the defaulted loan. In some cases, even where there is no apparent equity in a property, a borrower may nevertheless be motivated to defer foreclosure in order to avoid the recognition of substantial gains from cancellation of indebtedness or other tax consequences. In other cases, the prospect of a potential turnaround and preservation of equity may appear more imminent to the borrower than to the lender, leading the borrower to consider a bankruptcy filing if necessary to preserve its investment. Accordingly, a basic understanding of the rights and remedies of a secured lender in the event of chapter 7 or 11 bankruptcy proceeding is an important precursor to the workout process. Below are some highlights: A. Chapter 11 A company may elect to restructure and reorganize its business under chapter 11 of the Bankruptcy Code. Upon the filing of a voluntary petition under chapter 11, an “order for relief under chapter 11” is deemed to be entered.3 An “estate” is immediately deemed to arise 3 11 U.S.C. § 301(b). 10
  12. 12. consisting of all of the assets of the company as of the date of the petition.4 In the case of an involuntary filing, discussed below, the estate is created upon the court’s granting of the involuntary petition and entry of the order for relief. A company is not required to be insolvent in order to file for chapter 11 relief and may elect to use chapter 11 in order to effectuate a financial (balance sheet) restructuring, an operational restructuring, a combination of both, or a liquidation. From a lender’s perspective, a chapter 11 filing can significantly delay and even render moot any pending foreclosure proceedings. Further, the delay and expense associated with a typical chapter 11 case can contribute to significant erosion of the value of the lender’s collateral and even dissipation of the cash collateral of an unwary lender. B. Chapter 7 A company may elect to be liquidated by a trustee under chapter 7 of the Bankruptcy Code. Immediately upon commencement of a case under chapter 7, a trustee is appointed to administer all of the assets of the company’s estate. The trustee is responsible for collecting and liquidating all assets and for eventually making distributions to creditors holding allowed claims against the estate. The trustee is also responsible for reviewing all claims asserted against the estate, consenting to the allowance of claims, and objecting to claims as appropriate. The trustee is authorized to pursue and defend any pending litigation and to file new lawsuits on behalf of the company and the estate, including legal actions under the Bankruptcy Code to recover preferences and fraudulent transfers, discussed further below. The trustee’s goal is typically to fully administer the estate and make distributions to creditors holding allowed claims on a pro rata basis in accordance with the statutory priorities of claims. C. Secured Creditor Rights Generally, secured creditors are entitled to retain their prepetition liens on the same collateral (or the proceeds thereof) and to be paid in full plus interest at their contractual rate of interest,5 provided there are no defects or grounds for the debtor to seek to avoid those liens (for example, if such liens are unperfected or can be set aside as fraudulent transfers or preferences). However, a secured creditor’s claim may be bifurcated into a secured and unsecured claim under section 506 of the Bankruptcy Code in cases where the collateral is worth less than the face amount of the secured creditor’s claim. A creditor may avoid the effects of such bifurcation by making an election under section 1111(b) of the Bankruptcy Code to retain the full amount of its lien on the collateral. By making the election, the creditor waives the right to receive any distributions on the unsecured portion of its claim on confirmation of the plan, but retains the hope that it may recover a higher amount if the collateral increases in value after confirmation of the plan.6 The intricacies and strategies related to a section 1111(b) election are beyond the scope of this brief outline. It is worth noting, however, that the secured creditor would typically take into account the likelihood of whether its unsecured claim would enable it to assert a blocking 4 11 U.S.C. § 541(a). 5 11 U.S.C. § 506. 6 11 U.S.C. § 1111(b). 11
  13. 13. position in the unsecured creditor class thereby preventing the debtor from obtaining the requisite acceptance of at least one impaired class of claims, as discussed below. Such a blocking position would typically enable the secured creditor to gain leverage to negotiate better treatment of its secured claim under the debtor’s proposed plan. Another strategy is to make the election in cases where the debtor’s revenues would be insufficient to make deferred cash payments having a present value equal to the creditor’s fully secured claim, thereby defeating any attempted cram-down of the plan (discussed below). A secured creditor may seek relief from the automatic stay at any time in the chapter 11 case to commence or continue pre-bankruptcy foreclosure proceedings, as discussed further below. State law foreclosure proceedings typically take anywhere from 12 to 18 months to conclude, and in some cases longer, and can be thwarted by the debtor filing for Chapter 11 shortly before, or upon, a foreclosure judgment being obtained. D. Basic Bankruptcy Concepts 1. The Automatic Stay The automatic stay arises immediately upon the filing of a voluntary (or involuntary) petition for relief under chapter 7 or 11, without need of further court action.7 The automatic stay is the most fundamental protection provided to debtors under the Bankruptcy Code, and is intended to allow a debtor or trustee the “breathing room” to focus on implementing a reorganization or liquidation and to prevent creditors from improving their position or standing vis a vis other similarly situated creditors. Similar to a self-effectuating statutory injunction, the automatic stay prohibits third parties from taking any action against the debtor or against property that is deemed to be property of the estate. Any pending litigation, collection efforts, foreclosure proceedings or similar actions are immediately stayed. Even sending a default notice or verbally threatening action against the debtor is a violation of the automatic stay. Wilful violations of the automatic stay by third parties that are on notice of the commencement of the bankruptcy case can result in penalties and fines under section 362(k)(1) of the Bankruptcy Code.8 While on its face section 362(k)(1) applies to violations by individuals, some courts have applied it to corporations and partnerships that willfully violate the automatic stay.9 Unless modified by court order, the automatic stay remains in place throughout the pendency of the bankruptcy case. In most cases, debtors incorporate some form of continuation of the automatic stay and its injunctive effect in the provisions of their proposed plan of reorganization. Any party considering adverse action against a debtor should therefore presume the automatic stay is in effect and first consult with counsel on how to obtain relief from the bankruptcy court. 7 11 U.S.C. § 362(a). 8 11 U.S.C. § 362(k)(1). 9 Compare Sosne v. Reinert & Duree, P.C. (In re Just Brakes Corporate Sys.), 108 F.3d 881 (8th Cir. 1997), cert. denied, 522 U.S. 947 (1997), with In re Atl. Bus & Community Corp., 901 F.2d 325, 329 (3rd Cir. 1990). 12
  14. 14. 2. Grounds For Relief From The Automatic Stay A creditor may move from relief from the automatic stay : a. Under § 362(d)(1) for “cause,” including lack of adequate protection; or b. Under § 362(d)(2), if the debtor lacks equity in the collateral and the collateral is not necessary to an effective reorganization. Thus, secured creditors may seek relief from the automatic stay on the basis that their collateral is eroding in value and the debtor is not protecting their collateral from erosion thereby entitling them to adequate protection or relief from the automatic stay.10 Adequate protection may consist of: • monthly cash payments to compensate for any erosion in value of the collateral, • additional or substitute liens on other collateral, or • other negotiated protections, or court ordered relief that provides the “indubitable equivalent” of the creditor’s interest in the collateral. If the adequate protection granted later turns out to be inadequate, the creditor is granted a “super priority” administrative expense over most other expenses of administration (other than post-petition lender super-priority claims, if any, granted by the court). 3. Automatic Stay Strategies Even though bankruptcy courts are reluctant to grant relief from the automatic stay early, a secured creditor should consider making an early request in order to trigger its right to adequate protection for future loss of collateral value, which some courts have held are not triggered until the creditor files a motion for relief from stay (or in the alternative, adequate protection).11 A creditor may seek to take advantage of the ability to obtain a relatively quick hearing on account of provisions that provide the automatic stay will be deemed to terminate thirty (30) days after a request is made, unless the court orders the stay to continue in effect.12 Another reason to move early is to create a record for the court as to the “cause” justifying relief from stay. Because “cause” can include a wide range of factors, such as undue delays by the debtor, misconduct or mismanagement, waste, and the lack of any reasonable prospects for reorganization, an early request that is denied may serve as a reference point to a later request, effectively focusing the court on the debtor’s lack of progress during the case. Prepetition waivers of the automatic stay may seem appealing but they are rarely enforced. Such waivers are generally considered void as against public policy. However, a waiver that was given in the context of a meaningful prepetition restructuring, after the debtor 10 11 U.S.C. § 362(d)(1). 11 11 U.S.C. § 362(d); In re Continental Airlines, Inc., 154 B.R. 176, 180-181 (Bankr. D. Del. 1993). 12 11 U.S.C. § 362(e). 13
  15. 15. was afforded a timeline to refinance or reorganize its affairs, can serve as an additional factor to help persuade the court to expedite the time frame for granting relief from stay.13 4. Single Asset Cases If a case involves a “single asset real estate” debtor, the automatic stay automatically terminates within 90 days from the petition date (or 30 days from a determination that the case is a single asset case, whichever is later), unless the debtor has filed a plan with a reasonable possibility of being confirmed within a reasonable amount of time, or the debtor commences making payments at the non-default rate on the value of the creditors’ interest in the collateral.14 “Single asset real estate” means real property constituting a single property or project which generates substantially all of the gross income of a debtor on which no substantial business is being conducted by a debtor other than the business of operating the real property and incidental activities (e.g., shopping centers, commercial office buildings, hotels, and the like).15 1. Cash Collateral Notwithstanding a debtor’s authority to manage its assets and affairs and use property of the estate in the ordinary course of business as “debtor-in-possession,16 “ a debtor is NOT authorized to use any cash collateral without consent of the secured creditor or an order of the bankruptcy court.17 Typically, a debtor’s first day pleadings will include a motion seeking court authority to use cash collateral pursuant to a proposed budget. The lender may object and seek to modify the budget or to prohibit use of cash collateral altogether. As a practical matter, most courts will focus on whether the creditor’s security interest in the debtor’s property is “adequately protected” absent its lien on cash collateral. If not, then courts will seek to provide adequate protection with respect to the cash collateral sought to be used by the debtor. This can include granting the lender a replacement lien on post-petition generated cash collateral to the extent of the cash collateral used, in order to maintain the status quo of the lender’s security interest in its collateral as of the petition date during the pendency of the chapter 11 case. 2. Debtor in Possession Financing / Priming Liens A debtor can seek to entice lenders to provide “debtor-in-possession financing” or “DIP Financing,” as it is widely known, with a range of tools that are routinely approved by bankruptcy courts. First, the debtor can offer administrative expense status to a potential lender.18 Next, if unable to obtain a loan on that basis, the debtor can offer the proposed lender a “super-priority” administrative claim (having priority over all other administrative claims).19 However, lenders typically require more than a simple administrative priority or super-priority claim in order to lend to a company in a chapter 11 proceeding because they are typically reluctant to run the risk of administrative insolvency (insufficient funds to pay administrative claims in full). At the next level, the debtor may seek court approval to grant the proposed 13 See e.g., In re Shady Grove Tech Ctr. Assoc. Ltd. Partnership, 216 B.R. 386 (Bankr. D. Md. 1998). 14 11 U.S.C. § 362(d)(3). 15 11 U.S.C. § 101(51B). 16 11 U.S.C. § 362(c)(1). 17 11 U.S.C. § 362(c)(2). 18 11 U.S.C. § 364(a). 19 11 U.S.C. § 364(c)(1). 14
  16. 16. lender a lien on its unencumbered assets or secured by a junior lien on property that is already encumbered by a lien.20 Even though general unsecured creditors may object and insist upon a showing of necessity for a proposed financing that involves granting liens on unencumbered assets, debtors typically prevail in such cases where they can show a reasonable prospect or likelihood for reorganization. At the highest level, a debtor may seek court approval to grant the proposed lender a lien on already encumbered assets that is equal or senior to existing liens. However, in this case, the debtor must establish “that it is unable to obtain such credit otherwise.”21 Further, the debtor must establish that the existing lender is adequately protected notwithstanding the proposed senior or “priming” liens. This typically involves consideration of various factors, including: a valuation of the subject property to assess the nature of any “equity cushion” that may exist, whether the property is eroding in value, the nature of payments proposed or available, and whether the debtor has a reasonable prospect for reorganizing.22 Typically, existing senior and junior secured lenders would object vigorously to any priming liens on their collateral absent a showing of how their liens are adequately protected. 3. Plan Confirmation Issues In a typical chapter 11 case, the debtor’s goal is to file and confirm a chapter 11 plan. Some highlights of the plan process are set forth below. a. The Disclosure Statement A debtor is required to prepare and distribute a disclosure statement prior to solicitation of acceptance of its plan of reorganization. The disclosure statement must contain adequate information regarding the assets, liabilities, and affairs of the debtor so as to enable the holder of a claim or interest to make an informed judgment about the proposed plan of reorganization.23 b. The Plan During the first 120 days after commencement of the chapter 11 case, only the debtor may file a proposed plan of reorganization.24 This period of “exclusivity” may be extended by the court for cause to a date that is not more than 18 months after the petition date.25 The debtor has an additional 60 days after the filing of its plan to solicit acceptances of the plan from each impaired class.26 If the debtor fails to file a plan of reorganization within the fixed deadline, or if the plan is not accepted by the creditors within the deadline for soliciting acceptances, the debtor loses 20 11 U.S.C. §§ 364(c)(2), (c)(3). 21 11 U.S.C. § 364(d)(1)(A); See e.g., In re Aqua Assoc., 123 B.R. 192, 195-196 (Bankr. E.D. Pa 1991). 22 See e.g., In re St. Petersburg Hotel, Assoc., Ltd., 44 B.R. 944, 946 (Bankr. M.D. Fla. 1984); In re Stoney Creek Tech LLC, 364 B.R. 882, 891-92, n. 27 (E.D. Pa. 2007). 23 11 U.S.C. § 1125(a)(1). 24 11 U.S.C. § 1121(b). 25 11 U.S.C. § 1121(d)(2)(A). 26 11 U.S.C. § 1121(d)(2)(B). 15
  17. 17. exclusivity and any party in interest may file its own competing plan of reorganization.27 The typical time from the filing of a chapter 11 case to confirmation of a plan of reorganization is 18 months and sometimes up to two years or more in cases where the debtor’s exclusive period has expired and competing plans are at issue. This time can be shortened significantly with the use of a “prepackaged plan.” c. Confirmation of the Plan. In order for the bankruptcy court to confirm its proposed plan of reorganization, a debtor must meet all of the requirements of section 1129 of the Bankruptcy Code.28 These requirements include establishing that: (a) at least one impaired class has accepted the plan and with respect to any non- accepting class, the requirements for a “cram-down” have been met (see below); (b) the plan meets the “best interests of creditors test” which requires in essence that each impaired class has either accepted the plan or will receive no less than it would receive in a liquidation under Chapter 7; (c) the plan is feasible (i.e., is not likely to be followed by a liquidation or need for further reorganization); (d) the plan was proposed in good faith; and (e) the plan does not violate any provisions of the Bankruptcy Code. d. Voting on the Plan With respect to an impaired class of creditors, the class is deemed to accept a plan if voting creditors that hold more than two-thirds in dollar amount and more than one-half in number of the claims in the class vote to accept the plan, excluding any votes not solicited or cast in good faith, as determined by the court on request of any party in interest. e. “Cram-down” Provided all of the requirements set forth in section 1129 of the Bankruptcy Code are met, the bankruptcy court may confirm a plan notwithstanding the rejection of the plan by one or more classes of impaired creditors provided the court determines the plan “does not discriminate unfairly” and is “fair and equitable” with respect to each impaired class that has not accepted the plan.29 This is referred to as the “fair and equitable” test required for a “cram-down.” The “fair and equitable” test for a plan cram-down differs for secured creditors, unsecured creditors, and equity holders. Generally, however, the fair and equitable test for unsecured creditors and equity holders requires that the class receives property of a value equal to the allowed amount of their claims or 27 11 U.S.C. § 1121(c). 28 11 U.S.C. § 1129. 29 11 U.S.C. § 1129(b)(1). 16
  18. 18. that junior classes or interests receiving nothing on account of their claims or interests30 under the so called “Absolute Priority Rule” (discussed below). With respect to secured creditors, the “fair and equitable” test generally requires that the creditor keep its lien; receive deferred cash payments totaling at least the allowed amount of its lien claim; and, as of the effective date of the confirmed plan, the value of the payments to be made must have a present value equal to at least as much as the secured creditors’ interest in the collateral.31 A plan may also be deemed fair and equitable with respect to secured creditors if it provides for deferred cash payments having a present value equal to the creditors’ allowed secured claim within a reasonable time after confirmation (for example, from a proposed sale of assets contemplated in the plan). f. The Absolute Priority Rule Taking into account the priorities of claims, as set forth above, under the Absolute Priority Rule, if a class is impaired and votes against confirmation of a proposed plan, then the class must either (i) be paid in full (including unpaid accrued interest), or (ii) if paid less than in full, then no junior class of claims or interests may receive anything of value under the plan. In cases where “old equity” wishes to retain an interest in the reorganized debtor, the Absolute Priority Rule can pose significant challenges. Old equity holders may argue that a “new value exception” to the Absolute Priority Rule applies and must establish the following at confirmation: 1. they are making a new contribution in money or money’s worth; 2. the contribution is reasonably equivalent to the value of the interest retained in the reorganized debtor; and 3. the new value contribution is necessary for implementation of a feasible plan of reorganization.32 g. The Effect of Plan Confirmation Once the plan is confirmed, the debtor’s assets and liabilities are subject to the terms of the plan and all creditors and parties in interest are bound to the terms of the plan, whether or not they voted for the plan.33 Typically, the bankruptcy court retains jurisdiction to enforce the terms of the plan and resolve any disputes arising from the plan or that impact distributions to be made under the plan. If a plan is not confirmed, the debtor and/or other parties in interest may seek to propose an alternative plan as the debtor’s exclusive period to propose a plan will likely have lapsed by 30 11 U.S.C. § 1129(b)(2)(B). 31 11 U.S.C. § 1129(b)(2)(A). 32 See Bank of Am. Nat’l Trust & Savings Ass’n v. 203 N. LaSalle Street P’ship, 526 U.S. 434 (1999). 33 11 U.S.C. § 1141. 17
  19. 19. this point.34 Parties may also seek to convert the case to a liquidation if there is no reasonable prospect of reorganization.35 IX. Potential Traps & Pitfalls (Claims vs. Lenders) A. Improper Conduct Prior to Foreclosure. Lenders may expose themselves to claims by improperly acting as if they own the collateral prior to obtaining title by way of a foreclosure action. This can include a lender negotiating with third parties for the prospective sale of the collateral without the consent of the borrower prior to foreclosure. Borrowers in such cases may allege that the lender has damaged the borrower by undermining or chilling the bidding that would have occurred at the foreclosure sale. B. Lender Liability. Borrowers may raise a wide gamut of alleged improper lender conduct as the basis for lender liability including: undue lender control over management or day-to-day operations of the property, tortious interference with contractual relations (tenants); improper default, breach of implied covenant of good faith and fair dealing, oral waiver/modification of loan requirements and/or other inequitable conduct. C. Equitable Subordination. Similarly, borrowers may raise claims for equitable subordination of a lender’s claim based on similar alleged improper conduct giving rise to lender liability claims. Equitable subordination can result in a lender’s claim being subordinated to trade creditors or treated pari passu with other unsecured claims. D. Recharacterization. A borrower may also seek to “recharacterize” a particular loan as an equity contribution instead of a loan obligation, thereby cancelling the purported promissory note and any related security interests. This cause of action is typically asserted against lenders deemed “insiders” where the underlying loan documentation (or lack thereof) may evidence the parties’ intent to make a capital contribution at the time of the original transaction. E. Preference Exposure. A borrower may assert preference claims against a non- insider lender for the transfer of additional collateral or an improvement in the lender’s position that may have occurred within 90 days prior to the commencement of a bankruptcy case. Generally, a preference involves the borrower making a transfer of its property on account of an antecedent debt to a third party during the 90-day period prior to a bankruptcy during which time the debtor is presumed to be insolvent, subject to certain defenses that may be raised by the creditor (including, for example, that the transfer was made in the ordinary course of business, for contemporaneous new value, or that subsequent new value was given). F. Fraudulent Transfer Exposure. A borrower may assert fraudulent transfer claims against a lender on account of transfers deemed constructive fraudulent transfers of collateral within four years prior to the commencement of a bankruptcy case (six years in some jurisdictions). Generally, a constructive fraudulent transfer involves the borrower receiving less than reasonably equivalent value for a transfer while it was insolvent, rendered insolvent or inadequately capitalized. 34 11 U.S.C. § 1121(c). 35 11 U.S.C. § 1121(b). 18
  20. 20. X. Recent Developments Related to CMBS Recent developments in the GGP chapter 11 case are noteworthy and may have a long- lasting impact on both the pricing and form of the CMBS market in the future. In August of 2009, the U.S. Bankruptcy Court for the Southern District of New York declined to dismiss the chapter 11 cases of several GGP subsidiaries, lifting the veil of market presumptions on supposedly “bankruptcy remote” capital structures. The court ruled that certain special purpose entity (SPE) borrowers could remain in chapter 11 despite having strong cash flows, no defaulted debt and “bankruptcy remote” capital structures. The lenders sought to dismiss their chapter 11 cases as having been filed in bad faith because the SPEs were solvent, had no defaulted debt or immediate need to restructure, and were supposed to be “bankruptcy remote.” The lenders also pointed to the replacement of the SPEs’ independent directors on the eve of bankruptcy as further evidence of a bad faith filing. The court noted that the SPE capital structure was intended to render the borrowers “bankruptcy remote” but that the record made clear the lenders had extended loans with balloon payments that required a refinancing that could default if refinancing could not be obtained or the parent came to their rescue.36 The court also emphasized the interdependence of purportedly remote entities with their corporate group: “If the ability of the Group became impaired, the financial situation of the subsidiary would inevitably be impaired.” Id. Thus, the court ruled that a bankruptcy filing can be made in good faith “on consideration of the interests of the group as well as the interests of the individual debtor.” Id. at *54. Further the court noted that contrary to the lenders’ assumptions that independent managers of the borrowers were required to primarily take the lenders’ interests into account in considering the approval of a chapter 11 filing, such managers could act only to the extent permitted under Delaware corporate law which provides that directors of a solvent corporation are required to consider the interests of their shareholders in exercising their fiduciary duties. Id. at *58. Indeed, the ruling implies that if the independent directors had not taken the parent shareholder’s interests into account, they may have breached their fiduciary duties. Also noteworthy in the GGP case, is the illustration of the negotiation and communication difficulties created by CMBS capital structures. The court noted that the debtors attempted to contact master servicers for loans set to mature in 2010, seeking to communicate with special servicers, but were rebuffed allegedly because loans had to be closer to maturity to be the subject of any renegotiation talks. However, the same response was provided for loans maturing in 2009. Id. at *27. Attempts to contact special servicers directly were met with referrals back to the same master servicers. Finally, the debtors’ attempt to hold a summit of special servicers failed, with only one special servicer expressing interest in attending. Id. at *27-28. The GGP experience is not unique as anecdotes abound not only on borrowers’ inability to establish a viable communications channel for workout discussions on CMBS loans, but also on delayed foreclosure proceedings where the alleged lender is unable to produce the original loan documentation necessary to a foreclosure action. In sum, the GGP ruling challenged the CMBS market’s presumptions on the viability of supposedly bankruptcy remote SPE capital structures. As a result, the ruling may cause a slow- down in the return of capital to the CMBS market, or at a minimum, cause lenders to re-think existing capital structures and attendant risk pricing. In the meantime, the impact of CMBS 36 GGP, 2009 Bankr. LEXIS 2127, *48 (emphasis added). 19
  21. 21. capital structures on the next wave of commercial real estate loan workouts is still unfolding, creating unique challenges to both borrowers and lenders. 20
  22. 22. Carmen H. Lonstein, Chair Financial Restructuring, Creditors’ Rights and Bankruptcy Baker & McKenzie LLP One Prudential Plaza 130 E. Randolph Street, Suite 3600 Chicago, Illinois 60601 USA 21
  23. 23. Tel: +1 312 861 8606 Fax: +1 312 698 2136 EXHIBIT A SAMPLE PRE-NEGOTIATION LETTER VIA OVERNIGHT MAIL [Date] [Address to Borrower and all Guarantors] Re: _________________________ Gentlemen: _____________________, an Illinois limited liability company (“Borrower”), _________________ and ________________ (collectively, “Guarantors”) have requested __________________ (“Lender”), to enter into certain discussions with representatives of Borrower and Guarantors (the “Discussions”) concerning a possible restructuring of the terms of that certain Building Loan Agreement dated as of __________________ by and between Borrower and Lender (the “Loan Agreement”), as amended by that certain First Amendment to Construction Mortgage, Building Loan Agreement, Assignment of Leases and Rents and Other Loan Documents dated as of ____________________ by and among Borrower, Guarantors and ____________________ (“Managing Agent”) and Other Related Documents, in respect of a construction loan made by Lender to Borrower in the original principal amount of up to $_____________ (the “Loan”) in connection with the property located at ______________________ (the “Property”). All capitalized terms used herein shall have the definitions set forth in the Loan Agreement unless otherwise defined herein. Borrower and Guarantors acknowledge they have received notices of Default dated ______________ (the “ Notice”) and ________________ (the “ Notice”) (collectively, the “Default Notices”) wherein Lender has notified Borrower and Guarantors of certain Defaults under the Loan Agreement, consisting of breaches of Sections ______ of the Loan Agreement, as detailed in the ______________ Notice, and Sections _________ of the Loan Agreement, as detailed in the _____________ Notice. Borrower and Guarantors have requested that Lender engage in Discussions with them concerning the Default Notices and matters related to the Loan and Lender has agreed to engage in such Discussions, including any meetings or discussions involving any of the parties hereto 22
  24. 24. (the “Parties”, and each a “Party”). Any such meetings and discussions related thereto are included in the Discussions as defined above. This letter agreement will confirm the understanding of Lender, Borrower and Guarantors with regard to the Discussions, as follows: 1. The Discussions are voluntary in nature, are entered into in reliance upon the understandings set forth herein and may be terminated by either Lender, Borrower or any of the Guarantors at any time without cause or notice and without liability of any kind. Specifically, Lender may determine not to undertake further Discussions, or may terminate the Discussions, at any time and for any reason whatsoever without prior notice to the Borrower or any Guarantor and without liability for such termination. 2. Borrower and the Guarantors acknowledge and agree that there are existing Defaults under the Loan Agreement as described in the Default Notices and further that the Maturity Date of the Loan is __________________. 3. Neither the Discussions nor any oral or written statements, memoranda or letters of Lender, Borrower or any Guarantor in connection therewith shall be binding upon any such Party as it is expressly agreed that any binding agreement between any of the Parties in connection with the Loan must be contained in a definitive and formal written agreement approved by Lender and signed by all Parties. Also, as the Discussions are in the nature of settlement negotiations, all Parties agree that none of the Discussions may be used by any Party for any purpose, including as admissions for evidentiary purposes. 4. Notwithstanding the Discussions, the Loan Documents and Other Related Loan Documents are and shall remain in full force and effect without change unless and until modified by appropriate instruments executed by the Parties. None of the Discussions or any other action taken or not taken by Lender before, during or after the Discussions, including the acceptance of partial payment or performance by Borrower or any Guarantor, shall be deemed a waiver of, limitation on, forbearance of any of the rights and remedies of Lender whether under the Loan Documents, pursuant to the Default Notices, at law or in equity and Lender may exercise any and all of such rights and remedies at any time. In agreeing to attend any meeting or undertake any Discussions, Lender is not explicitly or implicitly agreeing to forebear from taking any action pending such meeting or Discussions, including without limitation any action that may be appropriate pursuant to or in connection with the Default Notices. Lender expressly reserves all of its rights and remedies available to it under the Loan Documents. 5. The Borrower and Guarantors acknowledge and agree that continuing throughout the pendency of the Discussions, the Lender has had, and shall continue to have, the right, in its sole discretion, to administer, enforce and otherwise deal with the Loan, the Loan Documents, and the Default Notices, notwithstanding the fact of these Discussions, and notwithstanding the fact that there exist Defaults under the Loan as more fully described in the Default Notices. 6. By entering into the Discussions, Lender is making no promise or commitment to do anything or to refrain from exercising any and all available remedies in connection with the Loan or the Default Notices, and Borrower and Guarantors may not rely on the Discussions continuing or resulting in a restructuring of their obligations under the Loan Documents. 23
  25. 25. Therefore, Borrower and Guarantors shall, throughout the term of the Discussions, pursue alternative opportunities, including the refinancing, sale or leasing of the property securing the Loan, subject, however, to the limitations contained in the Loan Documents. 7. Borrower and Guarantors represent and warrant to Lender that each of them has received the advice of counsel in connection with this agreement and that each of them fully understands all of the terms hereof. 8. Borrower represents that it is duly authorized to execute this agreement in accordance with Section _______of the ______ Operating Agreement. 9. This agreement may be executed by the Parties in counterpart originals and shall constitute the entire agreement of the Parties concerning the Discussions. All prior or contemporaneous understandings or representations by either Lender, Borrower or Guarantor shall be superseded hereby. This agreement shall be governed by and construed in accordance with the laws of the state of _____. 10. If the foregoing accurately sets forth the terms of our binding agreement, each of the Parties must sign this letter in the space provided below and return it to the undersigned immediately. Sincerely, LENDER By: _____________________________ Title: _____________________________ Accepted and agreed to this ____ day of ______, _____ BORROWER: ____________________, a ___________________ By: a duly authorized Managing Member 24
  26. 26. __________________________ Name:____________________ [Type Name ] GUARANTORS: __________________________________ ___________________, an individual __________________________________ ___________________, an individual 25