Commercial Real Estate Lawyer Blog

Workout Incentives and Disincentives, Especially with respect to Hotels

Sun, 04 Apr 2010 14:38:31 -0500

When a commercial real estate loan goes, or is going, bad, each party has options. Pretend and extend, state receiverships, foreclosures, short sales, bankruptcies, and deeds-in-lieu of foreclosure - whether within or without the context of a formal workout agreement - each has its own pros and cons for each party. Deciding what to do is particularly difficult in the case of a hotel, since a hotel is both a real estate investment and an operating business, usually with labor unions and flags, sometimes with public/private incentives, and often with numerous other third parties. Hotels that are part of a complex including condominiums or other facilities add even more interested parties and their lenders. The following are some of the main considerations involved.

Buying a Claim against Yourself from a Bankruptcy Estate; Evaluating Non-Cash Bids

Wed, 20 Jan 2010 14:39:50 -0500

The decision of whether and how to sell assets in a bankruptcy proceeding can trigger a number of disagreements, and the bidding process itself can attract some unusual bids. For example, in some cases, the Trustee may not feel that selling a particular asset is worth the time and trouble; however, a creditor may disagree. Another example occurs in a case in which the bankruptcy estate has potenial claims for breach of contract or torts. In such a case, the breaching party or tortfeasor may be willing to offer the highest and best price to buy (and, thus, resolve) those claims against itself. In some cases, the most valuable bid may be a non-cash one. However, if the benefits of such a non-cash bid are public benefits, or do not otherwise ultimately produce cash with which to pay the creditors entitled to be paid, the Trustee may not be able to accept that bid. In some cases, it is difficult to evaluate the value of a bid in terms of the ability of the bidder to perform of of the Trustee's costs of keeping the bankruptcy proceeding open or of performing its own obligations under the terms of the bid. The purpose of this article is to high-light some of the cas law dealing with such conflicts

And You Assumed That Escrow Moneys Were Bankruptcy-Proof . . .

Wed, 15 Apr 2009 16:16:02 -0500

DRAFTING 1031 ESCROW AGREEMENTS TO ADDRESS A POTENTIAL INSOLVENCY OF A QUALIFIED INTERMEDIARY; LESSONS FROM LANDAMERICA

Presented at the Annual Meeting of the American College of Real Estate Lawyers on October 31, 2009 in Washington, DC

8/15/09

The LandAmerica bankruptcies taught us that we cannot merely assume that third-party escrow arrangements are safe from unrelated third-party creditors. Now we know that the bankruptcy of the third-party intermediary, especially where the funds are not covered by deposit insurance and time deadlines are involved, can have profound implications far beyond the loss of the deposit itself. The following explores what happened in the LandAmerica case with respect ot Section 1031 escrow deposits and what drafting implications that has for future transactions.

Purchase Price Challenges to a Commercial Foreclosure Sale in Maryland

Tue, 21 Oct 2008 13:11:54 -0500

(10.21.08)

The below addresses what challenges an owner may make to the purchase price obtained in a Maryland foreclosure sale of commercial real estate. Since this area of the law is changing rapidly, the reader needs to check statutes adopted, and cases rendered, after 10/21/08 and, particularly, not to assume that any of the below applies to residential property.

Steps a Secured Lender Should Consider in a Chapter 11 and the Role of a Proposed Plan of Reorganization at Each Step

Mon, 13 Oct 2008 14:30:49 -0500

The plan of reorganization is one of the most critical documents in a Chapter 11 bankruptcy proceeding. Even before declaring a default under a mortgage or deed of trust, a secured lender needs to plan ahead by considering, among other things (a) what remedies the lender has at each step of a bankruptcy proceeding; and (b) whether the borrower/debtor can, at each such step, propose a sufficient-enough plan of reorganization to prevent the lender from realizing upon those remedies. Such planning will also help the lender predict how long the bankruptcy proceeding is likely to take, what it is likely to cost, and what the lender's risks of adverse consequences, such as a cramdown, are. If nothing else, such planning will help the lender to determine what terms it should offer in workout negotiations.

As a Chapter 11 bankruptcy proceeding progresses, a secured lender will want to consider seeking in the following order in light to thedebtor's ability to then propose a sufficient-enough plan of reorganization: (a) a lift Stay, (b) a conversion or dismissal, and (c) counting the classifications and the votes to avoid a cramdown.

Drafting Commercial Leases in Light of Bankruptcy Issues

Thu, 18 Sep 2008 11:24:45 -0500

Every time a new bankruptcy opinion is rendered with respect to a lease, or even a challenge to a lease clause is made in a court, draftspersons and their clients wonder what could have been done to avoid the risks and expense of dealing with the issue. Thus, these days, form leases are being reviewed frequently. Some attempted drafting solutions will be rejected by the court outright as being within the ambit of a statutory prohibition or as interfering with the role of the court in interpreting statutes. In a commercial case, especially one in which the lease grants the landlord alone the right to attorneys' fees, draftpersons may view a questionable clause as possibly intimidating an unsophisticated tenant or as giving the landlord at least an additional argument in court. This article deals with some of the provisions landlords or tenants may attempt to draft into leases to deal with a bankruptcy of themselves or of the other party.

Form - Workout Agreement to Continue Funding Construction

Thu, 03 Apr 2008 11:25:31 -0500

If mezzanine and other lenders are involved when a real estate project is going badly, especially one in the middle of construction, the lenders will probably have to decide whether, and, if so, on what terms, to continue finding. If the best course of action is indeed to continue funding, then issues are likely to arise as to how to incentivize potential funding sources to provide the additional funds, and the developer, if the developer is the best person to complete the construction, to continue. Obviously, many risks and variations are possible. The following form is a template for addressing some of those issues and is to be used in the context of local boilerplate.

Form - Workout Agreement for a Deed-in-Lieu

Thu, 03 Apr 2008 01:16:27 -0500

The following form is designed to address the situation in which a lender and the borrower agree upon a workout in the form of a deed-in-lieu. As with all forms, it needs to be tailored to the particular transaction. Furthermore, it does not include state and local requirements or any of the boilerplate.

A Tenant's Efforts to Assume and Assign a Commercial Lease in a Chapter 11 Triggers Lots of Issues to Fight About

Thu, 10 Jan 2008 15:39:47 -0500

A tenant's right to assume, and then possibly assign, its lease involves more than whether the tenant has met the statutory criteria. Procedural issues are involved such as whether and when to hold an auction, with or without a stalking horse bid; whether the stalking horse bid, or the bidding terms and procedures governing any such auction, unduly favor the stalking horse bid over other potential buyers (including the break-up fee); and whether, particularly in the case of multiple leases, the debtor or Trustee should sell designation rights instead of assigning the leases.

Bankruptcy as a Business Planning Tool

Tue, 20 Nov 2007 15:06:49 -0500

BANKRUPTCY AS A BUSINESS PLANNING TOOL or SURVIVING BANKRUPTCY

Part 11

COURT CARVES OUT AN EXCEPTION TO THE LEASE REJECTION DAMAGE CAP, BUT LEAVES THE LANDLORD STANDING IN THE SAME LINE AS THE OTHER UNSECURED CREDITORS WITH RESPECT THERETO

One of the uses of bankruptcy, as a business planning tool, is to enable a debtor to attempt (a) to get out of, i.e. reject, pending leases and contracts [11 U.S.C. Sections 365(a)]; and (b) with respect to rejected real property leases, even to leave some extra money for the unsecured trade creditors, with whom the debtor may want to do business after the case is over, by capping the amount of the damages a landlord can claim by reason of such a rejection of a lease [11 U.S.C. 502(b)(6)]. As to post-petition or post-repossession or post-surrender rent under a real property lease in a tenant bankruptcy, 11 U.S.C. 502(b)(6) limits the landlord's claim (and it is only a claim) to "the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease". However, in the recent case of In re El Toro Materials Company, Inc., 2007 U.S. App. LEXIS 22991 (October 1, 2007), the Court carved out an exception to that lease rejection cap. In that case, the debtor/tenant had rejected the lease and left behind, on the leased premises, "one million tons of its wet clay 'goo,' mining equipment and other materials". The landlord claimed $23 million in damages for the costs of removing those items. The Court held that such removal costs are not subject to that lease rejection cap, i.e. that that cap applies only to rent and rent-like items, not to clean-up or repair costs. However, as with other non-priority rent, the landlord must stand in the same line, as all of the other unsecured creditors, with respect to its claims for such non-monetary defaults.

TOP 10 WAYS LAWYERS CAN MESS-UP DEALS

Fri, 12 Oct 2007 01:36:03 -0500

Sometimes deals fall apart, or turn-out badly, for reasons that have nothing to do with economics. One of those reasons can be the attorney/client relationship involved. The purpose of this presentation is state some of the miscommunications and other attorney/client missteps that can occur and how you can avoid them.

Certain Transactional Planning in, or in Relation to, Bankruptcy

Wed, 16 May 2007 14:33:27 -0500

This article is intended to address certain transactional issues that can come up in a bankruptcy proceeding or in relation thereto - specifically family asset protection vehicles, special purpose entities, sale lease-backs, and bankruptcy court ordered sale bidding procedures (including break-up fees). This article is here because it sets forth a number of issues to consider. However, because this area of the law is changing, this article is out of date, particularly with respect to whether any protections are provided by single member limited liability companies or separate, but related, entities that in fact work together, particularly through cross-guaranties and cross-collateralizations.

Whistleblower Obligations of Attorneys

Tue, 10 Apr 2007 12:00:28 -0500

There are times when an attorney, in representing a corporation or other business entity, cannot simple "go along to get along" or "see no evil, hear no evil, speak no evil". Times arise when the interests of some owners don't correspond with those of other owners, or when the interests of the owners generally don't correspond with the interests of the board of directors, of the managing partner(s), or of individual directors, officers or employees. Times also arise when the desire or rush of the business people to consummate a transaction may go too far. These duties are particularly applicable when the attorney is representing a publicly-traded company. Sarbanes-Oxley, the regulations adopted thereunder, and the various rules of professional conduct or responsibility dictate, among other things, who the client really is, when and how an attorney has an obligation to report to higher-ups in the company, to the SEC, and otherwise publicly. The purpose of this article is to focus upon the laws, rules and regulations governing the obligations of attorneys to speak-up, or to be whistleblowers, in such situations.