1.1 Monitoring the Loan:
The uncertainties of the current market and economy are forcing lenders to take a closer look at their loan portfolios. Hopefully, it is the lenders’ standard practice to conduct a regular review and analysis of the financial condition of their borrowers, guarantors, if any, and major tenants, and to analyze the physical condition and performance of the collateral property, the relevant markets and their loan documentation files, so they are prepared when a loan default occurs. It is imperative to know your borrower, your collateral and the market where the collateral is located. If the market experiences a down turn and impacts your borrower and its business, you are more likely to be prepared and the first missed payment will not come as a complete surprise.
Some borrowers are proactive and the lender will know there is a problem long before the first payment is missed. Other borrowers go through great lengths to avoid communications, and force the lender to take remedial action before borrower will make his or her intentions known. The lender will have a difficult decision to make and should undertake a thorough review of all possible alternatives, risks and potential liabilities. Does the lender want to ultimately be the owner of the borrower’s business or the collateral? What are the costs and risks involved? Before the lender takes remedial action, the lender should first fully explore the risks, potential liabilities and costs associated with such ownership. If the current market is causing the borrower’s business to deteriorate temporarily, it may make sense to explore a temporary forbearance on exercising any remedies, to give the parties a reasonable period of time to negotiate a loan modification that will assist the borrower’s operations through difficult times.
Here are the key items lender should review with counsel when the borrower calls regarding a defaulted loan:
1.2 Review of Loan Documentation and Files:
Regularly, and certainly at the first sign of a distressed loan situation, the lender should conduct a review of its loan files to confirm that the files are complete and the collateral is properly perfected. Legal counsel should be consulted to assist with this review and evaluation. In reviewing the loan documents, the following points should be considered:
- Are all original loan documents available, including the promissory note, the recorded mortgage, the assignment of leases and rents, if applicable, and the ucc financing statements? Is there a lender’s mortgagee policy and a final survey in the file? If they are held by a custodian, obtain a certificate and listing from the custodian that the files are complete. The lender should obtain a complete copy of the documents for independent verification by counsel. If the lender has engaged a service to monitor timely filings of ucc financing statements for the state of organization of borrower, obtain current copies to confirm they were properly filed and that required continuation statements have been timely filed (before the 5 year expiration period). County filings can be obtained through the title company as discussed further below. Although it will be too late to obtain priority over intervening liens, such filings not previously made should be made immediately so they can age past the bankruptcy preference period.
- Are all documents complete, blanks completed and exhibits attached?
- Were the loan documents properly signed by authorized officers of each of borrower, guarantors, if any, and lender? Are proper resolutions in the file? If a power of attorney was permitted, the original should be resourced from the files.
- If you are missing the mortgagee’s policy of title insurance, you are likely also missing the recorded mortgage documents. Call the title immediately to locate the documents (they may be still processing the policy) and if necessary, to run a search of the real property records for the missing recorded mortgage documents.
- If the loan has been sold in to a securitization or previously assigned, obtain the assignments to the current holder of the loan. If the assignments are not complete, obtain all missing assignments in accordance with any assignment agreements.
- Check for any loan document amendments or letter agreements regarding prior defaults and/or loan modifications or communications between lender and borrower regarding same. Counsel will need to analyze any prior agreements or communications among the parties to resolve any prior course of conduct issues that may arise in connection with remedial action or workout to be conducted by lender. Prior alleged promises or commitments that are no longer viable should be dealt with as part of the exercise of remedies and the workout process.
1.3 Financial Information/Cash/Liquidity
- Determine if borrower has complied with its financial reporting requirements under the loan documents. If financial information has been received, evaluate the financial condition of the borrower and its business/collateral. This evaluation is important in determining lender’s remedial alternatives. Is the borrower experiencing temporary market driven issues or has the business or collateral lost its value or become obsolete?
- If there is a deficiency in financial information, the lender should ask that the deficiency be immediately cured. Typically, failure to deliver the financial information is a sign of distress. The lender can certainly require this information as a precondition to any forbearance or workout discussions. Depending on the nature of the business or collateral, lender may require an audit of the borrower’s financials, and/or business valuations or new appraisals of the collateral properties, to determine the financial condition of borrower, its business and the collateral. [Discussion: Lack of information may raise timing issues for efficient resolution. Especially in multiple property cases, where information can be critical, if the borrower’s information is not satisfactory, it can be expensive to have financials prepared on short notice and in form satisfactory for proper evaluation of the financial status of the assets and the borrower. Taking care to customize needed information at the outset of the loan is very valuable.]
- Bankruptcy concern – If the lender is requiring an audit of the borrower’s business and assets, be careful who you engage and how such auditor is engaged (i.e. lender engagement vs borrower engagement). Depending on the property type and the timing of required resolution, the lender will typically insist on a company that it trusts and knows it can rely on for a good work product. In the event of a bankruptcy, the lender may want this same company to provide valuation services to the trustee or bankruptcy court. The company may not be permitted to be engaged for conflict reasons. If there is any likelihood of a bankruptcy or receivership, the lender should give careful thought to who it will promote to be the operator and/or auditor of the borrower’s assets and business. For larger, multiple property transactions, these decisions are strategic for efficiency purposes and are very important for the success of the bankruptcy or receivership.
1.4 Determine Lien Status and Perfection of Collateral:
- Before instituting any remedial action, lender should perform secretary of state and county Uniform Commercial Code lien, judgment lien and tax lien searches on the borrower, the general partner or member, guarantors and other significant parties. Even if matters are not discovered which would have priority over the lender’s mortgage lien or security interests, this information will assist the lender in analyzing whether the borrower or other relevant party is having other financial problems which may lead to the inability to perform obligations with respect to the secured collateral property.
- Obtain copies of all UCC financing statements filed of record, including any continuation statements, to confirm that the UCC financing statements were properly filed, contain the proper collateral and legal descriptions and were properly continued, if applicable.
- Perform a title search to determine whether there are any exceptions to title which did not appear in the original title policy or which occurred subsequent to the loan closing. If exceptions are discovered which should have been disclosed on the original policy, make sure the title company is properly notified of this potential claim to avoid any defense from the title company resulting from any delay in communicating problems. Even if matters are not discovered which would have priority over the lender’s mortgage lien or security interests, this information will assist the lender in analyzing whether the borrower or other relevant party is having other financial problems which may lead to the inability to perform obligations with respect to the secured collateral property.
In separate actions, Trigild was appointed receiver for two luxury apartment complexes in Arizona, a 320-unit property in Mesa, and a 240-unit apartment complex in Tucson. Trigild tapped an Arizona-based management company to handle onsite operations.
Adding to its roster of successful residential projects, Trigild also recently closed the receivership estates of two multifamily properties — spanning 424 residences — in Washington state, as well as a 104 unit condo conversion project in San Bernardino, CA.
A longtime expert in the hospitality industry, Trigild was also appointed receiver of a large lodge and residential community on Big Sandy Lake in Minnesota. Situated on 23 acres of land, the property includes a lodge, 33 townhomes and 20 single family homes in various stages of construction.