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Lender Land Mines Panel, 2009 Trigild Lender Conference

The 2009Trigild Lender Conference featured a slew of interesting topics. Especially pertinent was the “Lender Landmine” panel. The panelists were: Kay Kress, partner, Pepper Hamilton; Robert Kaplan, partner, Jeffer, Mangels, Butler & Marmaro; Maura O’Connor, partner, Seyfarth Shaw; Kevin Semon, vice president special servicing, Midland Loan Services; and Bert Haboucha, senior vice president, iStar Financial.

Among the session highlights:

Q. When a borrower defaults under operative loan documents, what are some of the steps to take/issues to consider?
A. The lender should always conduct proper due diligence. This involves obtaining and reviewing all loan documents, and looking for common defects or deficiencies. Possession of the originally executed promissory note should be obtained, along with the original title insurance policy. Collateral – real and personal property – should be checked and reviewed, as should environmental reports. If appropriate, a Phase 1 should be ordered. Order and conduct review searches, such as title and review updates and Federal and State tax lien searches. In the case of hospitality loans, look for a tri-party agreement with the franchise and always make sure you are giving proper notice.

It is very important to pay attention to the details. More often than not, said O’Connor, “It’s the very simple things that create real problems – a borrower’s name is misspelled, the title is wrong, or the loan is missing a document.”

Q. Are there any key issues when dealing with construction loans?
A. For construction loans, lenders should confirm that title endorsements have been obtained for any optional advances, as well as ascertain the stage of completion and the cost to complete all remaining improvements, and identify all contractors and subcontractors working on the project. These details should be carefully compared to information previously provided by the borrower.

It is also crucial to review the environmental reports. “Determine if you have environmental insurance in the event there are environmental issues,” Kress said.

Q. How do you determine the value of the collateral?
A. According to Haboucha, at this point in the economic cycle, it is very difficult to determine value and “internal evaluations should be conducted,” at minimum on a quarterly basis. It is highly beneficial to determine valuation on your own -- ordering an appraisal and obtaining appropriate historical financial information.

Q. What are some other key issues?
A. It is critical to understand who the borrower is and what other professionals can be helpful to you. However, cautioned Kress, “be careful about approaching other players without the permission of the borrower.”

Determine which professionals need to be involved – attorneys, financial advisors and appraisers are just a few to consider. O’Connor pointed out that it is important “not to use the same attorney who documented the loan to do the workout.” It is also important to hire good local counsel who knows the local jurisdiction and local judges.

Once you have all the proper information, you can then “assess the leverage that both you and the borrower have,” said Kress.

Q. After due diligence is completed, what other options should be considered?
A. After obtaining all the proper information, lenders should develop a solid game plan. Look at financing commitments, Kress said. Paying off the debt may or may not be a good idea – depending on the timing and conditions of financing. The sale of collateral is another option.

Foreclosures and receivership are alternatives to consider. Receivership may be especially useful to sell the property and/or modify debt. If the plan is to go forward with receivership, talk to your local counsel to determine what court you want to file in – state or federal. “While the state process is typically speedier, Kaplan said, for serious lender liability issues, you might want to go to a federal court. While it is often a lengthy process, foreclosure can help avoid burdensome contracts and liabilities.

An understanding of state law is critical for both foreclosures and receiverships, as states vary dramatically. Before assessing options, have a clear understanding of the one-action rule. “In California, the one action rule requires you to foreclose on real estate collateral first,” Kaplan explained.

“Many lenders are afraid of bankruptcy, but in certain circumstances, it may be an acceptable resolution plan,” Haboucha said. “There is transparency is bankruptcy, as everyone gets notice,” said Kaplan.

“Taking the time to do a careful analysis is always worth it,” O’Connor said.

Q. How can Lender Liability be circumvented?
A. To avoid the trap of lender liability, cover all bases. This is especially important in today’s economy, as desperate borrowers take to suing lenders. Indeed, said Kaplan, “there has been a revival of lender lawsuits – defunct for nearly a decade -- a consequence of current economic times.”

According to Kaplan, lenders/servicers should always send notice of default and of acceleration. It is also important to enter into renegotiation and/or forbearance agreements before negotiating with a delinquent borrower. Lenders should be especially cautious in discussions with borrower’s franchisor, lien claimant and major vendors, and assume that every internal communication – print and electronic -- will ultimately be produced and reviewed by the borrower. This is critical in an era of rampant e-mailing.

Avoid sending billing notices – or other communications that are inconsistent with notices of default – to the borrower. Additionally, never try to control the borrower’s operations. And above all, know your borrower and your borrower’s business.

Trigild News

Trigild was appointed receiver of a 304-unit apartment complex in Tucson, AZ where it will concentrate on evaluating market pricing and increasing occupancy. In a separate action, Trigild was appointed receiver of a gated housing development in Polk County, FL.

As management company, Trigild will oversee day to day operations of the 100 room Hotel Indigo Ontario in Rancho Cucamonga, a newly unveiled upscale boutique hotel and the first Hotel Indigo to open in California.

Trigild has been tapped to spearhead the financial management and overall supervision and operation of seven Boston Blackies restaurants -- a popular hamburger chain which recently filed for Ch. 11 bankruptcy -- located in Chicago, IL and its surrounding suburbs.

In separate actions, Trigild was appointed receiver for three retail centers, including a complex situated on 35-acres in Parma Heights, Ohio; another on 35,000-sq.-feet in the Temecula, CA wine country and a third property encompassing three, one-story stucco retail buildings totaling 54,974-square-feet in Manteca, CA. As receiver, Trigild will work to increase occupancy and maintain and secure the properties.

The receivership estate of a broken housing development in Madera, CA was successfully closed by Trigild. In its role as receiver, Trigild helped complete all construction and obtain certificates of occupancy -- and remains in charge as project manager. Additionally, Trigild closed the receivership of a 10-acre vacant ranch in Simi Valley, CA -- resolving erosion control and other issues.

Trigild president, Bill Hoffman, will give a speech on distressed hotels at the Hotel Brokers International Conference is Las Vegas on January 28, 2010.