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Moderator: Robert Kaplan / Jeffer Mangels Butler & Mitchell LLP

TRENDS IN CRE LOAN SALES Fishing for Solutions. Moderator: Robert Kaplan / Jeffer Mangels Butler & Mitchell LLP Panelist: Geoff Davis / HREC Investment Advisors Panelist: Phil Montgomery / P.O'B Montgomery & Company Panelist: Mark Fair / Jones Lang LaSalle Hotels October 2012.

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Moderator: Robert Kaplan / Jeffer Mangels Butler & Mitchell LLP

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  1. TRENDS IN CRE LOAN SALES Fishing for Solutions Moderator: Robert Kaplan / Jeffer Mangels Butler & Mitchell LLP Panelist: Geoff Davis / HREC Investment Advisors Panelist: Phil Montgomery / P.O'B Montgomery & Company Panelist: Mark Fair / Jones Lang LaSalle Hotels October 2012

  2. Note Sales: Motivation • Why hold a note sale? • Quicker recovery for underperforming assets • Reduce overexposure / portfolio concentration(asset type, sector, geographic, borrower) • Portfolio rebalance • The private equity market for buying loans • Can a borrower buy back its own non-performing loan?

  3. Note Sales: Motivation • Why hold a note sale? • Reduce regulatory pressure • Manage yield and duration risk • Exiting business lines or specific markets

  4. Note Sales: Pros • Time Value of Money • Immediate, quantifiable recovers • Avoid protracted foreclosure actions and delays obtaining title to collateral • - Some judicial foreclosure states have a several year process • Due diligence and close faster than asset sale

  5. Note Sales: Pros • Decrease Event Risk • Bankruptcy Risk – expensive, cash collection issues, cram down, risk yield maintenance rendered uncollectible • Litigation Risk – TRO, receivership/court imposes its own receiver • Devaluation of underlying collateral – market risk, property deterioration, liquidation discount, accruing property taxes and expenses • Contingent liability – lender liability, property management liability, enforceability issues, environmental risk

  6. Note Sales: Pros • Lower Transaction Costs • Lower legal fees • Lower or no brokerage fees • No operational / property management fees

  7. Note Sales: Pros • Capital / Internal Resource Relief • Allows immediate reinvestment • Eliminate servicer advancing requirements • Frees resources to focus on more critical strategic objectives • - Reduce time resolving problem assets with uncertain recoveries - Reduce time on onerous reporting and loss estimates

  8. Note Sales: Cons • Loss of Upside Potential • Opportunity to collect late charges, default interest and yield maintenance • Access to alternative repayments sources • Right to pursue deficiencyand guarantors • Ability to "rehabilitate" asset, improve value

  9. Note Sales: Cons • Relinquish Operational Control • Flexibility / creativity in workout terms • Forego benefit of economies of scale and/or operational expertise

  10. Note Sales: Cons • No-trade Risk • Delay collections while sale takes place • Risk if sale doesn't close • Litigation/bankruptcy issues pending closing

  11. Legal and Documentation Considerations • Note Sales • Have LSA ready before due diligence • - Sets expectations • - Sets ground rules • - Importance of representations and warranties • - Facilitates quick close • Liquidated damages/transaction fee deposit • Hotel franchise considerations when buying loans

  12. Legal and Documentation Considerations • Note Sales • Due diligence reports including title searches, surveys, Uniform Commercial Code financing statement searches, litigation, judgment, and bankruptcy searches, Phase 1 environmental site assessments, construction consultants, engineering and geophysical/soil stability reports and background search on borrower • Review current and historical financial statements, interview property managers, leasing agents, real estate brokers, tenant leases, tenant estoppels, rent rolls and documentation relating to ground leases, if any, and market reports, and conduct physical inspection of the collateral

  13. Legal and Documentation Considerations • Note Sales • Consents needed • Cash Managements Agreements • Review loan documents for unusual provisions, ability to exercise legal remedies and custom negotiated provisions that may impair rights to realize upon collateral • Think like a Lender

  14. Legal and Documentation Considerations • Note Sales • Collateral Issues • - Property Access • - Title • - Environmental and Structural Assessment • Entity History • Mezzanine loan due diligence  ascertain if value of collateral is greater than outstanding balance of senior and extent to which inter-creditor agreements exist between senior lenders and mezzanine lenders

  15. Legal and Documentation Considerations • Note Sales • Indemnities • - May be limited due to reduced contingent liability related to note sales • - Phase out over time • - May be limited to purchase price (or some multiple of price) • - Determine whether or not selling lender wants indemnities for pre-sale activities and risks associated therewith

  16. Questions Bob Kaplan, Esq. Jeffer Mangels Butler & Mitchell LLP Two Embarcadero Center 5th Floor San Francisco, CA 94111 415.398.8080 RKaplan@JMBM.com

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