Form – Workout Agreement to Continue Funding Construction

April 3, 2008

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.

COMBINED TERMS SHEET FOR LOAN MODIFICATION AGREEMENTS FOR THE SENIOR LENDER AND THE MEZZANINE LENDER

This Terms Sheet is intended to set forth only the Terms that Senior Lender Bank (the “Senior Lender”), Mezzanine Lender Finance Company (the “Mezzanine Lender”), and In-Trouble Development LLC (the “Developer”) [the Developer being a single purpose entity whose sole asset is the "Project" hereinafter described, and whose sole purpose is the development and sale of that Project] have tentatively agreed to as a possible solution to the following situation. However, except as provided below with respect to the Developer’s payment of various costs of the Senior Lender and of the Mezzanine Lender in connection with the negotiation and preparation of this Terms Sheet and any formal, legally binding agreements contemplated hereby (such agreements, in form and substance satisfactory to the Senior Lender and to the Mezzanine Lender in their sole and absolute discretions, being hereinafter referred to, collectively, as the “Loan Modification Agreements”), this Terms Sheet is not intended (a) to be legally binding, or (b) to create a basis for an estoppel or a duty to negotiate. No party shall be bound by anything other than any Loan Modification Agreements executed and delivered by the respective parties hereto. Without limiting the foregoing, the parties hereto specifically recognize that (a) the Senior Lender’s Investment Committee may not grant the requisite approval of this Terms Sheet or any transaction connected herewith; and (b) the parties hereto may not agree upon the Terms of any such Loan Modification Agreements, especially in light of any information that may be discovered during the course of any negotiations and in light of any additional material Terms that a party hereafter decides are necessary or appropriate for its own protection.

Summary of the Status Quo
1. The Senior Lender made an $80,000,000 acquisition, development and construction loan to the Developer (the “Senior Mortgage”). That loan is secured by a first lien mortgage on the land, improvements, furniture, fixtures, and equipment and other assets constituting the In-Trouble Condominium Project (the “Project”). $60,000,000 of that has been funded and is accruing interest at the rate of 10%.

2. The managing member of the Developer and that member’s spouse (collectively, the “Guarantor”) personally guarantied the completion of the construction of the Project up to $25,000,000. Now, because of problems with other projects, the Guarantor’s net worth is about $5,000,000, most of which is illiquid. [However, that managing member remembers, very clearly, that, during the negotiations leading up to the making of the loan, the Senior Mortgage officer told that managing member that the Senior Mortgage officer could not foresee a situation in which the Senior Lender would actually call on that guaranty. That managing member's spouse was not involved in those negotiations.]

3. Mezzanine Lender loaned $20,000,000 for the Project (the “Mezzanine Loan”), which loan is secured only by a UCC security interest encumbering all of the membership interests in the Developer. All of that has been funded and is accruing interest at the rate of 15%.

4. The Developer rightfully threw the general contractor off the job for bad workmanship and failing to meet construction deadlines. Construction of the Project is backed by a construction completion bond issued by an independent bonding company. That bonding company is now paying the costs of completing the construction of the Project with a new general contractor, subject to the bonding company’s subrogation rights. However, the extra-carrying costs attributable to construction delays, recent design up-grades to market, and slower-than-anticipated sales are creating additional expenses, including a now-on-going $10,000/month cash shortfall. [The Developer estimates that it needs about an additional 9 months, and $10,000,000 of additional funding, to complete the Project, over and above the remaining $20,000,000 from the Senior Lender.]

5. The Developer has submitted, to the Senior Lender and the Mezzanine Lender, a revised business plan for the completion of the Project and the sale or rental of the units thereunder given the changes in circumstances that have occurred since the loan documents were originally entered into. The Developer estimates that, if the Project is completed and sold based upon his presently anticipated time-lines, and taking into account his requested concessions and the net additional anticipated interest, the Project will create a profit of about $7,500,000. [The Senior Lender and the Mezzanine Lender each thinks that, even if they make the concessions requested by the Developer, the Developer's profit would be about $2,500,000. However, each of them feels that the Developer is, by far, the best person to complete the Project.]

6. [The highest offer the Developer has received for the Project, at this point, is $75,000,000. The only other financing the Developer found, to make up the shortfalls needed to complete the Project, would leave him with nothing for his past or current efforts to complete the Project.]

Refinancing Terms

1. Extension of Durations. The Terms of the Senior Mortgage and the Terms of the Mezzanine Loan is each extended by 9 months to cover the estimated completion and out-sales dates.

2. Continuation of the Advances under the Senior Mortgage; Increase of Mezzanine Loan to Cover the Monthly Shortfalls and the Necessary Additional $10,000,000.

3. Conversion of Fixed Interest to Contingent Interest. From the date of the Loan Modification Agreements (a) the regular interest rate on the Senior Mortgage shall be reduced from 10% to 9%; (b) the regular interest rate on the Mezzanine Loan shall be reduced from 15% to 13.5%; and (c) no Default Interest Rate shall be imposed except with respect to any defaults under the respective loan documents as modified by the Loan Modification Agreements. However, the dollar amounts those rate reductions produce (cumulatively, “Contingent Interest”) shall be due and payable only as draws out of the “Profits” (as hereinafter provided) [note the lender's risk of being held to be a partner] and only if and to the extent there are such Profits. There is no cap on Contingent Interest.

4. Monthly Repayments of the Loans until Maturity. [Interest only? Delays?]

5. Additional Contingent Interest. Since the Senior Mortgage and the Mezzanine Loan are each far more risky than they were when they were made originally, the interest rate of 2% shall also be charged, as additional interest, on the outstanding balance of each from time to time commencing on the date of the Loan Modifications (“Additional Contingent Interest”). However (a) the Additional Contingent Interest attributable to the Senior Mortgage shall not exceed a total of $_____________________; and (b) the Additional Contingent Interest attributable to the Mezzanine Loan shall not exceed a total of $_____________________. Furthermore, Additional Contingent Interest shall be shall be due and payable only as draws out of the Profits (as hereinafter provided) and only if and to the extent there are such Profits.

6. Distribution of Profits; Equity Kicker. All “Profits” from the sale or rental of the retail and the condominium units in the Project and other “Profits” from the operation of the Project, all “Profits” from the sale of the Project itself, and all “Profits” from a refinancing or additional permitted financing of the Project, shall be paid as follows:

(a) first to pay all outstanding attorneys’ fees and other expenses due under the Senior Mortgage;
(b) with any then remainder to pay the Contingent Interest on the Senior Mortgage until all amounts of such then accrued Contingent Interest have been paid in full;
(c) with any then remainder to pay the Additional Contingent Interest on the Senior Mortgage until all amounts of such then accrued Additional Contingent Interest have been paid in full;
(d) with any then remainder to pay any principal and regular interest then due and payable under the Senior Mortgage as provided therein, as modified hereby;
(e) with any then remainder to pay all outstanding attorneys’ fees and other expenses due under the Mezzanine Loan;
(f) with any then remainder to pay the Contingent Interest on the Mezzanine Loan until all amounts of such then accrued Contingent Interest have been paid in full;
(g) with any then remainder to pay the Additional Contingent Interest on the Mezzanine Loan until all amounts of such then accrued Additional Contingent Interest have been paid in full;
(h) with any then remainder to pay any principal and regular interest then due and payable under the Mezzanine Loan as provided therein, as modified hereby; and
(i) with any then remainder to be split (i) 25% to the Senior Lender; (ii) 37 ½% to the Mezzanine Lender; and (iii) 37 ½% to the Developer.

However, neither the Senior Lender nor the Mezzanine Lender shall be entitled to any Contingent Interest, Additional Contingent Interest, or splits described in clause (h) above, for which Profits become available for the payment thereof after the principal amount of the Senior Mortgage, or the principal amount of the Mezzanine Loan, as the case may be, has been paid in full, whether by pre-payment or at maturity.

7. Deed in Lieu Put in Escrow Now Pending Default of the Loan Modification Agreements.

8. Capitalizing Arrearages and Workout Expenses as Additional Principal.

9. Requiring Additional Collateral. 10. Increasing the Caps on the Existing Guarantees, or Requiring Additional Guarantees or Capital Contributions.

11. Adding or Activating Lock Box Requirements, Financial Covenants, Lender Approval Rights, and Other Lender Controls Over the Operation of the Developer or the Project. 12. The Developer’s Waiving it Rights to Object to a Stay in Bankruptcy.

13. Documenting the Loan Modification Agreements in the form of Amended and Restated Loans, rather than New Loans.

14. The Developer’s Obligation to Pay the Attorney’s Fees and Other Expenses of the Senior Lender and of the Mezzanine Lender in connection with the Negotiation and Preparation of this Terms Sheet and any Loan Modification Agreements, whether or Not any Loan Modification Agreements are Actually Consummated.

15. Release of Lender from Any Liability to Date.