FAQ

Many of the non-numeric provisions of a lease can have critical economic consequences. The main ones, that I generally start with, are (a) who is liable for the tenant’s obligations under the lease (for example: a single purpose entity, a full or springing personal guaranty); (b) what assignment or subletting rights does the tenant have and whether there are any limitations upon the purposes for which the premises may be used (for buy-outs or mergers, or to get out if the tenant’s business gets into trouble); (c) how much, in tenant improvements and operating costs, is the tenant responsible for (some potential tenants are shocked to find out the total amount that the property is really costing them), and which party is responsible for which maintenance and repairs; (d) is there anything about the property that raises insurance issues; and (e) what protections does the tenant have, from the landlord’s lenders, if the landlord gets into trouble, especially if the tenant invests a lot in tenant improvements.

This involves several issues. One of the triggering questions is whether the company can simply go out of business, hold a short sale, or give the lender a deed in lieu, without the company’s or its principals’ really having to file bankruptcy. If bankruptcy is indeed called-for, one of the main responses to your question is whether the company (a) can prove, within about 3 months, that it has reasonable at least preliminary turn around plan, if it gets some time and/or monetary relief from the court (a Chapter 11 reorganization); or (b) even if it gets some time and monetary relief from the court, it has no reasonable likelihood of being able to continue operating and to turn profitable within about 9-12 months (a Chapter 7 liquidation). However, even if the company’s prospects are not good, there may be reasons to file a Chapter 11 before considering converting it to a chapter 7; nevertheless, delaying the inevitable is seldom one such reason. A lot potential clients don’t want to risk giving up control or to pay the court’s filing filing fee (usually $1,167 to $1,738), much less the attorney’s retainer. All of the foregoing calls for a candid discussion with a qualified professional.

We generally approach defaults under securitized loans, in the same manner as defaults under portfolio loans, but with having to deal with 2 lenders and with such matters (albeit some of them are the same as with a portfolio loan or with a second mortgage) as:
1. Any conflicts among the interests of the various members, including the various rights and duties under the LLC operating agreement or by operation of law.
2. The fact that a bad boy guaranty triggers personal liability if, among other things, the LLC declares bankruptcy or fails to pay specified expenses (whether or not paying those expenses at the time is not then, in your business judgment, the best alternative use of funds), perhaps even if the LLC does not have the funds to pay those expenses. Capital contributions may be required to avoid a triggering of personal liability. Of course, if you personally, are on the verge of bankruptcy, such a triggering may not be as big an issue.
3. The constraints that the special servicer is under in its ability to agree to a workout. Usually, those constraints are set forth in an MBS trust Pooling and Service Agreement.
4. The relationship between the 2 lenders (usually, that relationship is spelled out in an intercreditor agreement).
5. Not only the economics that the 2 lenders are facing in relation to the value of the property, but also the additional economics that the mezzanine lender is facing as a subordinate lender under the intercreditor agreement. Those may or may not trigger your getting greater help from the mezzanine lender.
6. Don’t forget the original issue discount and the imputed interest rules.
7. In almost all cases, a special servicer is not like your friendly portfolio lender, i.e. a special servicer is usually not looking to maintain good relations with you or for future business from you. It is looking solely to maximize its investors’ returns on just this one loan.
8. It’s important for you to put together a workout plan, in light of the foregoing, as soon as possible.