Special Servicers and Defaulted CMBS Loans Restructuring or Foreclosing Distressed Assets While Navigating Regulatory and Contractual Challenges

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Presenting a live 90-minute webinar with interactive Q&A Special Servicers and Defaulted CMBS Loans Restructuring or Foreclosing Distressed Assets While Navigating Regulatory and Contractual Challenges THURSDAY, FEBRUARY 21, 2013 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Patrick E. Mears, Partner, Barnes & Thornburg, Grand Rapids, Mich. Joseph E. Lubinski, Senior Associate, Ballard Spahr, Denver Lori Lustberg Smith, Partner, Andrews Kurth, Dallas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

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If you have not printed the conference materials for this program, please complete the following steps: Click on the + sign next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

Duties and Responsibilities of the Special Servicer under Pooling and Servicing Agreements Joseph Lubinski 1225 17 th Street, Suite 2300 Denver, Colorado 80202 303.299.7359 lubinskij@ballardspahr.com

Manage Loan Documentation Review of the Loan File Is the file complete? Are there originals? Does it appear there might be subsequent modifications or amendments that didn t make it to the file? Based on the file only, who is the current holder? 6

Manage Loan Documentation Review of the Loan File (cont d) What Existing Information Is (Probably) Not in the File? Current balance information/payoff statement Borrower financial information Project historical information Rent rolls, quarterly statements, annual statements Current borrower contact information 7

Manage Loan Documentation Supplementing the Loan File What updated information should be requested/ordered from third parties? Appraisal Phase I Report Lien Search Title Commitment Survey 8

Manage Loan Documentation Assessing and Evaluating the File How meaningful are the gaps in documentation? What are the lender obligations under the loan documents? Approval rights Response timelines 9

Manage Loan Documentation Assessing and Evaluating the File (cont d) What is the nature of the default (payment, maturity, non-monetary)? What are the consequences of default (lockbox, leases, default interest rate, etc.)? What borrower obligations may have been missed over time? What are the lender s remedies and options 10

Manage Loan Documentation Assessing and Evaluating Servicer Options Regardless of what the loan permits, are there local limitations on remedies? What approvals must be obtained before the special servicer can take action? 11

Negotiate Restructuring of Mortgage Loan and Security Documents After Evaluation of the Documents, Evaluate the Deal How is the property operating? What are the borrower s financials? What are the market conditions? 12

Negotiate Restructuring of Mortgage Loan and Security Documents Typical Modification Requirements Realistic operating forecast Existing NOI Current leases Future leases 13

Negotiate Restructuring of Mortgage Loan and Security Documents Typical Modification Requirements (cont d) Equity Investment / Principal Paydown Borrower Guarantor New Equity Liquidation of Reserves/Escrows Additional Collateral 14

Negotiate Restructuring of Mortgage Loan and Security Documents How Much is Owed? Outstanding principal Accrued interest Default interest Late charges Consultant costs Attorney s Fees Advances Other fees (servicing, modification, etc.) 15

Negotiate Restructuring of Mortgage Loan and Security Documents What are the Usual Structures/Options Rate modification (temporary or permanent) Extend, pretend (and hope) Split the debt (A/B notes) 16

Negotiate Restructuring of Mortgage Loan and Security Documents No Deal?!? On to remedies... 17

SPECIAL SERVICERS AND DEFAULTED OR DELINQUIENT CMB LOANS: Commencing Mortgage Foreclosure Proceedings, Seeking the Appointment of a Receiver and Pursuing Claims Against Guarantors Prepared by: Patrick E. Mears Lisa D. Updike Barnes & Thornburg LLP 616-742-3936 patrick.mears@btlaw.com 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP.

I. Commencing Mortgage Foreclosure Proceedings Review and Analysis of Mortgage Loan Documents Identify critical documents Scope of review Proper execution Compliance with applicable law Verification of existence of a default Verification of proper assignments of loan documents 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 19

I. Commencing Mortgage Foreclosure Proceedings (cont d) Analyze title search results and UCC search results Determine perfection and priority of liens Determine proper defendants in judicial foreclosure action 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 20

I. Commencing Mortgage Foreclosure Proceedings (cont d) Selecting the Method of Foreclosure: Judicial or Nonjudicial Judicial foreclosures Summons and complaint filed in proper jurisdiction Applicability of one-action rule Joinder of parties and claims Entry of foreclosure judgment Establishment of upset price Determination of redemption period Conduct and confirmation of sale 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 21

I. Commencing Mortgage Foreclosure Proceedings (cont d) Nonjudicial foreclosure Publication and posting of notice of foreclosure Sale notice requirements Conduct of foreclosure sale Determination of redemption rights 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 22

I. Commencing Mortgage Foreclosure Proceedings (cont d) Which foreclosure method should I choose? Length of time to complete procedure Need to determine priority of liens Title insurance issues 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 23

II. Requesting the Appointment of a Receiver Nonuniformity of Receivership Law Federal or State Receiver State receiverships: action commenced in state court where subject property is located Federal receivership: alternative requirements of diversity of citizenship and federal question jurisdiction 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 24

II. Requesting the Appointment of a Receiver (cont d) Considerations Suggesting Need for Receiver Failure of restructuring efforts Mortgagor is a fraudster Need for quick seizure of mortgaged realty and rents Threatened or actual waste Purchaser wanting quick purchase of property 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 25

II. Requesting the Appointment of a Receiver (cont d) Enforcement of Rent Assignments Many states permit mortgagee to obtain assignment of rents and leases and to enforce same Many mortgagees prefer having a receiver appointed to collect rents Bankruptcy risk of doing nothing: rents as cash collateral 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 26

II. Requesting the Appointment of a Receiver (cont d) Court Procedures for Appointment of a Receiver File summons and complaint in jurisdiction where property is located File motion for the appointment of a receiver Propose Order Appointing Receiver: CRITICAL DOCUMENT Administration of receivership estate Sales of receivership property free and clear of liens and interests Termination of receivership proceeding 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 27

III. Obtaining and Enforcing Deficiency Judgment Against Mortgagor and Guarantors Entry of Money Judgment Against Mortgagor and Guarantors in Judicial Foreclosure Action Entry of Money Judgment Against Mortgagor and Guarantors in Separate Action Bad-Boy Guaranties are Common in CMBS Transactions 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 28

III. Obtaining and Enforcing Deficiency Judgment Against Mortgagor and Guarantors (cont d) Case Law Generally Enforces Terms of Bad-Boy Guaranties Trend of case law Cherryland decision: a well-known exception to enforcement Common Defenses to Enforcement of Guaranties Asserted by Defendants Entry of Final Judgments and Commencement of Collection Actions 2012 Barnes & Thornburg LLP. All Rights Reserved. This page, and all information on it, is the property of Barnes & Thornburg LLP which may not be reproduced, disseminated or disclosed without the express written consent of the author or presenter. The information on this page is intended for informational purposes only and shall not be construed as legal advice or a legal opinion of Barnes & Thornburg LLP. 29

SPECIAL SERVICERS AND DEFAULTED CMBS LOANS - REMIC ISSUES February 21, 2013 Straight talk about your business Lori Lustberg Smith 214.659.4647 lorismith@andrewskurth.com andrewskurth.com

PURPOSE OF REMIC Real Estate Mortgage Investment Conduit. Fixed pools of mortgages in which investors hold various classes of interests. Pass-through entity. Not subject to being taxed at trust level. CMBS transactions structured and priced based on assumption that will not be subject to tax. Violation of REMIC rules subjects Trust to imposition of taxes. 2/19/2013 31 Andrews Kurth

GENERAL REMIC CHARACTERISTICS To preserve tax-exemption, REMICs must continually hold qualified mortgages or permitted investments. Generally qualified mortgage means mortgages secured by real property collateral that: (1) have a LTV ratio not greater than 125%, and (2) are transferred to the REMIC within 3 month period starting with Trust s startup date or on the first day the REMIC issues securities. Permitted Investments means: (1) Temporary cash flow investments passive investments from which REMIC earns interest, (2) Qualified Reserve Assets which is cash the Trust holds on hand to pay expenses, or (3) Foreclosure Property. 2/19/2013 32 Andrews Kurth

REQUESTS FOR MODIFICATION No significant modifications permitted. Significant modifications to loans are held to be deemed exchanges under IRS rules, thereby violating the second prong of the qualified mortgage test and incurring tax penalties. Exception for Defaulted Mortgage Loans. Borrower default or reasonably foreseeable default If servicer reasonably believes there is a sign of risk of default of loan upon maturity or at earlier date, modification can be made (expanded 2009) Exception for Assumptions. Exception for Substituting Collateral. If obligation continues to be principally secured by an interest in real property (added 2009). Principally secured means: (1) FMV at least 80% of adjusted issue price (appraisal, sales price or other commercial valuation) OR (2) FMV before > FMV after (appraisals or other commercial valuation) Exception for changing recourse nature (as long as continues to be principally secured by interest in real property) (added 2009). 2/19/2013 33 Andrews Kurth

REO & REMIC CONCERNS Foreclosure Property REO Timing for REMIC Holding REO/Extension Construction on REO Disposition of REO 2/19/2013 34 Andrews Kurth

TIME LIMIT FOR HOLDING REO PROPERTIES How long can REO remain foreclosure property? Grace Period End of 3 rd tax year following the tax year of foreclosure. Discretionary one-time extension (for up to 3 years) might be allowed thereafter. No other extensions permitted. 2/19/2013 35 Andrews Kurth

EXTENSION OF TIME LIMIT FOR HOLDING REO PROPERTIES Process for Extension When? Prior to October 31 of the year in which the Grace Period expires What to provide? Regs require: Name, address, taxpayer ID of REMIC Date foreclosure property was acquired Statement as to whether previous extensions requested Statement as to when the Grace Period should be extended Description of the efforts to dispose of the property Also often request: Tax returns Statement as to nature and operations of the property 2/19/2013 36 Andrews Kurth

EXTENSION OF TIME LIMIT FOR HOLDING REO PROPERTIES Must establish that an extension of the Grace Period is necessary for the orderly liquidation of the REMIC s interest in the foreclosure property. Good faith efforts to dispose. Market conditions precluded disposing of the property. Accompanied by penalties of perjury statement signed by authorized representative of REMIC. 2/19/2013 37 Andrews Kurth

PERMITTED ACTIVITY FOR REO A REMIC must be passive (i.e. may not actively engage in a trade or business). Upon foreclosure, Trust is forced to operate the property. Careful balance. 2/19/2013 38 Andrews Kurth

PROHIBITED ACTIVITY FOR REO Active Income. Construction (unless underway at the time of default and constructed by an independent contractor). 10% complete before default becomes imminent. Construction more than 90 days after property became REO is performed by an independent contractor. Typically Special Servicer may not make significant operating decisions that address matters other than consistent with normal course of business or completing construction. Retain third party management company. 2/19/2013 39 Andrews Kurth

CONSTRUCTION ON REO Construction includes: Renovations Remodeling to reconfigure layout 2/19/2013 40 Andrews Kurth

CONSTRUCTION ON REO Construction does not include: Repair/maintenance of a building/improvement to offset normal wear and tear or obsolescence. Restoration because of casualty. Preparation for a new tenant provided: Useful life of building/improvement not extended, and No significant increase in value. Deferred maintenance. 2/19/2013 41 Andrews Kurth

DISPOSITION OF REO General Standard for Disposition Special Servicer uses its reasonable efforts consistent with servicing standard to solicit cash bids. Reasonably likely to realize fair price within customary and normal time frame. Special Servicer determines fair price. occupancy physical condition state/local economy and market obligation to dispose 2/19/2013 42 Andrews Kurth

MULTIPLE SALES OF REO Sale of REO in Multiple Transactions. No specific REMIC requirement that sales be separate. Could result in REMIC being engaged in trade or business of development or selling REO. Must analyze facts and circumstances. 2/19/2013 43 Andrews Kurth

GENERAL OBSERVATIONS Observations: Regs create a framework for allowing liquidation of REO in a manner that makes sense while preserving the passive nature of the REMIC. These goals are often at odds and result in uncertainty. Regs often provide limited guidance Results are fact and circumstance specific Common sense and credit don t control REMIC Opinions Required Helpful/Cover Yourself 2/19/2013 44 Andrews Kurth

CONCLUSION REMIC rules always permeate. Address on front end. PSA and regulations. When in doubt, ask. 2/19/2013 45 Andrews Kurth

AUSTIN 111 Congress Avenue Suite 1700 Austin, Texas 78701 512.320.9200 HOUSTON 600 Travis Street Suite 4200 Houston, Texas 77002 713.220.4200 RESEARCH TRIANGLE PARK 4819 Emperor Boulevard Suite 400 Durham, NC 27703 919.313.4827 BEIJING Room 2007, Capital Mansion No. 6 Xin Yuan Nan Lu, Chao Yang District Beijing, China 100004 86.10.8486.2699 LONDON Level 16, City Tower 40 Basinghall Street London EC2V 5DE England 44.20.7382.0550 THE WOODLANDS Waterway Plaza Two 10001 Woodloch Forest Drive Suite 200 The Woodlands, Texas 77380 713.220.4800 DALLAS 1717 Main Street Suite 3700 Dallas, Texas 75201 214.659.4400 NEW YORK 450 Lexington Avenue New York, New York 10017 212.850.2800 WASHINGTON DC 1350 I Street, NW Suite 1100 Washington, DC 20005 202.662.2700 Copyright 2012 by Andrews Kurth LLP. Andrews Kurth, the Andrews Kurth logo and Straight Talk Is Good Business are registered service marks of Andrews Kurth LLP. All Rights Reserved. This presentation has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create (and receipt of it does not constitute) an attorney-client relationship. Readers should not act on this information without seeking professional counsel. Prior results do not guarantee a similar outcome and depend on the facts of each matter.