Real Estate Law Blog

Interesting Interview with GGP's President Tom Nolan

This interview is well worth a listen for insight on what's happening with General Growth Properties:

Weekly Roundup

Bankruptcy Court Denies Use of Cash Collateral

On June 29, the bankruptcy court judge in In re Four Bucks, LLC found in favor of a lender who objected to the debtor's proposed use of rents from an apartment complex as cash collateral. The lender argued that the rents had been absolutely assigned to it as collateral for a loan made prior to the debtor's bankruptcy. Analyzing existing caselaw about rent assignments and the language of the relevant loan documents, the Court found that "the Lender and Debtor intended to create and did create an absolute assignment of the rents collected from the Property." The judge's opinion went on to say that "[w]hile Debtor did have a revocable license to collect rents for the benefit of the Lender, that license was revoced prior to the Petition Date as a result of Debtor's default. Debtor did not have any interest in the rents from the Property prior to the Petition Date. Therefore, no interest in the rents passed to Debtor's estate and Debtor cannot properly use the rents as cash collateral." This judge's ruling, which provides some helpful hints to lenders in documenting their loans, is contrary to the ruling in the General Growth Properties bankruptcy, where the court allowed the debtor entities to use income generated by their shopping malls as cash collateral. Without seeing the loan documents involved in the GGP case, it's hard to know where the Fort Worth judge would have come down.

SBA to Offer Refinancing of Commercial Real Estate

According to a recent news story, the U.S. Small Business Administration has recently expanded its 504 lending program to include certain refinances of commercial real estate. More info available on the SBA's website at tinyurl.com/yukpux.

REITs Gearing Up to Acquire Real Estate Debt

The Wall Street Journal reported on Friday that several big-name financiers are forming and promoting REITs that are targeting commercial mortgage debt. The jury is out on whether investors will buy in to the REITs' objectives, but the WSJ notes that "the clobbered real-estate prices . . . are impossible for some investors to resist."

Tuesday Roundup

This week's Monday Roundup comes a day late due to the Memorial Day holiday.

New Federal Legislation Affecting Tenants' Rights Following Landlord Foreclosure

On May 20, President Obama signed into law the Protecting Tenants at Foreclosure Act of 2009 (the "Act"), Title VII of a larger piece of legislation called the "Helping Families Save Their Homes Act of 2009." The Act provides new rights for tenants of foreclosed-upon residential property, which presumably includes single-family homes, multifamily properties, and residential condominiums. The buyer in such a foreclosure must provide at least ninety days' prior notice if the tenant is to be required to vacate the property. Furthermore, a tenant under a "bona fide lease" has the right, with a limited exception, to occupy its leased premises until the end of the then remaining lease term. The Act defines a "bona fide lease" as one that resulted from an arm's-length transaction in which the tenant is not the mortgagor or its child, spouse, or parent, and the rent is "not substantially less than fair market rent." The official version of the Act as signed by the President has not yet been released, but the full text of the enrolled bill (as approved by Congress and sent to the President for signature) is available by clicking here.

LandAm Subsidiary Sale Approved by Bankruptcy Court

The Richmond Times-Dispatch reported on Friday that U.S. Bankruptcy Court Judge Kevin R. Huennekens approved the sale of six LandAmerica Financial Group Inc. subsidiaries for $28.5 million. Two of the subsidiaries -- LoanCare Servicing Center Inc. and LC Insurance Agency Inc. -- will be acquired by Fidelity National Financial; the other four go to Georgia-based Buyers Protection Group Inc.

Commercial Mortgage Bond Spreads Narrow Following Announcement that "Legacy Securities" will be Included in TALF Program

The Fed's announcement that certain so-called "legacy securities" will be eligible collateral under the TALF program (see 5/22/2009 posting in this blog) seems to have help create a climate of optimism that has led to a drop in yields on commercial-mortgage-backed bonds. Citing data from Bank of America Corp., a recent Bloomberg report said that the spread on top-rated commercial-mortgage-backed bonds (relative to benchmark interest rates) narrowed 12.3% last week, bringing the spreads to the lowest number since November 5, 2008. Various industry analysts indicated that new "clarity" in the program has increased confidence that the TALF program will be effective in helping revive credit, one noting approvingly that announcements of program details such as applications deadlines (late July for "legacy" assets and June 2 for newly issued CMBS) assuage fears that the program "won't get off the ground."

Monday Roundup

CMSA Response to GGP Court Ruling

Last week the judge in the General Growth Properties ("GGP") bankruptcy case ruled that GGP would be allowed access to funds from its many SPE subsidiaries to fund ongoing operations in connection with requested $400 million DIP financing. According to an announcement on GGP's website, the DIP financing will be used to "refinance certain pre-prepetition secured indebtedness and provide additional liquidity" to GGP and the other debtors in the bankruptcy.  The Commercial Mortgage Securities Association ("CMSA") originally opposed GGP's requested access to the SPE funds, filing a joint amicus brief with the Mortgage Bankers Association in which the industry organizations characterized the GGP request (to use cash collateral from the 169 mall-owning SPEs to fund GGP operations) as potentially "disastrous to the world of real estate finance," because it undermines the separateness of the entities that is the "structural underpinning for non-recourse asset specific financing."

In a statement following the judge's ruling, CMSA gave cautious and qualified approval of the ruling, saying that it "recognizes the integrity of the special purpose entity structure," but reiterating concerns about the appropriateness of including the SPEs in the bankruptcy to begin with. CMSA's apparent (partial) change of heart with respect to GGP's use of the cash collateral appears to reflect relief at both the fact that the DIP financing terms were amended so that the individual properties were not pledged as collateral for that loan and also the judge's clear statement in his ruling that he was not consolidating the entities for purposes of the bankruptcy case.

A hearing is planned for later this month to address, among other issues, whether the SPEs did a "bad faith filing."

Stats on Significant Drop in Commercial Mortgage Loans

The International Council of Shopping Centers recently reported on a 70% drop (from Q1 2008) in commercial mortgage loan originations. That number was a composite of statistics in the commercial-mortgage-backed conduit loans (an 83% drop), retail (76%), hotel properties (88%), office (66%), and multifamily (61%).  According to this report, the dollar volume of multifamily loans by Fannie and Freddie was down by 26%.

Monday Round-Up

Lagging Rebound in Commercial Real Estate

Despite positive signs that the economy may have reached bottom and be heading toward a rebound, the commercial real estate market continues to lag behind such indicators as consumer confidence (up in April to the levels last seen in September 2008), job losses (pace slowing), and the stock market (up since its March 9 low). This morning's Richmond Times-Dispatch included a column discussing the dramatic increase in office and apartment vacancies in the past few months. Uncertainty about whether the commercial real estate ("CRE") market has yet bottomed out means, among other things, that financing for CRE projects remains "expensive and scarce." The Richmond columnist posits that the beginnings of recovery in the CRE market await that moment when investors and lenders find "the good solid ground of rock bottom."

Meanwhile, on Friday the Mortgage Bankers Association reported on a survey of general contractors, subcontractors, and designers that indicated low confidence among them -- 85% of those surveyed believe commercial construction continues to decline, and most of those don't anticipate a turnaround in that market for at least 12 to 18 months.

Addition of Commercial Real Estate to Federal TALF Program

With the support of, among others, the International Council of Shopping Centers, the Federal Reserve recently announced that, effective May 1, certain commercial mortgage-backed securities ("CMBS") now will be included as eligible collateral in the Term Asset-Backed Securities Loan Facility ("TALF"). This program, part of the Economic Stabilization Act of 2008, is intended to encourage the flow of credit by facilitating the issuance of asset-backed securities. According to the Terms and Conditions published by the Federal Reserve Bank of New York, eligible CMBS collateral must be "U.S. dollar-denominated, cash [CMBS] issued on or after January 1, 2009" that satisfy a number of specified conditions, including acceptable pooling and servicing agreements, credit ratings "in the highest long-term investment-grade rating category," terms that provide for principal and interest payments on fully-funded, first-priority mortgages on income-generating commercial properties located in the U.S. or one of its territories, securing loans that were originated on or after July 1, 2008.

CMBS Concern About GGP Bankruptcy

Friday's Wall Street Journal reported widespread concern in the CMBS (commercial mortgage backed securities) market arising from the General Growth Properties ("GGP") bankruptcy. CMBS investors apparently are "rattled" because when the GGP parent company filed, it "took 166 of its malls into bankruptcy with it," a move that surprised debt holders on those malls. The surprise stems from two elements: first, the malls were performing well and servicing their respective debt, and second, each of the malls was owned by separate "special purpose entities" ("SPE"), a common ownership structure typically required by lenders in real-estate-secured loans because it is supposed that this structure -- where the borrower owns only one asset (the real estate that serves as collateral for the loan) and the cash flow from that asset is pledged to service the debt -- insulates the borrower entity if its parent company files bankruptcy.  The WSJ report says that GGP sought, and obtained, board approval from each of the 166 SPEs to include them in the bankruptcy; prior to getting this board approval, GGP reportedly replaced directors on around 90% of the SPE boards in the weeks leading up to GGP's Chapter 11 filing. Apparently the governing documents for some or all of those entities either allowed such replacement or did not prohibit it. Various lenders are protesting the inclusion of the performing properties in the GGP bankruptcy, and the industry will be watching the progress of this case and evaluating its wider impact. At a minimum one can anticipate a move for tighter SPE covenants in future CRE loans.

What Commercial Landlords Should Do When a Tenant Files Bankruptcy

The following was adapted from a portion of a client alert prepared recently by Ira Herman and Lynn Gray Ruvang, partners in our New York and Fort Worth offices, respectively. The full alert includes useful information about the impact of a tenant’s bankruptcy on the landlord/tenant relationship, how the bankruptcy process works, strategies that commercial landlords may employ to protect their interests once the tenant has filed, and protective lease provisions that landlords can include in their leases to reduce the financial consequences of tenant financial distress.  A copy of the full alert may be obtained by clicking here.

 

If a tenant files for Chapter 11 bankruptcy relief, a landlord should act expeditiously to protect its interests. Absent a compelling reason not to do so, the landlord, though its counsel, should file a Notice of Appearance and Demand for Notices with the bankruptcy court. This ensures that the landlord will receive notice of all important events in the bankruptcy case, including those that might affect the landlord’s interest, and will position the landlord to monitor the tenant’s case. Such monitoring enables the landlord to evaluate legal and financial developments during the administration of the case that might impact the landlord-tenant relationship.

At the earliest stages of a tenant’s bankruptcy case, the landlord should focus on the tenant’s access to funds to perform its post-filing-date obligations to the landlord and other creditors. In today’s environment, virtually all Chapter 11 filers will seek either financing in the form of a debtor-in-possession loan or authority to use the cash proceeds of a pre-bankruptcy lender’s collateral. Critically important to the tenant’s attempt to secure such financing will be a budgeting process; every request to obtain bankruptcy financing will require the tenant to disclose its proposed budget for periods that may be as short as several days or as long as six months or more. For a landlord, the tenant’s motion for financing is an opportunity to make sure that rent is included in the tenant’s proposed budget. The proposed budget also will provide the landlord with a “snapshot” of the tenant’s financial condition.

Another critical issue for a landlord at the earliest stages of a tenant’s Chapter 11 will be determination of whether the tenant’s interest in the lease is of value. The landlord should seek answers to some or all of the following questions:

• Can the tenant survive without occupying the leased premises?

• Is the lease rent above or below market?

• How much of the lease term remains?

• Does the tenant have any remaining term extension rights under the lease?

• Is there anything unique about the leasehold that will increase its value to the tenant or others (e.g., a unique location or market penetration issues)?

The leasehold’s value will be an important driver of the landlord’s strategy during a tenant’s Chapter 11 and, in particular, the decision of whether to try to recapture the leasehold or try to keep the tenant in possession.

Notwithstanding the Bankruptcy Code’s provisions that generally are favorable to a tenant’s interest in its bankruptcy case, a landlord can take steps to avoid what the landlord is likely to view as an overly harsh outcome. Procedurally, a tenant in bankruptcy is required to file a motion with the court when it seeks to assume, reject, or assume and assign an interest in a lease. Such motion practice provides the well-counseled landlord with an opportunity to respond and complain about a tenant’s overreaching, its failure to comply with the Bankruptcy Code regime, and the impact on a landlord’s rights of the tenant’s chose course of action (assumption, rejection, or assumption and assignment, as the case may be).

The landlord in this situation is advised to:

• Be familiar with and vigilant about the time periods governing assumption or rejection.

• Pay attention to assumption and rejection motions filed by the tenant that might not appear to directly involve the lease in question.

• Pay attention to events in the tenant’s case that will reveal information about the tenant’s plans for the future and its ability to finance its operations.

• Pay careful attention to deadlines for filing proofs of claim for “rejection” damages or estoppel notices with regard to monetary defaults to be paid as “cure” when a tenant’s interest is being assumed or assumed and assigned.

• Carefully review any plan of reorganization filed by a tenant, as the plan may purport to effect assumption or rejection and otherwise impact a landlord’s interests.

A tenant’s bankruptcy sets into motion a complex chain of events that has far-reaching effects on a landlord’s rights under its lease agreement with the tenant. Landlords with financially distressed or bankrupt tenants would be well advised to have an attorney assess what steps should be taken to protect the landlord’s interests, both before and after the tenant files for bankruptcy protection.