navigating commercial loan forbearance agreements

real estate newsletter | Summer 2010

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In ThIs Issue

1 NavigatingCommercialLoanForbearanceAgreements

2 CurrentTrendsinMultifamilyHousingFinance

3 SubleasinginaDownEconomy

4 HoosierDecision:“Impossibility”WarrantsPreliminaryInjunctionAgainstPaymentObligation

5 TheTOUSADecision:ALender’sNightmare?

Increasinglycommercialrealestateownersarereaching out to their lenders for forbearance.Whether facing an impending loan maturity,lossofasignificanttenant,capitalimprovementrequirements, deferred maintenance or amaterially softening leasing market, thesepropertyownersneedloanrelief.Loansmaybecurrent;theremayberecourseinthenatureofawell-capitalizedguarantor;thelendermaybesecure that it is adequately collateralized andmay have excellent remedies and no fear ofutilizingthem.Nonethelessthecircumstances—business,legalandpractical—maycryoutforafair, balanced and, most important, workableforbearanceagreement.

Thisarticlesetsfortharoadmaponwhatsuchaforbearanceagreementshouldlooklike.Whilethestrategies,objectivesandprovisionsbelowareapplicabletomanytypesofsecuredloans,we limit the discussion to a commercial realestateloanmadeandheldbyaportfoliolendersecuredbyafirstmortgageonasingleparcelofcommercialpropertylocatedinNewYork.

sTraTegIes

At its core, the forbearance agreementimplements the following principle — inexchange for economic and legal concessions,the lender obtains certain credit or collateralenhancements and/or invokes its remedies.

The lender concessions fall into the followingcategories: (1) restraint or forbearance fromaccelerating the loan and/or pursuingforeclosure and other legal remedies; (2)extension of the maturity date; (3) waiver ofeconomicorcovenantdefaults;(4)suspensionof required principal amortization and/orinterestinstallmentpayments;(5)modification(i.e.,reduction)oftheinterestrate,includingawaiver, accrual, or accrual and forgiveness ofdefaultinterest;(6)partialreleaseofrealestatecollateraloragreementtoacceptreleaseprices;(7) release of guarantors or reduction of theguaranty obligations; (8) reduction of theprincipal indebtedness or the opportunity torepay the indebtedness at a discount; (9)modification of covenants or capitalrequirements; or (10) an exchange of debt forequityintheborrowerentity.

The enhancements obtained by the lender inexchange for the concessions include (1)additional collateral; (2) concessions orcontributions from other lenders; (3) a newpartial (or even full) guaranty of a previouslynon-recourse loan, debt service or otherfinancialobligation;(4)anincreaseinthescopeof guaranteed obligations, or additionalspecified“recourse”events;(5)additionalloancovenants, financial reporting or monitoring

navigating Commercial Loan Forbearance agreements By Richard S. Fries and Todd B. Marcus

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Real Estate Newsletter Summer 2010

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Due to the current economic downturn, multifamily rentalhousing issuffering fromaseverescarcityof financingandcapital.Althoughrecentlytherehavebeensomesignsofanoveralleconomicrecovery,themultifamilyhousingindustry’sability to recover will depend to a certain degree on theviability of existing and newly authorized governmentprograms, including those of the Federal HousingAdministration(FHA),FannieMaeandtheFederalHomeLoanMortgageCorporation(FreddieMac).Thisarticlereviewsthecurrent state of multifamily rental housing finance,summarizes governmental initiatives and programs thatprovide financing and assistance, and identifies initiativesthatwouldfurtherfacilitatemultifamilyhousingdevelopment.

The sTaTe oF The MarkeT While there are some signs of improvement, financingremainsscarce.Manyprojectsthatwouldhavebeenfeasibleon traditional underwriting terms prior to the currenteconomic downturn cannot obtain financing today. Manyprojects that obtained construction financing prior to thecreditcruncharestillunabletosecurepermanentfinancing.Some of the factors leading to the scarcity of financinginclude:

• rents.Therentsusedinunderwritingprojectsfinancedonlyafewyearsagoarenotyetachievable.

• Vacancies.Ingeneral,rentalhousingvacancyratesnationwide,aswellasretail/officevacancyrates,haveincreased.

• Troubled Condo Projects.Manycondominiumprojectsundertakeninrecentyearshaveremaineduncompletedandothers,thoughcompleted,haveremainedemptyorhavebeenaddedtotherentalpool.

• Capitalization rates and Valuations.Theincreaseincapitalizationrates,coupledwiththereductioninrents,hasgenerallyreducedappraisedvalues.However,insomeareas,capitalizationrateshavecomebackdownandsomeareevenapproachingpre-recessionlevels.

• Tighter Lending standards.Lendersarenowtypicallyapplyingmuchmorestringentunderwritingstandards,includinghigherloan-to-value(LTV)anddebt-servicecoverageratios.Lenders(otherthanFHA,FannieMaeandFreddieMac)arenowinmanycasesrequiringLTVratiosfornewconstructionloansinthe50to60percentrange,comparedto70to80percentpreviously.

• Increased Fees.Lendersarecharginghigherinterestratespreadsandhigherloan,letterofcreditandcreditenhancementfees.During2009,forexample,FreddieMac’screditenhancement/liquidityfacilityfeesforvariableratetax-exemptbondtransactionsincreasedfromlessthan125basispointstoapproximately250basispoints.However,in2010,FreddieMac’sfeeshavedecreasedandareapproximatingpre-2009levelsexceptforliquidityfeesforvariableratedemandbonds.

• Buyer/seller Disconnect.Manyownersarenotwillingtoselltheirpropertiesatcurrentvalues,whilebuyersarehuntingforbargains.

• Market uncertainty.Someinvestorsarestayingoutofthemarketbecauseofuncertaintyastovalues.

• Drop in Low-Income housing Tax Credit (LIhTC) Pricing.PricesforLIHTCshavedroppedsubstantiallybecausetheprogram’smajorinvestorshavelessincometoshelterfromtaxes.MajorplayerssuchasFannieMaeandFreddieMacareoutofthemarket.

Onthepositiveside,inadditiontosomesignsofrecoveryinthecreditmarkets,currentmarketconditions—inparticular,the combination of pricing, higher capitalization rates insomeareasandlowinterestrates—maypresentopportunitiesforsomepurchasers.

FeDeraL BonD PrograMsCongress and the Obama administration have institutedseveral programs to increase the use of tax-exempt bondsduring the current recession. Under the New-Issue BondPurchaseProgram(NIBP),TreasuryispurchasingFannieMae,Freddie Mac and FHA-backed securities backed by tax-exempt housing bonds; under the Temporary Credit andLiquidity Program (TCLP), Fannie Mae and Freddie Macprovidereplacementcreditandliquidityfacilitiesforexistingbonds.Manystateandlocalissuersoftax-exemptbondsforrentalhousinghavecollectivelyissuedbillionsofmultifamilyhousingbondsunderNIBP;theproceedsofthebondsaleshavebeenplacedinescrowandarebeingandwillbeusedduring 2010 to make multifamily mortgage loans.Unfortunately, to date very few multifamily projects haveactually closed under the program. Greater volume isexpected later in the year, and it is possible Treasury willextendtheprogram.

Current Trends in Multifamily housing Finance By Kenneth G. Lore and Martin Siroka

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AsubstantialamountofsubleasespaceisavailableinmanymarketsthroughouttheU.S.Withasluggisheconomy,manytenants have not experienced the business growth theyanticipatedwhentheyoriginallyenteredintotheirleasesorhavebeenforcedtodownsizeorconsolidatetheiroperations,resultinginexcessorunderutilizedleasedpremises.

The boom-time scenario is familiar to the real estatecommunity:whentimesweregoodandatenant’sbusinesswasexpanding,thetenantenteredintoalargemasterleaseinaprimelocation,countingonyearsofsteadygrowth.Withdemand high, the landlord commanded a lofty rent for along-term lease. Then, economic conditions deteriorated,leavingthetenantsaddledwithahighrentfortheremainingtermofamasterleasethatbecomesaseriousfinancialdrainonitsbusiness.

Forlandlords,thesecircumstancesarealsoamajorcauseforconcern. Economic conditions have heightened the risk oftenant default or bankruptcy, which could deprive thelandlord of cash flow needed to satisfy its debt-serviceobligations to its lender and leave it with the prospect ofhaving to re-let space in its building. In addition, availablesublease space might also compete with available directleasespaceinthebuilding.Whilesubleasespaceislikelytobe available at a lower rent than direct space, it poses anadditionalchallengetothe landlord’sability to leasedirectspaceinadifficulteconomicenvironment.Alandlordmighthavetherighttorecapturespaceproposedtobesublet,butthatrightisonlymeaningfulifthelandlordisconfidentthatit can secure a replacement tenant, which is a less certainprospectintoday’seconomy.

Torelievesomeofthefinancialburdenofcarryingamasterlease,manytenantshavesoughttonegotiateaconsensualearlyterminationoftheirleaseinexchangeforthepaymentof a termination fee. However, if the landlord is concernedthat it will not be able to find a satisfactory replacementtenant for the vacated space or the early termination willhaveanadverseeffecton itspresentor future financingofthebuilding,thelandlordmightnotbewillingtoconsenttoan early termination. Also, a tenant might be in financialdifficulty and not have available funds to pay a lump-sumleaseterminationbuyoutamounttothelandlord.

Sinceanearly terminationmaynotbeachievable,a tenantmightpursueasubleaseofalloraportionofitspremisestomitigate its lease exposure.This presents opportunities for

subtenants to acquire space at reduced rental rates. In adistressedmarketwithasizableamountofavailablesubleasespace, negotiating leverage has shifted to subtenants,especiallythosethatarecreditworthy.

Themotivationsforasubtenantarevaried.Asubleasemightbe an opportunity to bridge its space needs for a shortdurationwithouthavingtomakealong-termcommitmenttoa particular building or region. It might be a chance toupgradetobetterspaceinamoredesirablebuildingforthesamerentbeingsoughtforadirectleaseinalessdesirablespace.Asubleasecouldalsobeanopportunityforatenantalready leasing space in a building to expand into aneighboringtenant’sleasedspaceatadiscountedprice.

Whilethemostobviousattractionforpotentialsubtenantsisthepossibilityofleasingspaceatbelow-marketrates,thereareotheradvantages.Somesubleasedspacewillcomefullybuilt out or furnished and therefore move-in ready withoutoccupancy delays usually attendant to build-out periods.Furthermore, subtenants can usually get space for shorterterms than under a typical master lease. A subtenant mayalso be able to negotiate other positive financial termsbeyond reduced monthly rent such as rent abatementperiods, improvement allowances or reduced securityrequirements.

There are, of course, downsides for subtenants. The leasetermmaybeveryshortandnotincludeanyoptionstoextendorexpand.Thesubtenantalsomaynotbeabletoalter thespace and can be restricted from further subletting orassigningitsinterest.

Another set of problems for subtenants is the result of thenatureofthesubleaseitself.Asublease,bydefinition, isacontractbetweentheexistingtenantandthesubtenant.Thelandlordisnotapartytothesubleaseand,asaresult,thesublease creates no “privity of contract” between thesubtenant and landlord. This means that the subtenantcannotenforcethemasterleasedirectly.If,forexample,thelandlordfails toprovideservicessuchascleaningcommonareas, the subtenant typically cannot sue the landlorddirectly.Instead,thesubtenantshouldnegotiateaprovisioninitssubleasethatrequiresthetenanttoenforcethemasterleaseonthesubtenant’sbehalf.Further,ifthedirecttenantfailstopayrentorotherwisedefaults,themasterleasecouldterminateandthesubleasewillusuallyterminatealongwith

subleasing in a Down economyBy James L. Black, Jr.

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Whatright,andunderwhatcircumstances,doesathirdpartyhavetoenjointhepaymentobligationofanother?ThisissuewasrecentlyaddressedbytheU.S.CourtofAppealsforthe7thCircuit,withasurprisingoutcomethatmayhavenegativeimplicationsforenforcementoflettersofcredit,theworkhorseofthecommercialsecurityarena.

TransaCTIon sTruCTureTheunderlyingtransactioninthecase,Hoosier Energy Rural Elec. Corp., Inc. v. John Hancock Life Ins. Co. (2009),involvedaformof“synthetic”lease.Essentially,JohnHancockmadea loan to Hoosier Energy secured by a lease rather than amortgage.JohnHancockpaidHoosier$300millionforalong-term lease in Hoosier Energy’s Merom electric generationplant. Hoosier in turn leased the facility back from JohnHancockforashorterperiod,makingperiodicpaymentswitha present value of $279 million.The $21 million differencerepresented profit to Hoosier Energy and value to JohnHancockintheformofdepreciationdeductionsasthelong-termtenantoftheplant.

TohedgeagainsttheriskofHoosierEnergy’srepudiationofthe lease in the event of a bankruptcy filing, John Hancockrequired that Hoosier Energy provide a credit default swap(CDS)andasuretybond,bothissuedbyAmbac.Likealetterof credit, a CDS assures payment to the beneficiary whencertaincontingenciesoccurandwithoutproofofloss.AmbacanditsaffiliatesagreedtopayJohnHancock$120millionifcertaineventsoccurredasadirectobligationtoJohnHancock.HoosierEnergyseparatelypostedsubstantialliquidassetstoAmbac’screditintheeventAmbacwasrequiredtopayJohnHancock.

One of the contingencies to the CDS was maintenance ofAmbac’screditratingaboveaprescribedthreshold.Whereitslipped below that threshold, Hoosier Energy was to find areplacementforAmbacwithin60days.Ifnoreplacementwasfoundwithinthe60-dayperiod,thenAmbacwasrequiredtopay JohnHancockthe fullamountdueunder theCDSuponJohnHancock’sdemand.

IMPaCTs oF The FInanCIaL CrIsIsDuring the 2008 credit crisis, Ambac’s credit rating didindeed slip, and John Hancock demanded that HoosierEnergy find a replacement surety. When Hoosier Energy

reported trouble with locating a replacement, the deadlinewas extended. At the arrival of the extended deadline,HoosierEnergy indicateditwas innegotiationswithathirdparty having very highly rated financial standing to replaceAmbac but hadn’t yet secured a commitment. Since thecontingencywasnotmet,JohnHancockcalledonAmbactoperform. Ambac indicated it was ready, willing and able toperformitsobligationsunder theCDS.HoosierEnergy thenfiled suit and obtained a temporary restraining order, laterconverted to a preliminary injunction, forestalling Ambac’spayment. Hoosier Energy alleged that if Ambac paid JohnHancock on the CDS (approximately $120 million), thenHoosierEnergywouldberequiredtocovertheoutlayunderits independent obligation to Ambac, which would driveHoosierEnergyintobankruptcy.Thelowercourtfoundthistobean“irreparableinjury”justifyingapreliminaryinjunction.

ThIrD-ParTy sTanDIng To enjoIn PayMenTKeytothecourt’sholdingwasitsanalysisoftwocoreissues:(1) it found Hoosier Energy to have standing to enjoinAmbac’s payment to John Hancock under the CDS eventhoughHoosierEnergywasnotadirectcontractualparty,and(2)itdeterminedtherecouldplausiblybeanargumentonthemerits that would enable Hoosier Energy to prove it was“impossible” to find a replacement surety intermediary inlight of the 2008 global economic crisis. Both of thesefindings have troubling implications as to enforcement ofCDSsand,byanalogy,lettersofcredit.

BothaCDSandaletterofcreditaretoolsthatshifttheriskofpaymentfromonepartytoanother,entitlingthebeneficiaryto look to the creditworthiness of the bank or surety asopposed to thatof theborroweror the lessee.Thebankorsurety is obligated to pay the beneficiary simply upon thepresentationofaconformingdrawordemand.Theunderlyingtransactionanditsvagariesarenotwithinthepurviewofthebank,noristhepaymenttreatedasfundsofthedebtorinabankruptcyproceedingoftheborrower/lessee.

Forexample,asavvyleasinglawyerrepresentingtenantswilladvisethattheformofletterofcreditpostedassecuritybeagreedtoinadvance,typicallyasanexhibittothelease,withan express provision requiring a landlord certification thatthe tenant/obligor is in default under the subject lease aspartofanydrawrequest.Eventhismodesthurdledoesnot

Hoosier Decision: “Impossibility” Warrants Preliminary Injunction against Payment obligationBy Mia Weber Tindle

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Thenightmare:$500millioninsecuredloanschallengedinbankruptcycourt;allclaimsbylenderagainstborrowerandallliensavoided;allprincipal,interest,costs,expensesandother fees, including allprofessional feespaid to lender inconnectionwiththeloan,disgorged;$403million,plusninepercentpre-judgmentinterest,disgorged;allloantransactioncosts, litigation costs (including attorney fees, adviser feesandexpertfees)anddiminutionofvalueinpropertyincurredbyborrowertobepaidbylender;alienona$207.3millionfederaltaxrefundavoidedandallfundspaidfromsuchtaxrefunddisgorgedwithninepercentinterest.

This laundry list of woes was the painful reality for thelenders in In re TOUSA, Inc. (the “TOUSA decision”). TheTOUSAdecisionisa182-pagerulingbytheU.S.BankruptcyCourtfortheSouthernDistrictofFlorida(the“Court”)findingthattheloansmadebythesecuredlendersinthatcasewereconstructivelyfraudulenttransfers.

Thisarticlewillprovideabriefsummaryoftherelevantfacts,the implications of the decision and the lessons to belearnedfromthecase.OfparticularnoteisthattheCourt(1)dismissed the savings clauses contained in the loandocumentsasunreasonableandunenforceabledevices;(2)foundthesolvencyopinionrelieduponbythelenderstobeineffective;and(3)aspartofitsremedy,orderedthelenderstopaytheborrowerforthediminutionofvalueinitspropertyfromthetimeofthegrantingofthelienstothedateofthedecisionoftheCourt.

BaCkgrounDTOUSA, Inc. and its subsidiaries were in the business ofdesigning, building and marketing detached single-familyresidences, town homes and condominiums. The caseinvolvedan“upstreamguarantee”bycertainsubsidiariesofTOUSA(the“ConveyingSubsidiaries”)pledgingtheirassetsas collateral to secure the obligations of TOUSA to repayroughly $500 million in first and second lien term loans(collectively, the “Term Loans”). The proceeds of the TermLoanswereusedtosettlelitigationagainstTOUSAandoneofits subsidiaries (“Homes LP”). That litigation arose from adefault on separate debt incurred to finance a failed jointventure enterprise. Notably, none of the ConveyingSubsidiaries was a party to the lawsuit brought by theentitiesthatfinancedthefailedjointventureenterprise(the“TranseasternLenders”)forwhichthesettlementfundswerebeing paid. However, the Conveying Subsidiaries granted

liens on the majority of their assets to secure the fundsborrowedtosettlethislitigation.TOUSA,HomesLPandtheConveyingSubsidiariesdeclaredbankruptcysixmonthsafterthe loans were made by the Term Loan lenders. TOUSA’sofficial committee of unsecured creditors, representingapproximately $1 billion in unsecured bond debt, broughtsuit to avoid theTerm Loans and theTranseastern Lenderssettlementasfraudulentconveyances.

FrauDuLenT ConVeyanCesSection548(a)(1)(B)oftheU.S.BankruptcyCodepermitstheavoidance of any transfer of interest in debtor property, orany obligation incurred by a debtor, that was made orincurredwithintwoyearsbeforethedateoffilingabankruptcypetitionifthedebtorvoluntarilyorinvoluntarilyreceivedlessthan reasonably equivalent value in exchange for suchtransferorobligationand(1)was insolventonthedatethetransferorobligationwasincurred,orbecameinsolventasaresult of such transfer or obligation; (2) was engaged in abusinessortransaction,orwasabouttoengageinabusinessor transaction, for which any property remaining isunreasonably small capital; or (3) intended to incur, orbelieved that the debtor would incur, debts that would bebeyondthedebtor’sabilitytopayassuchdebtsmatured.Noactualfraudorintenttodeceiveisrequired.

TheCourtreasonedthattheConveyingSubsidiariesdidnotreceivereasonablyequivalentvalueinexchangefortheTermLoans because they received neither direct nor indirectbenefitsfromtheTermLoans.Withrespecttodirectbenefits,theConveyingSubsidiarieswerenotpartiestothelitigationthatwasbeingsettled,andtheyreceivednoproceedsfromthe Term Loans, no debt relief and no tax benefits. Withrespect to indirect benefits, the Court stated that indirectbenefits are cognizable only if (1) the benefit is actuallyreceived by the individual subsidiary, (2) the benefits arelimitedtocognizable“value”and(3)thepropertyisreceivedby the subsidiary “in exchange for” the transfer obligation.BasedonthesecriteriatheCourtdismissedthedefendants’assertions that corporate office services, business“synergies”and“avoidingdefault”constitutedthecognizableindirectbenefitsofacommonbusinessenterprise.

Afteraverylengthyanalysis,theCourtalsodeterminedthateachConveyingSubsidiary(1)wasinsolventbothbeforeandafter the loan transaction—“[t]o decide whether a firm is

The TOUSA Decision: a Lender’s nightmare?By Marc Anthony Angelone

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rights; (6) a lock box or the triggering of use of a lock boxfeature; (7) the cure of legal, document or perfectiondeficiencies (such as ratification of the indebtedness orguaranties);(8)controloftheprojectrevenue(cashcollateral)through a cash management agreement; (9) a cash flowsweeptiedtoanapprovedbudget,controlledexpenditures,oraneworimprovedrevenuestream;(10)acapitalinfusion;(11)ratificationoftheloandocuments,borrowerobligationsandthepriorityofthelienofthemortgage;(12)waiverandreleaseofdefensesandcounterclaims;and(13)consenttoremedies such as a judgment of foreclosure, a guarantor’sconfession of judgment, a consent tovacate the automaticstayinbankruptcy,aconsensualreceivership,oraconsensualsealedbidorotherauctionofthemortgagedpropertyupontheoccurrenceofasubsequentmaterialdefault.

Theforegoingcategoriesofconcessionsandenhancementshave made the negotiation and implementation of aneffective, workable and fair forbearance agreement an artform.

essenTIaL ProVIsIons

The“stateoftheart”commercialrealestateloanforbearanceagreementshouldincludethefollowingessentialprovisions:

• acknowledgment of Indebtedness

Thelender’s“ticketforadmission”toitsgrantofforbearanceistheacknowledgmentbyborrowerandguarantor(ifany)oftheexistingdebt.Borrowerandguarantormustacknowledgeandagreethattheoutstandingprincipalbalanceofthenoteornotes,togetherwithallaccruedinterestthereon,legalfeesandallothersumsdueundertheloandocumentsareimmediatelydueandpayableinfullwithoutdefense,offset,claimorcounterclaimofanykind.

• ratification of Loan Documents

Thelenderwantstocureallconceivableloanordocumentdefects,suchasincompletesignaturesorfailurestoperfectitssecurityinterests.Thus,theborrowerandguarantorwillratify,confirmandacknowledgethevalidityandbindingnature,bothatthetimeofdeliveryandasoftheexecutionoftheforbearanceagreement,ofallloandocuments,asamended,modifiedorsupplemented.Theborrowerandguarantorwillacknowledgethatalloftheirfinancialobligationsaredulyandproperlysecuredbymortgagesandallothersecurityorcollateralinstrumentsforthefullextentthereof,withoutdefense,offsetorcounterclaim,

aswellasthepriorityofthelender’slienonthemortgagedproperty.Theywillalsoacknowledgethatdefaultshaveoccurred,thatthelenderreservesallofitslegalrightsandremedies,andthatthelenderhasnoobligationtotenderthetermsofforbearancesetforthintheagreement.

• Forbearance expiration Date

Theforbearanceisborneofaloandefaultthatismaterialenoughforthelendertohavetherighttopursueitsremedies.Intheforbearanceagreement,thelenderagreestoforbearfromtheexerciseofitsremediesuntilanegotiateddateiscertain.Thisprovisionalsoshouldprovidethatnothingpreventsthelenderfromexercisingitslegalremediesupontheoccurrenceofaneworsubsequentdefaultundertheforbearanceagreement.

• suspension of Payments—note rate—Pay rate

Akeyeconomiccomponentoftheforbearanceagreementisthemodificationorsuspension—forthetermoftheforbearance,orbeyond—ofthecontractualdebtserviceinstallmentpayments,tiedgenerallytocashflow,capitalimprovementsordeferredmaintenanceneeds,orthemarketplace.Oftenthelendersuspendsordeferstheprincipalamortizationorprincipalreductionpaymentdates.Theinterestratemaybemodifiedtoprovideimmediate“raterelief”andcashflow.

Thesavvylendergenerallysuspends(orreduces)themonthlyprincipalinstallmentpaymentsandmodifiesinterestintoa“noterate/payrate”modelbywhichinterestcontinuestoaccrueatthecontractrate(whichcouldbethedefaultrateundertheloandocuments),buttheborrowerpaysinterestatalesseror“pay”rate.Thedifferenceisaccruedandpaideitherattheforbearanceexpirationdateorotherdatecertainor,morecommonly,capitalizedandrepaidoverthebalanceoftheloanterm.Sometimestheinterestshortfallisforgivenoncetheborrowerhasperformeditsobligationsandrepaidtheindebtedness.Thisaccrual—especiallyiftheloanisrecoursetowell-capitalizedguarantors—functionsasadditionalleverageforthelenderandeconomicmotivationfortheborrowertoperform.

• additional Collateral or additional guaranties

Inanyworkout,thelenderislikelytorequestadditionalcollateraloradditionalguaranties.Collateralcouldconsistofinterestsinotherrealproperty,membership

NavigatiNg CoMMERCial loaN FoRBEaRaNCE, CONTINUED FROM PAGE 1



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CuRRENt tRENdS iN MultiFaMily HouSiNg FiNaNCE, CONTINUED FROM PAGE 2

Fha anD seCTIon 8 Historically, the most significant federal programs toencouragethedevelopmentofmultifamilyhousingwereFHAmortgageinsuranceprovidedbytheDepartmentofHousingand Urban Development (HUD) and project-based rentalassistancefromHUDunderitsSection8program.

Since the late 1980s, FHA’s subsidized housing focus hasbeen on retaining existing projects within the affordablehousingportfolio.UnderitsSection236decouplingprogram,HUD continues mortgage interest rate subsidies, in effectfollowing the refinancing of the original HUD-assistedmortgage, in exchange for extension of low-incomeaffordabilityrestrictions.UnderHUD’sSection8mark-up-to-market program, HUD increasesSection 8 contract rents tomarket levels to induce owners to stay in the Section 8program.

These federal initiatives often operate in conjunction withstateand localpreservationefforts.Asanexampleofwhatcan be accomplished when there is a strong publiccommitment to preservation, in mid-December 2009,Bingham representedStarrett City in Brooklyn, the nation’slargest federally assisted housing project, in a refinancingtransaction that involved a Section 236 decoupling, a newSection 8 mark-up-to-market contract and a long-termextensionofaffordabilityunder theNewYorkstateMitchellLamaprogram.

FHA financing provides construction/permanent 40-yearnonrecourse mortgages with low equity requirements,attractive debt-service coverage ratios (1.1 debt-servicecoverage (DSC) for new construction/substantialrehabilitation loans, soon to be increased to 1.15 DSC forLIHTC projects and 1.20 DSC for market-rate projects), andmortgage insurance premiums (MIP) that are quite low(currently,45basispointsperyearformostnewconstruction/substantialrehabilitationloans)comparedtonon-FHAcreditenhancement. While FHA does not permit variable ratemortgage debt, this limitation is not as significant at thecurrenttimeduetothehistoricallylowratesforfixed-interestdebt.

The volume of FHA new construction and substantialrehabilitation projects declined by more than 50 percentbetween 2003 and 2008.The recent unavailability of otherfinancing sources has resulted in increased FHA volume(except in high-cost areas such as New York, Washington,Boston,LosAngelesandSanFrancisco).Theverylowlevelsof FHA new construction and substantial rehabilitation

activity in these high-cost areas is almost certainly due tostatutory limitationsonmortgageamounts,whichhavenotbeen increased to compensate for the high developmentcosts in those areas. By contrast, as part of its stimuluslegislation Congress substantially increased single-familyFHAandFannieMae/FreddieMacmortgage limits to levelssufficienttomakethoseprogramsavailabletohomeowners,eveninrelativelywell-offneighborhoodsinhigh-costareas.

OnMarch16,2010,HUDreviseditsunderwritingpolicyandannouncedthatthetotallandvaluewillbeexcludedfromthecalculationofthestatutorymortgagelimitsforFHAmultifamilymortgageinsurance,thuspotentially resulting in largerFHAmortgage amounts especially in areas that have high landcosts. The exclusion of land value in the mortgage-limitcalculation announced by HUD, while a helpful step, willneedtobecoupledwithstatutorychanges inthemortgagelimitsinordertosubstantiallyincreasetheavailabilityofFHAfinancinginareaswithveryhighdevelopmentcosts.

OnSept.15,2009,theHouseofRepresentativespassedH.R.3527, the “FHA Multifamily Loan Limit Adjustment Act of2009,” sponsored by Rep. Anthony Weiner (D-NY), tosubstantiallyincreasemortgagelimitsforelevatorbuildingsandprojectsinhigh-costareas.Sen.CharlesSchumer(D-NY)recently introduced a parallel amendment to the financialregulatoryreformlegislation.Althoughtheamendmentwaswithdrawn,Sen.Schumerisreportedlyinterestedinfindinganotherlegislativevehiclefortheamendment.Theenactmentofsuchlegislation,coupledwithHUD’srecentlyannouncedpolicy change excluding the total land value from themortgage limit calculation, would greatly enhance theavailability of FHA financing for multifamily construction inhigh-costareas.

LoW-InCoMe housIng Tax CreDITsSinceitsenactmentaspartoftheTaxReformActof1986,theLIHTC has been the federal government’s primary tool toencourage the development of affordable multifamilyhousing, leading to the development of more than twomillion housing units. Most of the affordable projectsfinancedduringthepast20yearshaveutilizedtheLIHTCtoprovideadditionalequity.

Prior to the current downturn, about 40 percent of LIHTCinvestmentscamefrombanksandanother40percentcamefrom Fannie Mae and Freddie Mac. These institutions havereduced their investment inLIHTCprojectsas theirneed tooffset taxable income has declined. In certain areas,




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it.Inshort,thesubtenantisrelyingonthetenanttoperformits contractual obligations under the master lease. A non-performing or financially tenuous tenant can put the entiresubleaseatrisk.

Thetenantisthemiddlemaninasubleasetransaction.Thesubleasegivesthetenanttheopportunitytopassthroughtoasubtenantalloraportionofunwantedspaceandrelatedleaseexpenses.However, thetenantwillnotberelievedofitsleaseobligationsandwillremainliableforitsobligationsas tenant under the master lease, as though the subleasehadneverbeenexecuted.Thetenantmayberesponsibletothe landlord for the subtenant’s actions—even though thetenant may have little control over the subtenant. Forexample,asubtenant’sholdoverbeyondthesubleasetermcouldresultinthetenant’sresponsibilitytothelandlordforholdoverpaymentsunderthemasterlease,whichareoften1.5 to2 times rent.The landlord’sholdover remedyagainstthetenantmightapplytotheentireleasedpremisesevenifmostoftheleasedpremisesarevacatedbutasubtenantofasmallportionoftheleasedpremisesholdsover.Accordingly,in the sublease, a tenant needs to be careful to negotiateprotections in the event of subtenant breaches after givingdue consideration as to how those breaches could exposethetenanttoliabilityunderthemasterlease.

In addition, the tenant must perform as sublandlord to thesubtenant under the sublease and thus incurs additionalliabilitiestoathirdparty.Thetenantwouldbewell-advisednottoassumetheobligationsofthelandlordunderthelease(suchastheprovisionofbuildingservicesorrebuildinguponacasualty),whichareoutofitscontrol. Instead,thetenantshould simply agree to use reasonable efforts to enforcethoseprovisionsagainstthelandlord.

Forlandlordsinadownmarket,subleasesareoftenexercisesinminimizingrisk.Alandlordmightconsenttoasublease(oreven recognize a subtenant directly) if the tenant is infinancial difficulty and the subtenant is creditworthy. If thetenantdefaultsandthemasterleaseterminates,alandlordmightprefertorequirethesubtenanttocontinuetoperformandpayrentdirectlytothelandlordandnothavetheabilitytowalkfromitssubleaseobligations.Alandlordisgenerallylessinclinedtorecognizeasubtenantifithasastrongandcreditworthydirecttenant.

Thelandlord’srightsinrespectofaproposedsubleasewilldependonthenegotiatedsublettingprovisionsofthemasterlease.Becausethewrongsubtenantcanaffectthequalityortenantmixoftheentirebuilding,particularly inashoppingmallorotherretailspaceleasecontext,thelandlordusually

willhave limited the tenant’ssublease rights in themasterlease.Whetheralandlordhasapprovalrightsoveraproposedsublease(ormustexercisethoseapprovalrightsreasonably)will impact the negotiating posture of the landlord. At thebeginningofsubleasenegotiationsthetenantandsubtenantshouldhaveaclearunderstandingof thoseprovisionsandany conditions the landlord might impose. The tenant andsubtenant also need to evaluate whether the landlord hasanyrecapturerightsorrightstoanyexcesssubleaseprofits.In a down economy, sublease rent is generally unlikely toexceedthecorrespondingmasterleaserent(andthelandlordisusuallylessinclinedtorecapturespace),butitisprudenttoknowthelandlord’srightsupfront.

Subleases are often highly negotiated and address manyissuessimilartothoseindirectleases,buttheyalsoinvolvesomeuniqueissues.Oneofthecomplexitiesofthesubleaseisthatitaddressesonlyasubsetofrightsandresponsibilitiesfromthemasterlease.Thisisunlikeanassignment,whichisatransferoftheentireinterestofthetenantinitsleaseandpremises. Typically, the sublease will incorporate (byreference) the terms of the master lease as though thesubtenantwerethetenant,thetenantwerethelandlordandthesubleasedpremiseswerethepremises.Theinterplayofthe master lease and the sublease must be carefullyorchestrated to ensure the correct package of rights andobligationsisbeingpassedalongtothesubtenant,andthatthe tenant does not assume responsibilities outside of itscontrolbecauseit’snotthebuildingowner.

Subleases usually require the consent of the landlord. Tri-partynegotiationsamongthelandlord,tenantandsubtenantadd to the complexity and timeline of the subleasetransaction. A detailed landlord consent document is oftennegotiatedamongthe threeparties.Thisdocumentcreatescontractualprivitybetweenthelandlordandsubtenant,andit might create rights and obligations among the partiesbeyondthosesetforthintheleaseorsublease.Thelandlordconsentdocumentmightcontainprovisionsbeyondasimpleconsenttothesublease.Italsomightaddressothermattersfor which landlord’s consent is necessary such as thesubtenant’s alterations, the subtenant’s signage and thespecificuseofthepremisestobemadebythesubtenant.

Sinceanyterminationofthemasterleaseusuallywipesoutthesublease,asubtenantthathassomenegotiatingleveragemay want to pursue a recognition agreement with thelandlord whereby the landlord will agree to recognize thesublease and the subtenant’s rights to continue to occupy



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subject the bank to liability if in fact the tenant is not indefault;thebankisentitledtorelyonthecertificationbythelandlord, and the draw will be honored. Rather, therequirement provides a basis for a claim by the tenantagainst the landlord, not against the issuing bank, if thetenant disagrees and takes the position that there was notenantdefault.

TheHoosierdecisioncastsdoubtonthefundamentalpremiseastotheindependenceoftheCDSorletterofcreditstructure.InfindingHoosierEnergytohavestandingtonotonlyobjectto,butalsoforestall,thepaymentobligationofAmbac,thecourtopinedtheunderlyingtransactionhad“threecorners.”While the structure involved “nominally independentcontracts,” the court affirmed Hoosier Energy’s standing toenjoin Ambac’s payment because “it would press legalfictionbeyondthebreakingpointtosaythattheindependentenforceabilityofeachparty’spromises to theothersmeantthatanyofthethreelackedstandingtocomplainaboutactsoftheothersthatwillproduceanimmediateconcreteinjury.”

MIssIon “IMPossIBLe”The court next turned to the potential merits of HoosierEnergy’sclaims.Itrejectedthelowercourt’sfirstfindingthattheleveragedleasetransactionitselfwasinvalid.Thecourtdid,however,grantpartialrelieftoHoosierEnergy,upholdingthe lower court’s finding that “temporary commercialimpracticability”couldpotentiallypermitHoosierEnergy todeferreplacingAmbacwhiletheeconomyimproved.

HoosierEnergyclaimedithadadutyundertheCDStofindahigher-rated surety to replace Ambac, while the 2008economic crisis made it commercially infeasible to find areplacement. Hoosier Energy presented a relatively novelargument in American courts, namely that the crash of thecreditmarketsequated toanunforeseenevent thatshouldtemporarily relieve Hoosier Energy of its obligations undertheCDS.JohnHancockarguedthatthecontingenciesunderthe CDS were designed to protect against the financialdistressofbothHoosierEnergyandAmbac,andthatwhenthis event materialized in the form of the lowered creditratingofAmbac,itwasentitledtothebenefitofthedrawithad negotiated. John Hancock characterized Hoosier ashavinganoption:eitheritcouldfindareplacementsurety,oritcouldpayAmbac.

In Hoosier, the court noted that “temporary commercialimpracticability”isnotadoctrinerecognizedunderNewYorklaw,whichwasappliedinthecase.Insteadthecourtusedarelateddoctrineof“impossibility.”UnderNewYorklaw,the

defense of impossibility only works “if some unexpectedeventupsetsallparties’expectations; it isnotenoughthattheunexpectedeventputsonesideinabind.”Therefore,thecourtreasonedthatifHoosierEnergyinfacthadanoptiontofindareplacementsuretyorpayAmbacontheswapfeature,thenitwouldnotbeentitledtorelief.Ontheotherhand,ifHoosierEnergycouldprovethat(1)itinfacthadadutytofinda replacementsurety,asopposed to just theoption topaysumsowedtoAmbacasJohnHancockclaimed,and(2)asaresultofthefinancialcrisis,itwasimpossibletofindsuchareplacement, then Hoosier Energy might win on the meritsand have a defense to the payment by Ambac to JohnHancock. On this basis, the court upheld the preliminaryinjunction to Ambac’s payment to John Hancock, stating,“[I]fnoonecouldhaveforeseentheextentofthecreditcrunchof2008—andifitreallymadeperformanceimpossible…thenthesortofargumentHoosierEnergymakescouldsatisfytherequirementsof[theimpossibilitydefense].”

enForCeaBILITy oF LeTTers oF CreDIT aT rIsk?ThecourtdidgrantsignificantpartialrelieftoJohnHancock.While it upheld the lower court’s grant of a temporaryinjunction,italsoconcludedthatfailurebyHoosierEnergytofind a replacement for Ambac by some certain period (thecourtchosetheendof2009)wouldentitleJohnHancocktorealizeonitssecurity.Subsequenttotheruling,theinjunctionwas dismissed altogether. While significant in the factualcontext of the case, this relief provides little comfort tolenders and other beneficiaries looking for certainty in thefront-end enforcement of their security arrangements withborrowersandotherobligors.

The court’s finding that Hoosier Energy had standing toenjointhepaymentobligationofitssuretytothebeneficiaryunder the CDS runs counter to the de rigueur independenttreatment a CDS or, by analogy, a letter of credit, is giveneverydaybypartieswhodealregularlywiththeir issuance.Perhaps more troubling is the court’s determination thatdisruptions in commercial markets as a whole could, incertain circumstances, give rise to a defense to paymentunderaCDSand,presumably,aletterofcredit.



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insolvent…acourtshouldask:Whatwouldabuyerbewillingtopayforthedebtor’sentirepackageofassetsandliabilities.If the price is positive, the firm is solvent; if negative,insolvent”; (2) had unreasonably small capital after thetransaction—“[the] standard asks whether a company hassufficient capital to support operations in the event thatperformance is below expectations…[b]alance sheetinsolvencyisalsoproofthattheConveyingSubsidiarieshadunreasonably small capital”; and (3) was unable to pay itsdebts as they became due—they actually were unable tomeettheirfinancialobligationsafterthetransaction.

saVIngs CLauses InVaLIDThe loan agreements for each of theTerm Loans containedsavings clauses that the Court found to be ineffective. Thesavingsclausesinquestionpurportedtoamendtheliabilitiesandlienstothedegreenecessarytomakethem“enforceableto the maximum extent” permitted by law. The Courtdeterminedthatthoseclauseswereunenforceable,stating,“[t]here is something inherently distasteful about reallyclever lawyers overreaching…[s]ome problems cannot bedraftedaround….[Thesavingsclauses]are,inshort,entirelytoocutetobeenforced.”TheCourtstatedthatbecausetheConveying Subsidiaries were insolvent even before thetransaction and received no value, the liabilities and lienscouldnotbeenforcedatall.Anyliabilitiesimposedandanyliens securing those liabilities were avoidable. The Courtwenton tosay thateven if theConveyingSubsidiarieshadbecomeinsolventafterthetransaction,thesavingsclauseswould be unenforceable under 11 U.S.C. 541(c)(1)(B), whichsays that an interest of the debtor in property becomespropertyoftheestate,notwithstandingany“provisioninanagreement”thatis“conditionedontheinsolvencyorfinancialcondition of the debtor” that “affects or gives an option toeffectaforfeiture,modificationorterminationofthedebtor’sinterest in property.” The Court held that these savingsclauseswerejustthetypeofprovisionsthattheBankruptcyCodeprotectsagainst.Iftheclausesweregiveneffect,theywould defeat the debtors’ cause of action for a fraudulenttransfer“andacauseofactionisunquestionablypropertyofthe debtor.” The Court believed that these savings clauseswere unenforceable provisions that attempted to contractaroundthecoreprovisionsoftheBankruptcyCodeandwereinvalid.Finally,animportantfactorintheCourt’sdecisiontoreject these clauses was that both Term Loans containedidentical savings clauses, which stated that the securedobligationstobepreservedcouldnotbedeterminedundereither loan until the liabilities had been determined under

the other loan. The Court found that this circular cross-reference scheme made the liabilities inherentlyindeterminableandthereforeimpossibletoenforce.

soLVenCy oPInIon unreLIaBLeAspartoftheirunderwritingprocess,theTermLoanlendersrequiredasolvencyopinion.However, theCourt foundthatthesolvencyopinionlackedcredibilityandthatthelendersshouldnothaverelieduponitbecause(1)mostimportantly,the fee to be paid to the firm rendering the opinion wascontingent on the conclusion—if the opinion showedsolvency,thefeewas$2million;ifinsolvency,thefirmwouldonlybepaidforitstimeandreimbursableexpenses;(2)thefirmlackedrecentexperienceinprovidingsuchopinions—ithad not prepared one in more than two years; (3) theborrower did not consider any other firm to provide theopinion; (4) the opinion was delivered in a suspiciouslyhurriedmanner—thefirmwasretainedonJune15,informedTOUSAthattheresultwouldbefavorableonJune20andadraftsolvencyopinionwasincirculationbyJune27;and(5)theopinionreliedonprojectionsprovidedentirelybyTOUSA’smanagement and was not a “bottoms up” analysis. Theengagement letterstated that the firm“wouldnot takeanyactiontoverifyaccuracyorcompleteness”oftheinformationprovided, the firm did not ask management how good theprojections had been historically, the information was notprovidedbyoperational-levelmanagementand,eventhoughTOUSAacknowledgedthatduetothedeclineintheeconomyitsprojectionswereoutdatedandoverlyoptimistic,itneverrevised itsassumptions.TheCourtconcluded thatbecausethefirmblindlyrelieduponTOUSA’sunsupportablefinancialprojections,itsopinionthatTOUSAwassolventasofJuly31,2007,wasnotcredible.

DIMInuTIon oF VaLue reCoVeraBLeIn this case the timing is particularly interesting. Thetransaction was concluded in July 2007—just ahead of themajoreventsoftherecentfinancialmeltdown.Noonecouldhaveclearly foreseenthe lengthandextentof theresultingeconomiccollapseat that time.When theTermLoansweremade, the value of the Conveying Subsidiaries’ assetsappeared to be greater than the obligations secured.However, by the time of the TOUSA decision, the value ofthose assets had greatly decreased below the value of theloans. The Court, in an effort “to restore the estate to thefinancialconditionthatwouldhaveexistedhadthetransfernever occurred,” employed its broad equitable powers to


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interests,marketablesecurities,taxrefunds,litigationrecoveriesandcondemnationawards,amongotherassets.Lendersalsowillseekneworadditionalrecourseagainsttheborrower’sprincipalsorinvestorsviaaneworamplifiedguaranty.

• Discounted repayment option

Borrowersneedtore-createequitylostduringthisdowncycle.Dependingontheparametersoftheforbearanceagreement,theborrowerutilizesthisstageoftheworkouttobringtothelenderitsprimaryobjective—paymentonadatecertain.Thisobjectivecomesataprice:theloandiscount.Hypothetically,a$50millionloansecuredbya$75millionassetmaynowbesecuredbya$40millionasset.Inthediscountedrepaymentscenario,theborrowerofferstorepaytheloanatadiscount,say,$38million—retaining$2millionofequityuponasale.Thebenefittothelenderistherealizationof$38milliononafixeddate,achievedinanopenandspirited(albeitsoft)marketplace,whichispreferabletothedelay,uncertaintyandriskofforeclosureoradeedinlieuofforeclosure.Ifthelenderdoesnotreceivethediscountedrepaymentamountbythediscountedrepaymentdeadline,oriftheborrowerorguarantorotherwisedefault,theagreementwillprovidethatthelender’sobligationtoacceptthediscountedrepaymentamountinsatisfactionoftheindebtednessiswithdrawn,nullandvoid,andofnofurtherforceoreffect.

• Waiver of Defenses and general release

Theprudentlenderwillnotmakeanysignificanteconomicconcessionsorgrantmeaningfulforbearanceunlessthelenderisassuredofacleanslatewhentheforbearanceperiodhasexpired.Theborrower—lookingforthelender’sforbearance—shouldacquiesce.Theforbearanceagreementshouldprovidethattheborrowerandguarantorswaiveandreleasealldefensestorepaymentoftheindebtednessandunconditionallyandirrevocablyrelease,dischargeandacquitthelenderand

personsandentitiesaffiliatedtherewithfromandagainstallclaims,causesofaction,liabilitiesordamages,knownorunknown,relatingtotheloandocuments,theobligationsevidencedorsecuredthereby,themortgagedproperty,thedealingsbetweentheparties,oranymattersrelatingthereto.

• Consent to remedies

Thesuccessfulforbearanceagreementshouldcontaintheborrower’sandguarantor’sconsenttoremedies.Theremediesincludeacceleration;receivership;consenttoforeclosurejudgments;confessionsofjudgment;exceptionstoNewYork’selectionofremediesrules;enforceabilityof“badboy”guaranties;andtheconsenttovacatetheautomaticstayinbankruptcy.

Dependingonthecircumstances,theborrowercould,intheforbearance agreement itself, accept service of process,waive defenses to the complaint, consent to lender’scomputationoftheindebtedness,consenttotheappointmentofareceiverorthird-partypropertymanager,consenttosaleof the mortgaged property at auction and the turnover ofpossession to the purchaser, and agree not to seek toadjournorhindertheentryoftheforeclosurejudgmentortheconduct of the foreclosure sale or any other liquidation ofcollateral. The borrower would also acknowledge that itsconsent to these remedies is a material inducement to thelender for its grant of forbearance privileges and othereconomic concessions, on which the lender relies to itsdetriment.

Inanyloanworkout,thepartiesneedtoreconcile,amicably,theircontraryobjectives(theborrowerseekstime,equityintheprojectandreleaseofpersonalliability;thelenderseekspayment, finality and predictability). The forbearanceagreement is an important, sometimes dispositive, step inthis process. The essential provisions outlined above arevaluabletools toconsiderasthepartiesstrivetomakethedistressedloanworkoutwork.



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Community Reinvestment Act (CRA)-motivated banks areonce again participating in the LIHTC program and areprovidingfavorablepricing.

Due to the withdrawal of major banks, Fannie Mae andFreddieMac fromtheLIHTCmarket,capitalgenerated fromLIHTCinvestmentshasdroppedbyalmost20percent.

In 2009 Congress responded to the collapse of the LIHTCmarket by enacting two provisions as part of the AmericanRecoveryandReinvestmentAct(ARRA):

• UndertheTaxCreditAssistanceProgram(TCAP),HUDwasauthorizedtoprovide$2.25billioninHOMEInvestmentPartnershipfundstofillfinancinggapsinprojectswithLIHTCallocations.

• UndertheTaxCreditExchangeProgram,statesmayexchangeaportionoftheir2009LIHTCallocationforcashgrantsatanexchangerateof85centsonthedollar,whichstatesmaythenallocatetoaffordablehousingprojects.ContinuedsoftnessintheLIHTCinvestormarketnationallyhasledtocallsforlegislationtoextendtheexchangeprogramandmodifytheprogramtobroadentheLIHTCinvestorbase.

Whilethisprogramhasbeenanimportantstopgapmeasure,thereisconcernintheindustrythatitcouldbethefirststageinashiftbyCongressawayfromsupportfortheLIHTCprograminfavorofagrantprogram,whichwouldbesubjecttotheuncertaintiesofannualappropriationsandotherissues.

ConCLusIonTheavailabilityoffinancingisthemostcriticalissuecurrentlyfacingmultifamilyhousing.Becauseconventionalfinancingwasunavailable(andnowisbeginningtobeavailableatlowLTVs), FHA mortgage insurance and other governmentalprograms are critically needed. On the federal level, whileFannieMaeandFreddieMaccontinuetoplayavitalroleinproviding multifamily financing, the more stringentunderwritingstandards,significantlyhigher feesand rates,more restrictive terms under current programs, andunwillingness to take construction and rent-up-risk, makethe availability of FHA multifamily financing for high-costarea projects a critical missing element. FHA financing willcontinue to be unavailable for projects in high-cost areasunless FHA multifamily mortgage limits for these areas arefurtherincreased.

On the equity side, proposed legislation to broaden andstrengthen the LIHTC program would help ensure pricingfirmnessforLIHTCs.

Despitetheslowdown,market-rateandaffordablemultifamilyhousing has been less risky than other commercial realestate. If interest rates remaincomparatively lowandrentscontinue to stabilize or increase, the current market maypresentattractiveopportunitiesforpurchasersofmultifamilyprojects.

CuRRENt tRENdS iN MultiFaMily HouSiNg FiNaNCE, CONTINUED FROM PAGE 7



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order the lenders to also reimburse to the ConveyingSubsidiariesthedifferenceinthevalueoftheirassetsfromthetimeofthegrantingoftheliensandthetimethedecisionwas delivered (Oct. 13, 2009). This diminution in valueamount(whichhadnotyetbeencalculatedatthetimeoftheruling) will undoubtedly result in a significant additionalliability for the lenders that theyhadnotanticipatedat thetimeofloanorigination.

suMMary anD LessonsWhile the TOUSA decision highlights the risks of using theassetsofsubsidiariestosecureparent-leveldebt,mostofitslessonsarenotnew.Nevertheless,theselessonsneedtobelearned again with each turn of the business cycle.Notwithstanding the result of pending appeals, lenderswoulddowelltokeepthefollowinginmind:

• Becautiousofupstreamguarantees,mortgagesandothersecurityinterestsandmakesurethatatleastsomevalueisgiventothesecurity-grantingsubsidiaryentities.

• Conductindependentfinancialanalysisofeachindividualdebtorandsubsidiaryguarantor(ratherthanonaconsolidatedor“commonenterprise”basis).

• Conductcarefulduediligenceandmakesureyouareawareofallmarketconditionsandallpublicfilingsandnoticesrelatingtoeachdebtor.

• Donotrelyonsavingsclauses.

• Makesuresolvencyopinionsarenotcontingencybasedand,ifpossible,makesuretheunderlyinginformationusedtomakethedeterminationoftheopinionisindependentlyobtainedandexamined.If,practically,alendermustrelyoninformationprovidedbythedebtor,thelendermustquestionallassumptionsmadebythedebtorandthevalidityoftheinformationprovided.Also,thelendermustmakesureithasthemostup-to-dateandaccuratefinancialinformationavailable.

the premises if the master lease terminates. Often thelandlord is only willing to “recognize” the subtenant in theeventofaterminationofthemasterleaseifitissatisfiedwiththefinancialconditionandcreditworthinessofthesubtenant,andif thesubtenantcommitstopayrenttothe landlordatthe rate set forth in the direct lease (which is often higherthan the sublease rent) and be bound by all of the directleaseterms.

Because a sublease transaction involves three differentparties—the landlord, tenant and subtenant—it can oftenhave greater complexities than a direct lease, but it alsoprovides opportunities for these parties to mitigate risk orobtainbargainterms,especiallyinachallengingcommercialrealestatemarket.

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