Live Blog from TREP (Part 2)

By Ken Ashley

WASHINGTON, D.C. (May 20, 2010)

Continuation of Live Blog from TREP (Tenant Representative) conference.

Background: This is a conference of some of the highest producing brokers with Cushman & Wakefield in the US. The conference consists of 65 brokers from the Firm and senior C&W Management.

Here are more highlights heard during the first day of the conference:

Representing Tenants in the Foreclosure Wave

Surfing Debt?

Patrick Connell, CW Capital discussing the receivers role (receivership 101):

  • A receiver is an  independent fiduciary represents the court not the owner or lender.
  • The receiver has 3 years after foreclosure to position the asset but this can be extended.
  • Agreements for receivership can be challenging and sometimes can take up to 9 months to negotiate.
  • Receivers put in new accounting systems and scrub the financials. They notify the tenants and actively manage the asset. When ready, they get the asset to market.
  • Receivership is an action normally take by the lender and the receiver functions as a powerful asset manager. This role also includes interaction with the court which adds complexity. Receivers spend ALOT of time in Court.
  • It there is a good transaction for the asset there is a way to get it done. Tenants likely will not have direct access to special servicers for liability reasons.
  • Future of the special servicing business: CW Capital 1 year ago 7.5 Billion, today 17.5 Billion. “We are in the third inning of an extra innings ball game.”
  • Know that there is a process here – it simply takes time.

Doug Olson, Monument Realty, discussing the marketing of distressed assets:

  • Monument Realty is a local developer. When Lehman Brothers went belly up, they dragged 27 of Monument’s projects into bankruptcy (“BK”).
  • Doug says he is here because of his real life experience with BK.
  • All of the assets Lehman assets were ground up development and were subject to a construction loan funding TI and commissions. Question to ask: “What is the lenders obligation to fund TI’s and commissions?”
  • Ask to see the leasing guidelines attached to the loan although admittedly hard to get.
  • Building value is torpedoed. Many times the sponsor hangs on for pride and fees.
  • Balance sheet notes are not trading despite the cocktail party chatter.
  • In the end, the lender wants to do the deal so keep pressing. This is an exercise in truthfulness.
  • Go pull the deed of trust on a candidate building and try and determine what the debt is. Make some assumptions based on the market and you can calculate a potential NOI.
  • Mez debt: Determine who the mez lender is because there are lots of companies that aren’t really in the business of lending. Must determine their intent, as they can become predatory and own the real estate.
  • Reputation of sponsors is important to them. If they are in the local market, and they tell you they will do something and don’t then they know they know that tenant reps will talk. Also impacts the building on the same level. Bad rap, no deals.
  • There is so much debt coming due, that you really need to try and find out when debt on a specific building is expiring.

Robert Weinstock, Pillsbury Winthrop, discussing tenants rights and obligations:

  • We’ve always had to worry about landlord instability and while issues are more acute in the current environment, they aren’t new.
  • Key issues: make sure tenant gets concession package and get the broker paid (Ed note: Thanks!)
  • Lease is both a contract and an interest in land. It has priority over some rights, but subordinate to others. The mortgage is most likely in priority to the lease because it was likely recorded before the lease.
  • SNDA is the way to address the subordination of tenant rights.
  • Tenant brokers should ask “where’s the money?” In other words, where is the cash coming from to fund TI and commissions.
  • Ask landlord to escrow it’s portion of the funding, but this is not a perfect remedy. In BK the funds can be swept up. Some tenants try to get a security interest in the escrow, but most lenders wont agree.
  • One can also contract with the landlord to do the work and provide for a termination option if the landlord doesn’t deliver.
  • Very few BK’s by commercial landlords in part because many buildings are single purpose entities and the BK doesn’t accomplish much.
  • A foreclosure is where you have secured debt and the holder of the mortgage or deed of trust has right to take title to the real estate. This is a sale of the asset.
  • In a receivership, the lender is not taking title.
  • A bankruptcy judge and code trumps just about everything, no matter what the lease says.
  • <Comments from Lou Christopher> Offset is not acceptable because our clients are not the bank. We require SNDA (not best efforts but the document with rep that future SNDA’s will be substantially similar). Ask for a  letter from lender saying they have the funds, ask who your principals are, and ask the landlord to confirm who their lender is. The basic premise is that a lender will not commit fraud in a letter representing the cash situation.
  • Consider a lease deal like a building purchase deal. You must complete due diligence.


One response to “Live Blog from TREP (Part 2)

  1. Frank Farrington

    Very interesting stuff! The comments regarding the lease from Mr. Weinstock are very insightful.

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