The Fall 2009 issue of REsource: A Goodwin Procter Publication for the Real Estate Industry includes an article by William E. Stern, a partner in Goodwin Procter’s Banking Practice, that discusses the potential impact on real estate investors of a Treasury legislative proposal that could potentially subject a broad range of organizations to regulation under the Bank Holding Company Act.

The FRB, FDIC, OCC, OTS, NCUA and the Federal Financial Institutions Examination Council State Liaison Committee (collectively, the “Bank Regulators”) jointly issued guidelines on commercial real estate workouts entitled “Policy Statement on Prudent Commercial Real Estate Loan Workouts” (the “Policy Statement”).  The Policy Statement updates and replaces the Bank Regulators’ existing guidelines on this topic and provides guidance for financial institutions and bank examiners who are addressing issues concerning commercial real estate (“CRE”) loan borrowers who are “experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties.”  The Policy Statement is designed to provide illustrations of sound risk management practices for CRE loan workouts.

The Bank Regulators recognize that in these difficult economic times, it is often preferable for financial institutions to restructure troubled CRE loans rather than to foreclose on the borrower.  The Policy Statement declares that banks that “implement prudent loan workout arrangements after performing comprehensive reviews of borrowers’ financial condition will not be subject to criticism for engaging in these efforts even if the restructured loans have weaknesses that result in adverse credit classifications.”  Moreover, performing loans made to creditworthy borrowers will not be downgraded simply because of a decline in the value of the underlying collateral.  In an extensive attachment to the Policy Statement, the Bank Regulators provide detailed examples of how the guidance should be applied to CRE workouts.

The OCC issued Interpretive Letter #1118 (“Letter #1118”), permitting a national bank (the “Bank”) to exchange real property acquired for a debt previously contracted (“DPC”) for an interest in an entity that would dispose of the real property.  The Bank had purchased participations secured by townhouse units in a townhouse apartment complex, and subsequently acquired an interest in the units (the “DPC Interests”) when the borrower defaulted.  The Bank and several other financial institutions with fractional interests in townhouse units at the complex decided to contribute their DPC Interests to an LLC (“LLC”) to manage and dispose of the real estate.  In this case, the Bank contended that by exchanging the DPC Interest for an interest in the LLC, which would wholly own the property interests making up the entire townhouse complex, it would be better able to recover its loan loss and to dispose of the property.  Furthermore, the LLC would operate and maintain the complex as a whole, rather than each individual bank’s bearing responsibility to operate and maintain its individual units in the townhouse complex, providing each of the banks with cost savings through efficiencies.  The OCC concluded that the Bank has authority under 12 U.S.C. §§ 24(Seventh) and 29 to engage in this exchange. [Read more →]

The Treasury Department has released further guidance with respect to the PPIP Legacy Securities Program, as set forth in a press release today (http://www.treas.gov/press/releases/tg82.htm). Treasury has extended the deadline for Fund Manager applications to April 24, 2009, and has made a few clarifications to (a) the interaction between TALF and the PPIP, (b) proposals to encourage participation by small, minority-, women- and veteran-owned businesses, and (c) the role of Treasury debt financing. I also note that the additional FAQ document, which is hyperlinked into the Press Release, contains the following further comment as to PPIP warrants:

What are the terms of the Treasury warrants in a Legacy Securities PPIF?
The terms and amounts of warrants will be determined in part based on the amount of Treasury Debt Financing taken and will be evaluated on a case-by-case basis.

Goodwin Procter’s Real Estate, REITs & RE Capital Markets Group issued a Client Advisory on opportunities for real estate funds in the federal Public-Private Investment Program. The Client Advisory is available on the Goodwin Procter website at http://www.goodwinprocter.com/~/media/EEA83A3624EF49548FD5BE86240DBBD7.ashx.

The March 3, 2009 Alert, Buyer Beware: Risks and Considerations in Purchasing Residential Mortgage Loans, discussed the legal risks and considerations associated with purchasing residential mortgage loans. This Article is intended to complement that discussion and focuses specifically on documentation risks in purchasing residential mortgage loans. [Read more →]

In recent posts, we addressed ways in which U.S. REITs and other public real estate companies can preserve capital through the use of cash/stock dividends and raise equity capital through at the market offerings (see, Goodwin Procter REIT Alerts “Cash Preservation Strategies for REITs” and “At the Market Offerings: Raising Equity Capital in Volatile Markets,” and BNA International’s “Cash Conservation Strategies for REITs“). While these strategies can be successful in strengthening balance sheets on a small scale and conserving capital, the purpose of this alert is to discuss more meaningful ways to normalize a company’s debt-to-total-capitalization ratio and to position a company for upcoming debt maturities by raising significant amounts of common equity capital (as opposed to preferred stock issuances, asset sales or joint ventures). For more information click here.

In Goodwin Procter’s November 2008 Real Estate Capital Markets Advisor, we presented thoughts on the then current economic environment relating to the commercial real estate industry, focusing principally on mortgage debt. In particular, we summarized the state of the CMBS market, outlining (i) the volume of scheduled maturities over the near term; (ii) the relatively modest delinquency rate on CMBS loans at that time; and (iii) the U.S. Treasury’s then stated intention to use the Emergency Economic Stabilization Act of 2008 to provide capital infusions into the financial system and not to purchase troubled debt. We also provided input on recent changes in the REMIC provisions relating to RMBS pools, and how similar changes could benefit the CMBS market. For more information click here.

This Goodwin Procter Client Alert discusses the issues surrounding firms – ranging from American Express to Goldman Sachs to Merrill Lynch – which have either chosen to become bank holding companies (”BHCs”) or have become subsidiaries of BHCs. These choices typically have been dictated by the benefits of BHC status, including opportunities to participate in the U.S. Treasury Department’s Troubled Asset Relief Program, greater access to the Federal Reserve’s various funding and liquidity sources, and market perceptions regarding stability in this challenging economic environment. These benefits, however, are coupled with costs and restrictions. Chief among them, banking laws, in particular the federal Bank Holding Company Act (”BHC Act”), restrict the ability of BHCs and their affiliates to engage in non-banking activities (”activities restrictions”) and acquire and hold non-banking assets and interests in companies engaged in non-banking activities (”investment restrictions”). A copy of the Client Alert is available here.

Like other parts of the economy outside the immediate context of the banking and financial system, the commercial real estate industry so far has felt the impact of current economic woes principally in the form of dramatically tightened credit markets. But worse is expected as rents fall and business failures increase in the current recession. Here are some thoughts on the current environment and what the future may hold, focusing principally on mortgage debt. [Read more →]

Like other parts of the economy outside the immediate context of the banking and financial system, the commercial real estate industry so far has felt the impact of current economic woes principally in the form of dramatically tightened credit markets. But worse is expected as rents fall and business failures increase in the current recession. Here are some thoughts on the current environment and what the future may hold, focusing principally on mortgage debt. [Read more →]