The uncertain economic climate and the questionable financial status of many banking and other lending institutions (collectively, “Lenders”) should be of great concern for real estate Borrowers, particularly Borrowers having real estate loans (“Loans”) that are partially funded or that are coming due within the next year. Borrowers should be prepared for the possibility that some Lenders (either a lead lender or a co-lender): (i) will fail and be taken over by the FDIC or another Lender, (ii) will refuse (or be unable) to fund and/or to extend the term of a Loan, and/or (iii) will act in a manner which is (from a Borrower’s viewpoint) illogical or not commercially reasonable. Any of such actions could prove to be disastrous to a Borrower.

Set forth below are various potential issues a Borrower may face. A Borrower should be proactive in analyzing and understanding the possible exposures of the various potential issues.

POTENTIAL ISSUES

PARTIALLY FUNDED LOANS

As to projects with partially funded construction or other Loans, the failure of one or more of the Lenders could result in one or all of the Lenders refusing to continue to fund the Loan. Although there may be very little that the Borrower can do to prevent this scenario, the Borrower should at least analyze the likelihood of this occurring and any possible solutions.

FULLY FUNDED LOANS NOT MATURING

As to each fully funded Loan not maturing within the next year, the Borrower’s exposure is very limited and there is very little that a failed Lender (or the FDIC) can do to adversely affect the Borrower so long as the Borrower keeps the Loan current and is not in default. In this regard, the Borrower should pay particular attention to its compliance with all covenants (particularly financial covenants) in order to avoid triggering a default.

LOANS COMING DUE

As to each partially funded or fully funded Loan maturing within the next year, the Borrower’s exposure may be very significant.

• If there are built-in extension rights, the conditions to the extension should be closely examined and care be taken to fully comply with each extension condition. In this situation, the Borrower should assume that the Lender may be looking for evidence of a Borrower’s non-compliance in order to avoid its obligation to extend.
• If there are no built-in extension rights, the Borrower should immediately try to ascertain the willingness of its Lender to extend and to explore alternatives. In this situation, the Borrower should assume (i) that its Lender is unwilling to extend, in which event the Borrower will be forced to refinance the Loan with another lender, or (ii) if willing to extend, its Lender may charge significant fees, increase the interest rate significantly, and/or require a significant principal payment or additional collateral in order to rebalance the Loan.

In this current lending climate, it should be assumed that refinancing a Loan with another lender will present a significant challenge. Even a Borrower with a long standing relationship with its current Lender should not assume that such Lender will want to be (or be able to be) accomodating. Accordingly a Borrower should give itself adequate lead time to explore other refinancing opportunities.

OTHER

• Guaranties. The financial covenants in all guaranties should be closely examined for compliance. In addition, as to limited Guaranties, compliance with the “non-recourse carve outs” should be closely examined.
• Letters of Credit & Interest Rate Protection Agreements. As to each Loan, the financial viability of (a) each Lender who has issued each letter of credit (whether a tenant letter of credit issued to the Borrower or a letter of credit issued on behalf of the Borrower), and (b) each Lender who has entered into an interest rate protection agreement (e.g. a “swap”, a “cap”, a “collar”, etc.) should be analyzed. In some instances, there may be little that can be done about a potential problem, but it is clearly better to be aware of the potential issues the Borrower may face.

RECOMMENDATIONS

LOAN REVIEW

As to each Loan, it is recommended that the Borrower review each Loan document in detail, assemble the following information and, once assembled, analyze the potential ramifications of each issue:

• Original principal amount of Loan;
• Date of original Loan;
• Name of the Lender and each colender (if any);
• Maturity date of the Loan and list of any extension options;
• List of all conditions to extending the term of the Loan;
• Description of the project;
• Description of all collateral securing the Loan;
• Outstanding principal balance and any balance remaining to be advanced;
• Anticipated timeline as to when each partially funded Loan will be fully drawn down;
• Interest rate;
• A listing of any known defaults, including technical reporting deadline breaches;
• A listing of any cross-collateralization and cross-default issues;
• An analysis of compliance with all financial covenants and all other significant covenants (e.g. insurance, payment of real estate taxes, mechanics liens, etc.)
• An analysis of compliance with all financial covenants and all other significant covenants (including “nonrecourse carve-outs”) in each Guaranty; and
• Any other potentially important issues.

ACTIONS

As to each loan that is maturing or with respect to which there are financial covenant defaults, other defaults or other potential issues (either existing or likely to occur in the future), the following actions are strongly recommended:

• that as to each potential issue, the Borrower develop alternative courses of action which will give the Borrower, if and when any of such issues arise, the ability to act quickly, which ability may mean the difference between success and failure; and
• that any Borrower facing any of these potential issues, consider meeting with its Lender as soon as possible. Many Lenders understand that refinancing may be impossible, and, in order to avoid additional problems, may be willing to extend or restructure now. Waiting until a default exists may be too late.