It’s Time to Fix Securitization: Are We Dinosaurs Staring Into the Tar Pit?

In order to avoid burying the lead, let me tell you where I’m going here.  The CRE securitization business is in trouble.  We need to throw out what biologists call the punctuated equilibrium, where once a system initially stabilizes, it thereafter changes little and resists radical change.  Elsewise, our business is at very material risk of irrelevance.

But to give you some time to mull all that over, let me set the table first.  I’ve been worried…

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The Calamity of the Weaponized Narrative

Tim Sloan resigned as the CEO of Wells Fargo a few months ago.  I had briefly worked with Tim and much admired him so, on a personal level, this was sad.  Now, Mr. Sloan’s resignation might have been a compelling and obvious move in any crisis consultant’s playbook, so I get that – but – oh, the vilification!

This commentary is about the ease with which we now embrace vilification and the substitution of ad hominem attacks for policy discussion about ideas and about the danger this poses to capital market participants. Continue Reading

CREFC June 2019

The annual June CREFC conference at the Marriott Marquis in New York City was slightly less well attended than Miami (well, no duh!), but low conference attendance and stormy weather didn’t stop over 400 people from attending Dechert’s annual party at the Knickerbocker. The market outlook from the commercial real estate finance crowd this year – perhaps – was remarkably positive given where we are in the cycle. Were we all trying to convince each other, or ourselves? Any unusual anxiety could, of course, be due to the thick fog and heavy rain but the conference itself felt a bit darker than in prior years because there are reasons for anxiety, right? This year, in addition to the tired sports analogies (how many 9th innings can there be?), there were multiple references to driving a car directly into a wall. That’s dark, man. Continue Reading

What the Commercial Real Estate Industry Needs to Know about Climate Change

In an effort to advance the conversation around climate change within the CRE finance community, Jason S. Rozes and Nitya Kumar Goyal recently published Climate Change Impact on Commercial Real Estate Finance — What the Industry Needs to Know Today, which provides a great foundation for understanding how climate change affects our industry and identifies recent developments that require further discussion.  Climate change, and particularly its intersection with commercial real estate, is a complicated issue that presents a range of threats and opportunities and we at Crunched Credit look forward to wading into it with you.  For more information on this topic or other CRE finance matters, please read our previous post or contact Jason S. Rozes and Nitya Kumar Goyal.

Contagion

Contagion, at least of the buggy sort, can make for a terrific, spooky movie. Remember Gwyneth Paltrow and Matt Damon in Contagion? (Spoiler alert – she dies early on.) Got to admit, I love The Stand and Captain Trips; we all love a good scare… in the movies. In reality, however, contagion means bad things are happening: Bubonic Plague, excess body piercings and the 24 hour news stories (in no particular order). Contagion is very scary. Continue Reading

Dechert OnPoint: Does Tribune Make Merit Management Obsolete?

A recent decision out of the District Court for the Southern District of New York may bring greater certainty to the interpretation of what constitutes a “financial institution” in connection with the safe harbor in section 546(e) of the bankruptcy code. The decision, In re Tribune Fraudulent Conveyance Litig., 2019 U.S. Dist. Lexis 69081 (S.D.N.Y. Apr. 23, 2019), addresses whether transfers are protected from avoidance under the section 546(e) safe harbor when a “financial institution” merely acts as a conduit and is neither the debtor nor the real party in interest that ultimately received the payment as a result of the debtor or the recipient being the customer of the financial institution and may undercut the practical impact of the Merit Management case. To read more about this decision, as well as the implications it may have on section 546(e) fraudulent transfer litigation, check out this Dechert OnPoint by Dechert’s Business Restructuring and Reorganization group.

 

“Nobody Fell Off the Turnip Truck Yesterday”: What’s at Stake for Commercial Real Estate Lenders in Sutton 58?

Note: This was republished on June 6, 2019 to reflect factual updates.

Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending.  At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.

A Defaulted Construction Loan and Frustrated Attempts to Foreclose:

Sutton 58 is a case involving a defaulted New York City construction loan consisting of mortgage and mezzanine debt provided by Gamma Real Estate.  After a maturity default, Gamma’s attempt to foreclose on its equity collateral through a UCC foreclosure sale was hindered by the bankruptcy filings of the mortgage borrower and mezzanine borrower.

The borrowers were established as single-purpose bankruptcy-remote vehicles but subsequently acquired additional assets from one of the defendants (Sutton Opportunity), and took on debt from Prime Alliance (another one of the defendants – both controlled by the individual Pilevsky family defendants).  Sutton Opportunity obtained a 49% indirect stake in each borrower as a result of the asset transfer.  The additional assets and debt destroyed each borrower’s status as a “Single Asset Real Estate” entity under the Bankruptcy Code (or “SPE”), and allowed both entities to file a petition for bankruptcy.  Both the transfer of assets and the transfer of indirect equity interests in each borrower violated separateness covenants in the mortgage and mezzanine loan documents.

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The Jack and Rick Show:  Point and Counterpoint

I’m a great admirer of Jack Cohen and his periodic market commentary.  I answered his last one and then after the two of us talked, we decided we’d publish them together as a duet.  So here you go.

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Beany & CECL

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting.  Continue Reading

A Survival Guide for Winning Default Rate Interest in Courtroom Battles

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection. In acting as the borrower’s fairy godmother, the Court noted that the 5% DRI, an industry standard for construction loans, was unreasonable because it was not negotiated in detail at origination and because it did not adequately forecast the lender’s anticipated costs and damages. So much for considering prevailing practices when gauging reasonableness! The court’s decision also hinged on the fact that the lender was able to collect exit fees, late fees, and loan extension fees while the loan was in forbearance. In the court’s opinion, such fees already compensated the lender for the costs associated with the default.  Now that’s novel!  We sort of thought that lenders collected exit fees, late fees and loan extension fees in consideration of other things the lender did or forbore from doing.  Silly us.

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