Articles Posted in Real Estate Financing

Oscar R. Rivera

Oscar R. Rivera

The Daily Business Review, South Florida’s only business daily and official court newspaper, chronicles in its weekly “Dealmakers” column the work of South Florida professionals in putting together and finalizing many of the area’s largest real estate transactions.  The firm’s Oscar R. Rivera was the featured Dealmakers in this week’s column, which appeared in today’s edition of the newspaper.  The article, which is titled “Attorneys for Buyer Closed $74M Office Deal with Bonus Acre to Develop,” focused on his work in representing the buyer of the Doral Costa office park in a $73.75 million acquisition.  It reads:

The reasons an affiliate of Triarch Investment Group wanted to acquire the 17.8-acre Doral Costa Office Park are clear.

The three Class A office buildings are 96 percent leased in a strong submarket. Tenants include Allstate Corp., HSBC Bank and Samsung. The property has nearly an acre of developable land.

“The Doral area is a very attractive area. Developable land in the heart of an office complex was very attractive to this buyer group,” said Oscar Rivera, a shareholder with Siegfried, Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, who represented buyer Doral Costa Capital LLC.

“These buildings are anchored by a significant and well-established group of tenants,” Rivera added. “It was a very solid investment for the buyer group.”

But completing the $73.75 million transaction with the seller, an affiliate of Boston-based TA Associates Realty, required fast work.

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A recent ruling involving a lawsuit by Wells Fargo Bank against the former ownership group of the Palm Beach Mall is emblematic of the post-recession efforts of lenders to recover damages from their commercial real estate borrowers. The convoluted case included several counts alleging various types of damages against the former owners and operators of the mall, but the lender lost on all of its counts and motions in both the trial and appellate courts. While it ultimately may not have impacted the outcome, a couple of seemingly minor mistakes and omissions in the guaranty and loan agreements created significant difficulties for the lender that it was unable to overcome in court.

The recent opinion by the Fourth District Court of Appeal in the case of Wells Fargo Bank v. Palm Beach Mall et al. affirmed the lower court’s decision in favor of the mall’s former ownership group on all counts. The lender had alleged that the mall owners breached the loan agreement by engaging in gross negligence or willful misconduct in its management and also by failing to maintain its status as a “special purpose entity” by not remaining solvent and by paying its liabilities and expenses from sources other than its own funds and assets. It sought to recover the entire outstanding amount of debt owed by the former owner, which had defaulted on its loan and issued the deed for the property to the lender in order to avoid foreclosure.

The appellate panel found that the trial court correctly applied New York contract law, on which the loan agreement was based, when it interpreted the language in the loan agreement to mean that the mall owner would be liable only if it performed deliberate acts beyond acting out of its own economic self-interest. The opinion holds that the owners did not act with reckless indifference to the rights of lender, which is the standard that must be applied under New York law for a finding of gross negligence under an exculpatory clause.

PBM.JPGAs to the issue of the owner’s insolvency, because the loan agreement failed to define “solvent” or “insolvent” the appellate court ruled that the trial court was correct in rejecting Wells Fargo’s balance-sheet insolvency definition (i.e., a company’s assets exceed its liabilities) in favor of the New York common law equity insolvency definition (i.e., the inability to pay debts and obligations as they become due in the regular course of business) in its interpretation of the loan agreement. Therefore, the mall owner did not breach the “special purpose entity” covenant in the agreement, as it was paying its liabilities and expenses as they came due and correctly using capital contributions from a member of the ownership group to make the loan payments and meet its operating expenses.

The appellate court also was not swayed by the lender’s argument that the trial court erred in refusing to treat the “single purpose entity” language, which was used once in the guaranty agreement, as “special purpose entity,” which was used throughout the loan agreement, or to reform the guaranty agreement accordingly. The appellate panel found that the trial court correctly pointed out that Wells Fargo, as an assignee of the original loan, was not party to the negotiations which gave rise to the loan documents, and as such it was not in a position to argue whether or not the use of “single” rather than “special” in this instance was intentional or not.

While it may not have changed the ultimate outcome in the case, it does appear that the use of the word “single” in the clause in question was likely a mistake in the guaranty agreement that should have been detected and corrected by the original lender prior to execution of the agreement, thereby ensuring that the term “special purpose entity” was used consistently throughout all of the loan documents, including in the guaranty agreement. In addition, the lack of a reference for the specific definition of insolvency as well as the standard for gross negligence that were to be applied under the loan agreement were errors of omission.

These errors and omissions in the guaranty agreement and the loan agreement proved to be very problematic for the eventual assignee of the original loan, and they illustrate the importance of making these documents involving large commercial real estate loans as specific and comprehensive as possible.

We are sometimes engaged to close loans on behalf of entities providing financing for individuals or projects. Often, there are a number of parties participating in the loans. In other words, different parties are pooling different sums to come up with the total amount of the loan. In these scenarios, it is essential that the relationships among all of the participants be properly and clearly documented.

Most established lenders use form participation agreements. When several friends come together to pool resources and lend money , that is often where we see a lack of documentation which can have unintended and often ugly consequences. We are often amazed when we are asked to foreclose on loans that we have not closed, and we find that the participation and the rights of the different parties providing the loan are not properly documented.

A participation agreement among all participants should be drafted by loan counsel and executed by all participants well before the closing of the loan. warranties and reps.jpg Key elements of the participation agreement are the naming of an “agent” to act on behalf of the participants, and the establishment of the rights and responsibilities of the agent and the participants. Generally, the agent is responsible for the management of the loan and the disbursement and collection of all funds on behalf of the participants. A lengthy list of the agent’s obligations and limitations is generally the linchpin of the agreement.

The agent is generally responsible for collection of the proceeds from all of the participants prior to the loan closing; coordinating the closing of the loan; managing and servicing the loan after closing; collecting all funds and making all disbursements to the participants during the loan process; managing compliance with the loan documents; enforcing the loan covenants and satisfying the loan upon payment.

The agent is generally compensated by retaining a percentage of the interest collected or earning a pre-established fee equal to a percentage of the outstanding principal of the loan, on a per annum basis. Sometimes the agent is compensated with a flat one-time fee for acting as agent and servicing the loan for the participants. The agent’s fee is a critical element of the transaction, and it should be properly documented so as to avoid any misunderstanding among the participants.

Our other real estate attorneys and I have a great deal of experience with these and other types of financing structures, and we write regularly in this blog about important business and legal issues for the commercial/industrial real estate industry in Florida. We encourage industry followers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

Oscar Rivera photo FINAL.jpgOur attorneys regularly contribute articles to the leading trade publications covering their industries. One of our most recent articles was written by partner Oscar R. Rivera for the latest issue of Retail Law Strategist, and it focuses on a very timely and important topic for those who own or operate shopping centers and retail real estate. The article, which appeared in the summer 2012 issue and is titled “The Game Plan for Avoiding Foreclosure and Restructuring Loans for Troubled Shopping Centers,” focuses on the negotiation do’s and don’ts for financially distressed shopping centers in their dealings with lenders. It discusses the tactics and financial data that the property owners should use in order to help them to avoid foreclosure and negotiate other options such as deed in lieu of foreclosure, forbearance and short sale.

Click here to read this article by Oscar, who is available to answer any questions on the information that he covers via email at orivera@siegfriedlaw.com or by calling him at (954) 781-1134.

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