Mid Atlantic Real Estate Journal — September 14 - 27, 2012 — 17A
www.marejournal.com
C OMMERCIAL R EAL E STATE L AW
By Jeffrey L. Silberman, Kaplin Stewart Is your loan Non-Recourse
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that, because the value of the borrower’s property was less than the debt, the borrower was insolvent and, therefore, breached the SPE covenants. The borrowers argued that it was never the intention of the parties that a decline in prop- erty value could trigger an SPE covenant breach, but the courts found no such evidence of that intent in the documents. This is scary stuff. Most borrowers acquiesce to “bad boy” carve-outs because the borrower understands that the lender is relying on the value of the property, and the bad-boy
the SPE requirements converts the entire loan to recourse, as opposed to holding the guaran- tor liable only for the actual loss caused by the breach. One of the standard SPE covenants is that the borrower remain solvent at all times; obviously, the lender does not want the borrower taking on liabilities it cannot pay. In the cases referenced above, a default occurred and the lender foreclosed. After the foreclosure, the amount real- ized by the lender was less than the debt owed, resulting in a deficiency. The courts held
or most borrowers, the closing of a so-called “non-recourse” loan is
carve-outs really impact the value of the collateral, such as waste, misappropriation of insurance proceeds, etc. On the flip side, the lender evaluates the collateral and the leases, and the lender assumes the risk that the ten- ants may leave, which is the primary reason loans default. With these new cases, lenders have a powerful new tool in the documents to trigger recourse liability. In addition, the list of re- course carve-outs has been growing. For example, most loan documents provide that
failure to pay taxes is a re- course carve-out. However, if the tenants leave and the bor- rower can’t pay the loan, how will the borrower fund taxes? This seems to be an irreconcil- able difference. The moral of the story is that borrowers need to think very hard about recourse carve-outs. The panacea of non-recourse may not be all that it is cracked up to be after all. Jeffrey L. Silberman is a principal in the Real Estate, Business & Finance group at Kaplin Stewart in Blue Bell, Pennsylvania. ■
the achieve- me n t o f a s i gn i f i cant milestone. At that point, s u b j e c t t o certain “bad boy ” carve outs, the indi- vidual mem- bers/partners
Jeffrey Silberman
of the borrowing entity are no longer personally liable to the lender. However, recent court decisions in other parts of the country have created openings, perhaps unintended, for lend- ers to trigger these bad-boy carve-outs and convert a non- recourse loan to recourse. The lenders that make non- recourse loans typically require that the borrowing entity be a single-purpose entity (an SPE), so that the borrower has no other unrelated debts or li- abilities that could impact the borrower’s ability to service the debt. Along with this concept, most loan documents impose various requirements on the borrower to keep itself separate in all respects from any other entities; again, to isolate the borrower from liabilities of oth- ers. This concept is so funda- mental that most non-recourse lenders include a breach of the SPE covenants in the “bad boy” carve outs to non-recourse. To take it one step further, most lenders state that a breach of WILLIAMSPORT, PA — In response to client needs, Manko, Gold, Katcher & Fox, LLP, (MGKF) an environmen- tal, energy and land use law and litigation firm has opened a satellite office in Williamsport. The new office is located at 25 West Third St. in Williamsport. It will be the third office for MGKF, adding to their Bala Cynwyd and Cherry Hill, NJ locations. MGKF partner Marc Gold will be joined by MGKF part- ners Todd Kantorczyk and Jonathan Rinde as well as Mi- chael Meloy and Michael Gross in the Williamsport office. They will split their time in the new office allowing them to spend the majority of their time in the firm’s headquarters. ■ Manko, Gold, Katcher &Fox, LLP expands to CPA
Contact: Jeffrey L. Silberman 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-260-6000 • www.kaplaw.com Other Offices: • Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r n e y s a t Law Real estate law from the ground up. Experience Counts. Count On Us.
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