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AGOODWINPROCTERPUBLICATIONFORTHEREALESTATEINDUSTRYSUMMER2013SOURCEnAIFMDWhatNon-EuropeanManagersMustKnownTheCMBSMarketRebootABalancingActnStageTwoCaliforniaRedevelopmentAgenciesPreparetoSellPropertynSyndicationNationBorrowerIssuesinSyndicatedLoans SOURCESUMMER2013AGoodwinProcterPublicationForTheRealEstateIndustryEditor-in-ChiefRobertM.HaightJr.EditorsLewisG.FeldmanJohnM.FergusonJohnT.HaggertyDouglasA.PrawChristopherB.PriceAndrewC.SucoProductionJessicaHekmatjahNathanG.LeonardDesignTheCastlePresswww.goodwinprocter.comCopyright2013byGoodwinProcterLLP.Allrightsreserved.Reproductioninwholeorpartwithoutpermissionisprohibited.Thispublicationmaybeconsideredadvertisingundertheethicalrulesofcertainjurisdictionsandshouldnotbeconsideredlegaladvice.ToensurecompliancewithrequirementsunderTreasuryDepartmentCircular230weinformyouthatthecontentsofthispublicationarenotintendedorwrittentobeusedandmaynotbeusedforthepurposeofiavoidingU.S.federaltaxpenaltiesoriipromotingmarketingorrecom-mendingtoanotherpartyanymatteraddressedherein.Eachtaxpayershouldseekadvicebasedonthetaxpayersparticularcircumstancesfromanindependenttaxadviser.MilkenInstituteGlobalConferenceGoodwinProcterwasaproudsponsorofthisyears16thAnnualMilkenInstituteGlobalConferenceApril28-May12013inLosAngelesCalifornia.Ourattorneysandclientswerealongside3000participantsfrommorethan50countrieswhoengagedwith550panelistscoveringtheworldsofnancerealestategovernmenteducationenergyenvironmenthealthmedicalresearchandmedia.PartnerandChairoftheLosAngelesOceLewFeldmanmoderatedapowerhousepanelofrealestateindustryleaderswhosharedtheircandidviewsoftodayscommercialrealestatemarketsrecovery.VisitGoodwinProcter.comtowatchthepanelandlearnmoreaboutourinvolvementinthecommunity.GOODNEWSIn1985afteralmost100yearsTheCoca-ColaCompanyreplacedtheoriginalformulaforitsnamesakesoftdrinkforanewformuladubbedNewCoke.Itisunclearwhythecompanyreplaceditscentury-oldformulabutonethingisclearthenewandimprovedbrandwasabust.LessthanthreemonthslaterthecompanyannouncedthereturnoftheoriginalformulawhichwasrebrandedasCokeClassicuntilNewCokewasociallydiscontinuedin2002.TheFordMotorCompanywasfoundedin1903survivedtheGreatDepressionandhasbeenanationalandworldwideleaderinautomobilemanufacturing.Initsrst50yearsFordintroducedseveraldozendierentmakesofcarseachwithvaryinglevelsofsuccess.Butin1957ForddecidedthatitsnewestproducttheEdselwasworthyofFordsmostelaborateproductlaunchinits50-yearhistory.September41957wasdubbedEDaytointroducethenewbrandtotheU.S.market.OnOctober131957FordsponsoredTheEdselShowtoshowcaseitsnewcar.Itopped.FordceasedproductionoftheEdselin1960havinglost350milliononthecarin1950dollars.NewandImprovedissometimesneither.Emergingfromthecrashof2008andthedicultyearsthatfollowedtherealestatemarketisattemptingitscomeback.Unlikeaproductthatisimprovedwithnewpackagingtasteorcolorweexploreinthesepageswhetherrealestateisimprovedthroughnewregulationsandstricterunderwriting.ThefourarticlesinthiseditionofREsourcehighlightthevariouschangesthatmakeupaportionofthenewandimprovedrealestatemarket.ChrisPriceandMarkLochiattodescribethenewCMBSmarketwithacomparisontothepriorCMBSmarketthatsueredsomuchduringtherecession.SamanthaLakeCoghlanandGlynnBarwickexploreEuropeanlegislationimpactingthemarketingandmanagingofrealestatefundsprovidinghelpfulinformationtothosenon-Europeanmanagersseekingtoinvestoverseas.CaliforniareactedtotherecessionbyeliminatingredevelopmentagenciesandLewFeldmanandDougPrawillustratetheopportunitythatawaitsinvestorsastheformerredevelopmentagenciesselltheirrealpropertyassets.SyndicationofloansisawayofreducingtherisksofholdingloansonthebooksandDeanPappasandAlisonWaisdiscussborrowerissuesinthesesyndicatedloans.Therealestatemarketisattemptingtoxtheperceivedproblemsthatledtoorwasaconsequenceoftherecessionbyrollingoutitsnewandimprovedproducts.WilltheseproductsyotheshelvescausingustocelebrateastrongermoreprosperousmarketOrwillwebesippingNewCokeinourEdselsOnlytimewilltell.RobertM.HaightJr.Editor-in-Chief 3REsourceSummer2013byChristopherB.PriceandMarkJ.LochiattoAtitspeakin2007priortothemeltdownof2008themarketforcommercialmortgage-backedsecuritiesCMBSwasfundingmorethan40ofcommercialrealestatemortgagelendingintheUnitedStatesincludingmorethan200billioninthatyearalone.Asloansfromthepre-meltdownperiodwhichisoftenreferredtoasCMBS1.0begintoreachmaturitytherewillbesignicantandincreasingdemandbyborrowersforrenancingproceeds.AresethealthyandgrowingCMBSmarketwillbeimportanttoaddressthisborrowerdemand.WilltheCMBSmarketinitscurrentcongurationi.e.CMBS2.0continuetogrowandavoidtheexcessesofCMBS1.0Thisgrowthwillbecriticalforcontinuedimprove-mentoftherealestatemarketgenerally.So-calledconduitlendersintheCMBSmarketoriginatemortgageloanstoborrowersthatarethenbundledandcarvedupintomultiplelevelsortranchesofdebtforwhichpublicandprivatesecuritiesareissuedandsoldtoinvestors.Asignicantamountoftheblameforthe2008marketmeltdownwasplacedwiththeCMBSmarket.Laxunderwritingresultedinexcessivefrothwhichallowedoriginatorstoreceiveoriginationfeesandthenpassalongrisktotheinvestors.AcomparisonofCMBS1.0andCMBS2.0reectsthevariousattemptsinthemarkettobetteralignriskspromotegrowthofconduitlendingandavoidtheexcessesofCMBS1.0allofwhichwillaecttheabilityofborrowerstotapintothemarket.Changesincludemorestringentunderwritingandrevisedborrowerandloandocumentationrequirementsaswellasincreasedregulatoryoversight.MoreStringentUnderwritingMoreconservativeunder-writingisakeyfeatureofCMBS2.0.Thetablebelowprovidesacomparisonoftypicalunder-writingstandardsunderCMBS1.0versusthoseunderCMBS2.0thedatainthetabledonotreectvariationsattributabletopropertytypesandmarkets.CMBS2.0incomparisontoCMBS1.0generallyreectssignicantlylowerloan-to-valueratiosLTVhigherdebtservicecoverageratiosDSCRandfewerloansthatareinterestonlywithoutanyprincipalamortization.ThedebtCMBS1.0CMBS2.0LoantoValueRatioOftenExceeding8080orlessDebtServiceCoverageRatio1.05x1.25xorgreaterInterestOnly55.59.3DebtYieldNA10-12CMBS2.0vs.CMBS1.0InadditiontofacingmorestringentunderwritingsponsorsofborrowersofCMBS2.0debtwillfaceexpandedrecourseobligationsundernon-recoursecarveoutguaranties.Thelistofso-calledbadactsthatcouldtriggerliabilityundernon-recoursecarveoutguarantieshasbeenexpandedfromwhatwasseeninCMBS1.0. 4AlsoCMBS2.0onlyunderwritesstabilizedin-placeincomegeneratedbyapropertybasedontrailingcashowandexcludesproformaincomebasedonborrowersprojectionsthatoftenwasincludedinCMBS1.0under-writing.MostCMBS2.0debtatoriginationhasnotincludedsubordinatedebtintheformofmezzaninedebtorB-notesandoftenprohibitsfuturemezzaninedebt.AlthoughCMBS2.0underwritingismoreconservativethanCMBS1.0itisnonethelessprovidinganalternativesourceofnancingtoborrowerswhoseprimarysourceofmortgagenancingsincethemarketmeltdownhasbeenlimitedtoinsurancecompaniesandcommercialbankswhichhavemorestringentunder-writingthanthatofCMBS2.0.BorrowersunderCMBS2.0havetheabilitytoaccessnon-recoursedebtwithhigherloan-to-valueratiostypicallyupto80permittedbyportfoliolendersupto70andtouseitforpropertytypesandmarketsthatportfoliolendersarenotunderwriting.HoweverdespitethestricturesofearlyunderwritingwithincreasedCMBSmarketvolumeandcompetitionamonglendersCMBSunderwritingstandardshavebeenlooseninginrecentyearssincetheCMBSmarketresumedinthewakeofthemeltdown.DSCRistrendingbackdownLTVratiosaretrendinguplendersareunderwritingsomeproformaincomeandthereisanincreaseduseofsubordinateB-noteandmezzaninenancing.Thislooseningofstandardsraisesyieldstandardi.e.netoperatingincomedividedbythemortgageloanamountwasnotsignicantinCMBS1.0butisplayingaprominentroleinCMBS2.0becauselowinterestratesinthecurrentmarketcaprateuctuationandprincipalamortizationlimittheusefulnessoftheDSCRstandardasametricforcomparingdierentCMBSissuancesandforprojectingtherenancingeligi-blityofamortgageloan. 5ChristopherB.PriceisapartnerintheNewYorkoceofGoodwinProcterandcanbereachedat212813-8951orcbpricegoodwinprocter.com.MarkJ.LochiattoisanassociateintheBostonoceofGoodwinProcterandcanbereachedat617570-8159ormlochiattogoodwinprocter.com.thequestionabouthowthemarketwillrespondandhoweectivetheotherfeaturesofCMBS2.0willbetocontroltheexcessesofCMBS1.0.RecourseObligationsandLoanCovenantsInadditiontofacingmorestringentunderwritingsponsorsofborrowersofCMBS2.0debtwillfaceexpandedrecourseobligationsundernon-recoursecarveoutguaran-ties.Thelistofso-calledbadactsthatcouldtriggerliabilityundernon-recoursecarveoutguarantieshasbeenexpandedfromwhatwasseeninCMBS1.0.Forexampleinreactiontothesignicantcostsanddelaysincurredbylendersinthemarketmeltdownasaresultofborrowersinterferingwithlenderspursuitofremediesoriginatorsareaddingsuchborrowerinterferencefollowinganeventofdefaulttothelistofbadactstriggeringfullrecourse.OtherexamplesofactionssometimesaddedtothelistofbadactstriggeringrecourseunderCMBS2.0includefailuretodelivertolenderinformationonthepropertyorprovidelenderaccesstotheproperty.InadditiontoexpandingthelistofbadactsCMBS2.0alsoaectstheconsequencesofsomebadacts.ForexampleintheeventofavoluntarybankruptcylingbyaborrowerunderCMBS1.0recoursemightthroughnegotiationbelimitedtotheactuallossesincurredbylenderbutunderCMBS2.0fullrecoursewouldmostlikelybetriggeredfortheentireamountdueundertheloan.BorrowersofCMBS2.0debtwillencounteradditionalloanandborrowerorganizationaldocumentationrequire-mentsthatwerepresentbutoftenwaivedinCMBS1.0.Originatorswillrequiredetailedreportingcovenantsoftheborroweranditssponsoraswellasnetworthandliquiditycovenants.DriveninlargepartbytheGeneralGrowthPropertiesbankruptcycasein2009borrowerswillalmostalwaysberequiredtoenterintoacashmanagementarrangementthatrequiresallcashfromthepropertytoowtoanaccountinwhichthelenderhasaperfectedsecurityinterest.ThestructuremaybeeitherahardlockboxmeaningthatthelendercontrolstheaccountREsourceSummer2013andtheapplicationofcashproceedsinaccordancewiththewaterfallintheloandocumentsoraspringinglockboxwhichcreatesahardlockboxuponcertaintriggeringeventstypicallyaneventofdefaultorfailuretomeetaDSCRtest.Fundingcashreservesupfrontatloanoriginationaswellasduringthetermoftheloanmayalsoberequiredforcapitalrequirementstenantimprovementcostsandleasingcommissions.Alsowithrespecttoindependentdirectorswhosear-mativevoteisnecessarytotakecertainmaterialactionslikeavoluntarybankruptcylingborrowersinCMBS2.0arebeingrequiredtouseindependentdirectorsfromnationally-recognizedcompaniesandtoobtainlenderapprovalpriortotheirremovalandreplacement.EvolvingStructureCMBSloanvolumewasvirtuallynon-existentin2008and2009inthewakeofthedownturnbutwiththere-emergenceoftheCMBSmarketandtheimplementa-tionofCMBS2.0volumehasincreasedmodestlysince2009reachingmorethan45billionin2012andmorethan13billioninthersttwomonthsof2013.Itisprojectedtoexceed65billionfor2013.ThemarketwillcontinuetotestCMBS2.0asunderwritingstandardsvarysecuritizationstructuringevolvesandregulatoryreformsareimplemented.ForCMBS2.0togrowasasourceofmortgagenancingaproperbalancebetweenadditionalcostsandrestrictionstoavoidpreviousexcessesmustbestruck.nHoweverdespitethestricturesofearlyunderwritingwithincreasedCMBSmarketvolumeandcompetitionamonglendersCMBSunderwritingstandardshavebeenlooseninginrecentyearssincetheCMBSmarketresumedinthewakeofthemeltdown. bySamanthaLakeCoghlanandGlynnBarwickTheAlternativeInvestmentFundManagersDirec-tiveAIFMDisEuropeanlegislationintendedtocreateauniedregulatoryframeworkthroughoutEuropeforthemarketingandmanagingoffundsthatwillinduecoursereplacethecurrentpatchworkofprivateplacementregimes.Itwillaectthebusinessofallnon-EuropeanfundsandtheirmanagersthatwishtoattractinvestorsfromtheEuropeanEconomicAreaEEAi.e.mostofEuropeexceptSwitzerlandandtheChannelIslands.Sowhatdonon-EuropeanmanagersneedtoknowaboutAIFMDWhoistheManagerTheAIFMDappliestothemanagerofanyfundthatisbeingmarketedtoinvestorsintheEEA.EachfundmusthaveoneandonlyonemanagerwhoisresponsibleforthefundscompliancewiththeAIFMDandwhocarriesoutatleastoneoftheinvestmentmanagementandriskmanagementfunctions.Themanagermaydelegatetheday-to-dayfunctionsforwhichithasresponsibilityofteninvestmentmanagementtoaportfoliomanagerprovidedthatitneverthelessretainsrealsubstanceandstillcarriesoutatleastoneofinvestmentmanagementorriskmanagement.Inanon-EuropeancontextthemanagerforafundintheformofapartnershipisoftenthegeneralpartnerGP.Forfundsintheformofaninvestmentcompanythemanagerwilloftenbethefunditselfwhereitisself-managed.Inbothcaseshoweveritispermissibleforthefundifitwishestotransfertheresponsibilityofmanage-menttoathirdpartyinwhichcasethatentitywouldbethemanagerinstead.Carewillneedtobetakenbyfundsthereforetoensurethatthecorrectmanagerisidentiedespeciallyifthetransitionalprovisionsaretobeusedasdiscussedbelow.WhatTriggerstheAIFMDTheAIFMDistriggeredbymarketingintheEEA.TheAIFMDdenesmarketingasdirectorindirectoeringorplacementattheinitiativeofthemanagerofunitsorsharesinafund.Therearehoweverdierentinterpreta-tionsofthedenitionofmarketingthatafundmanagershouldfullyunderstand.FirsttheAIFMDprovidesthatreversesolicitationisnotmarketingthatiswheretheinitiativefortheinvestmentcomesfromtheinvestorratherthanfromthemanager.ThisapproachmaybeusefulforamanagerwhohasasmallnumberofrepeatEuropeaninvestorsinaseriesofitsfundsalthoughthemanagerwillneedtobecarefulnottoabusetheprovisionandtomaintainproperrecords.AIFMDWhatNon-EuropeanManagersMustKnow6 7SamanthaLakeCoghlanisapartnerintheLondonoceofGoodwinProcterandcanbereachedat4402074474203orslakecoghlangoodwinprocter.com.GlynnBarwickisacounselintheLondonoceofGoodwinProcterandcanbereachedat4402074474226orgbarwickgoodwinprocter.com.SecondtheUKtakestheviewthatafundismarketedonlywhenaspecicoerthatiscapableofacceptanceismadetoaninvestor.OnthisbasissoftmarketingsuchaspresentingdraftdocumentationthatisstillsubjecttonegotiationorapitchbookisnotmarketingforthepurposeoftheAIFMDandallowsamanagertotestthewatersinacountrybeforetakingthenalstepsrequiredbytheAIFMD.ThisinterpretationisspecicfortheUKalthoughothercountriesmayfollowsuit.WherethereisnomarketingintheEEAtheAIFMDwillnotapply.ThismeansthatfundswhichareclosedtonewinvestorsforexamplewillnotfallwithintheAIFMDevenwheretheyhaveEuropeaninvestors.HowDoesaManagerMarketItsFundWheresharesorunitsinafundaremarketedintheEEAamanagermustdothreethingsunderAIFMD1.Makecertainpre-investmentdisclosurestoinvestors.MostofthesewillnotbecontroversialandlikelyalreadyexistinproperlypreparedprivateplacementmemorandaPPMs.FundsthatdonothavePPMsmayneedtoprepareaseparateAIFMDdisclosurestatement.Oneofthecontroversialpre-investmentdisclosurerequirementsisthedescriptiontoinvestorsofhowotherinvestorsmayreceivepreferentialtreatmentundersideletters.2.Insomecountriesregistereachfundwiththeapplicablecountrysregulator.TheAIFMDdoesnotmandatestatestorequirethispre-marketingregistrationandonlytheUKandGermanyhaveintro-ducedapre-registrationregime.Theburdenofpre-registrationisnottheadministrationandcostofdoingsoalthoughtheseshouldnotbeunderesti-matedbuttheinabilityofthemanagertomarketandthereforeclosethetransactionuntilregistrationhasbeenmadeandapprovalgrantedbythelocalauthority.3.Providepost-investmentdisclosuretoinvestorsandtothelocalauthoritiesineachcountrywherethefundhasbeenmarketed.Mostoftheinforma-tionthatmustbedisclosedislikelyalreadydisclosedtoinvestorsalthoughtheremaybesomesensitivitytodisclosinggeneralinformationregardingremuner-ationofthemanagersemployeesandocers.Thisdisclosureisquitesimilartothatrequiredundertherulesapplicabletopublicly-listedcompanies.WhenisAIFMDEectiveTheimplementationdateofAIFMDisociallyJuly222013ImplementationDate.HowevertheAIFMDprovidesforatransitionalperiodofoneyearto2014formanagerswhoareperformingactivitiesundertheAIFMDasoftheImplementationDate.ThistransitionalexemptionappliestofundsthatthemanagermanagesontheImplementa-tionDateandalsotoanynewfundsthatthemanagerestablishesbeforeJuly222014.Forafundtotakeadvan-tageofthetransitionrulesitiscrucialasdiscussedabovetoidentifycorrectlythemanagerofeachfundontheImplementationDate.Forexamplewhereamanageristhegeneralpartnerofapartnershipandthepracticeistocreateanewgeneralpartnershipforeachnewfundthetransi-tionalprovisionwillnotbeusefulforfundsestablishedaftertheImplementationDatesincethenewGPwillnothavebeenmanagingasoftheImplementationDate.ItisalsonotyetclearwhetherallmemberstatesofEEAwillimplementthistransitionalprovisionfornon-Europeanmanagers.AlthoughtheUKandGermanyhavesaidthattheywillothercountrieshavenotyetcommitted.ConclusionTheAIFMDwillhavesignicantconsequencesforamanagerwhowishestoobtainaccesstoEuropeaninves-tors.Therearestepshoweverthatmaybetakenbyamanagertoreduceitsburdenunderthisnewlaw.Onestrategyistocreateahybridmarketingstrategythatrequiresdierentactionsindierentcountriesagreeonregistrationinsomecountriestakeadvantageofreversesolicitationinothercountriesandtestthewatersthroughsoftmarketingintherest.Likeanystrategythehybridstrategydependsonthefactsapplicabletoaspecicmanagerandrequirescarefulconsideration.nREsourceSummer2013 creatinganinventoryofallpropertyownedbytheRDAoverwhichitandtheOBhavejurisdictionexaminingongoingdevelopmentsaccountingforbondproceedsandunderstandingtheenforceableobligationstowhichtheSAislegallybound.TheSAsandOBsrolesincludecompletingorother-wisesatisfyingallRDAactivitiesandobtainingaFindingofCompletionFOCfromtheStateDepart-mentofFinanceDOF.TheFOCresemblesanorderliftinganautomaticstayinbankruptcysinceitallowsanSAtoidisposeofpropertyinaccor-dancewithitsPropertyManagementPlanPMPiispendproceedsofbondsthatwereissuedonorbeforeDecember212010andiiireinstateloanagree-mentsformerlybetweenanRDAanditshostjurisdiction.TodatetheDOFhasprovidedover200FOCstotheSAsofformerRDAsthroughouttheState.WithaFOCinhandtheSAmovesintoapost-complianceperiodthatbeginswithimplementingitsPMPandendswithdispositionofallRDAproperty.WhatDoesAPMPLookLikePMPssetforththemannerofdispositionofeachofthepropertieswithintheSAsjurisdiction.PMPsmustbepreparedwithinsixmonthsfollowingcompletionoftheFOC.PMPsmustdivideRDApropertyintothreebucketsandthendividethelastbucketintothreemoreBucket1-EconomicDevelopmentParcelsAnSAcanusethePMPforlongrangeplanningandcontinuetoownpropertysuitedforeconomicdevelopment.Bucket2-GovernmentPurposeandEnforceableObligationParcelsAnSAcanlistpropertyonaPMPfortransfertoacityorcountywherethereisagovern-mentalorfuturedevelopmentuseforit.TheSAcanalsolistpropertyunderacategorythatallowsittoretainorsellpropertytosatisfyanenforceableobliga-tioncreatedbyaformerRDA.byLewisG.FeldmanandDouglasA.PrawOverthenextfewyearsrecently-dissolvedCaliforniaRedevelopmentAgenciesRDAswillbesellingtheirinventoryofrealpropertyassets.Thispresentsalong-awaitedopportu-nityforrealestatedevelopers.AshasbeenwidelypublishedonJanuary312012CaliforniaGovernorJerryBrownsucceededinhiscampaigntoeliminateover400CaliforniaRedevelopmentAgenciesandthroughtheunwindingprocessreturnpropertytaxestolocaltaxingagencies.Thenalstepoftheprocessincludesprocessinganddisposingofthousandsofparcelsofformer-RDArealestate.Thecharacteristicsandqualityoftheseassetsvaryfromstrategicurbaninllparcelswithdevelopmentpoten-tialtolessdesirablesurplusorheavilyblightedproperties.ThesaleofRDApropertyrequirestheeortsandapprovalsofthreegovernmentalentities.TheSuccessorAgencySAoftheformerRDAservesasthepropertyliquidatorwhiletheOversightBoardOBservesasacreditcommitteeofsorts.BoththeSAandOBarecreaturesofStatelawwithlimitedbutimportantresponsibilities.SinceFebruary12012eachSAhasbeenchargedwith8 LewisG.FeldmanisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2688orlfeldmangoodwinprocter.com.DouglasA.PrawisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2664ordprawgoodwinprocter.com.9Bucket3-FreeRangeChickenParcelsTherestofthepropertieswillbeoeredforsaleafterbeingplacedintooneofthreeadditionalbasketsApropertiesarestrategicpropertiesthatcanbeusedfordevelopment.EntitlementswillvarybutApropertiesmaybeaccompaniedbyapprovedentitle-ments.Bpropertiesarethosethatrequirezoningapprovalsorotherentitlementsbeforedevelopment.Cpropertiesarethestoryparcelstheirregularandtheblightedwithlittleoroutdatedentitlements.APMPshouldbeinstructivetoapotentialbuyerbecauseitwillincludespecicinformationabouteachparcelfordispositionincludingthevalueofthepropertyonthedateofacquisitionandanestimateofthecurrentvaluethepurposeforwhichtheRDAoriginallyacquiredthepropertylotsizecurrentzoninganestimateofleaserentalorotherrevenuesgener-atedbythepropertyandadescriptionofthecontractualrequirementsforthedispositionofthosefundsthehistoryofenvironmentalcontaminationincludingdesignationasabrowneldsiteandthehistoryofanyremediationeortandadescriptionoftheparcelspotentialfortransit-orienteddevelopmentandabriefhistoryofallpreviousdevelopmentproposalsandactivitiesfortheparcel.WhenWillPMPPropertyDealFlowBeginCurrentlawdoesnotprovidethetimeframebywhich-whenthepropertydescribedinaPMPwillgotomarket.RatherSAsareworkingtogureoutthebestwaytoavoidre-salepricingbyoodingthemarketwithformerRDAparcels.GiventhatOBsneedtoapproveofdispositionREsourceSummer2013plansitislikelythateachdispositionwillneedtobesupportedbyanMAIappraisal.ThustheprocessforthedispositionoftheAandBbucketsofpropertywilltaketimebeheavilydocumentedandbehighlycompetitiveoncedealshitthemarket.SomerealestatebrokeragesandonlineauctionhousesarealreadytryingtogetaheadoftheprocessandfunnelPMPdispositionsthroughauctionsites.OthersaremeetingdirectlywitheachSAtoensuretheabilitytobidonpropertycomingtomarket.UniqueOpportunityDespitethebureaucraticmorassandred-tapemanyRDAsholdfairlylargeparcelsofpropertywhichintherighthandscouldturnintosignicantopportunities.DevelopersandotherrealestateinvestmentprofessionalsarecarefullywatchingthePMPsinthehopesofacquiringpropertyreadyfordevelopment.nCurrentlawdoesnotdescribethetimeparametersofwhenthepropertydescribedinaPMPwillgotomarket.RatherSAsareworkingtogureoutthebestwaytoavoidre-salepricingbyoodingthemarketwithformerRDAparcels. loanorimposeminimumqualicationrequirementsforsuchlenders.Somelenderswillagreetolimitthepoolofpotentiallenderstoeligibleassigneesthataredenedasotherlendersinthesyndicatelenderaliatesandfundsmanagedbyalenderoritsaliate.LenderConsentAnumberofdecisionsandactionsonthepartofthelendersinasyndicatedloanrequirethemajoritysupermajorityorunanimousconsentofthelendersinthelendergroup.Thesedecisionsandactionsincludeconsenttodirectandindirectequitytransfersintheborrowerapprovalofandchangestobudgetschangesintheidentityofthepropertymanageroradeveloperplansandspecicationsandreplacementofaguarantorparticularlyincaseswheretheguarantorisindefaultofitscovenantsinitsguaranty.Whenaloaninvolvesmanylendersitisextremelyimportantfortheborrowertonegotiateforthelenderspre-approvalofcertainactionsintheloandocumentsincludingprovidingforthefollowingFlexiblepermittedtransferprovisionsallowingtheborrowertomakecertaintransferswithouttheconsentoftheadministrativeagentorthelenderssuchasthosetransfersthatdonotresultinachangeofcontroloftheborrower.Anobjectivestandardforthereplacementofthepropertymanagerordeveloperuponadefaulttoavoidproblemsanddelays.Criteriaforidentifyingandengagingreplacementpropertymanagersanddeveloperswithoutlenderconsent.Thelenderspre-approvalbasedontheestablishmentofminimumnancialrequirementsofreplacementbyDeanC.PappasandAlisonJ.WaisToavoidholdingloansontheirbalancesheetsonalong-termbasislenderswilloftensyndicatelargecommercialloansthroughco-lenderandparticipationarrangements.Thesesyndicationscanbecomprisedofasfewastwoorasmanyasadozendierentlenders.Theadministrativeagentfortheloantypicallyoneofthesyndicatelendershandlesallloandocumentnegotiationsandistheinterme-diarybetweentheborrowerandthelendergroup.Howevercertaincriticallenderdecisionsandactionsimpactingtheloanrequiretheapprovalmajoritysupermajorityorunanimousdependingupontheissueofthelendergroup.Thusfortheborrowerasyndicatedloanbegetsahostofissuesthatmustbeconsidered.KnowYourLendersTheborrowershouldinitiallyasktheadministrativeagenttoidentifythelenderswhowillco-lendorpartici-pateintheloanasthelendinggroupmayimpacttheloaninanumberofways.Manytimesthesyndicationisaccom-plishedatclosingoftheloanandtheborrowercanevaluatethelendersthatcomprisethelendergroupandaddressanyconcernsregardingeachlenderscredit-worthinessoridentitybeforetheloancloses.Howeverthesyndicationisoftencompletedafterloanclosing.Inadditioneveniftheloanissyndicatedpriortotheclosingthesyndicatelendersmaylaterassigntheirinterestsintheloantoalenderunknownatthetimeofclosing.Inbothsituationsitbehoovestheborrowertonegotiateprovi-sionsthataddressthesecircumstances.Theborrowermaymitigatetheriskofanunwantedlenderjoiningthesyndicationbynegotiatingforcertaincontrolsonorqualicationrequirementswithrespecttothelendersthatmayacquireaninterestintheloan.Forexampletheborrowermaynegotiateforapprovalrightswithrespecttoanylenderacquiringaninterestinthe10 11DeanC.PappasisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2525ordpappasgoodwinprocter.com.AlisonJ.WaisisanassociateintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2517orawaisgoodwinprocter.com.guarantorsuponadefaultundertheloancausedbyaguarantor.Approvalofcertainmatterslimitedtothatofjusttheadministrativeagentorinlimitedcasesamajorityoflenders.Ifconsentofallofthelendersasupermajorityorevenamajorityoflendersisrequiredtheborrowersabilitytooperateconstructdevelopandmanagethepropertycanbesignicantlyimpacted.Howevercomprisingthesyndicatewithlendersholdingamajorityorsupermajoritywithwhomtheborrowerhasagoodworkingrelationshipandregularlydoesbusinesswithcouldmitigatetheimpactsubstantiallyandallowtheborrowermaximumexibilitytooperateitsproperty.FutureAdvancesAnytimeaborrowerobtainsaloanthatrequiresfutureadvancessuchasaconstructionloantheborrowertakesariskthatthelendersmaynotbeabletofundtheadvance.Aborrowercanminimizethisriskbycontrollingthelenderswhomayparticipateintheloanbuttheborrowerdoesnotalwayshavetheleveragetonegotiatesuchcontrols.Insomecasestheadministrativeagentmaymakeadvancestotheborroweronbehalfofthelendersinrelianceontheotherlendersagreementtopaytheadministrativeagent.Ifthelendersfailtomakepaymentstotheadministra-tiveagentitmayhaveanunfetteredrighttorecallthefundsadvancedfromtheborrowertogetherwithanyapplicableinterestthereon.Therecalloftheadvancesisproblematicfortheborrowerwhohasalreadycommittedorusedthesefundstopaycontractorsvendorssuppliersorotherthirdparties.Toaddressthisproblemaborrowershouldconsiderirequiringalllenderstofundanydisbursementupfronttherebyeliminatingtheriskthatanyfundswouldberecalledbytheadministrativeagentiiprovidingthattheadminis-trativeagentcannotrecallfundsafteranoutsidedatee.g.30daysandiiirequiringimmediatenoticefromtheadministrativeagentifanylenderfailstofunditsproratashareofanyportionoftheloan.Theborrowershouldalsofocusonprovisionsintheloandocumentssettingforththeconsequencestoadefaultinglenderforafailuretofund.Forexampletheotherlendersshouldbegiventheoptiontofundadefaultinglendersamount.Asanotherexampletheconsequencestothedefaultinglendershouldbesevereincludingprovisionsrequiringadefaultinglendertoassignitsinterestintheloantoanexistinglenderorsubordinatingthedefaultinglendersportionoftheloantotheotherportionsoftheloanandpossiblyprovidingthatthedefaultinglendersloanceasestoaccrueinterest.ForeignLendersBorrowersshouldbecognizantofloanassignmentstoforeignlenders.Newlawsbeingphasedinoverthenextfewyearsrequiresignicantwithholdingtaxesimposedonforeignlendersthatdonotmeetcertainrequirements.Iftheborrowerisrequiredunderthetermsoftheloandocumentstogross-upforwithholdingtaxesthentheassignmenttoaforeignlenderthatissubjecttosuchwithholdingtaxwouldbeverycostly.Theloandocumentsshouldprovideforeitherconsenttoassignmentsoverforeignlendersorshouldexcludesuchwithholdingtaxesfromthegross-uppaymentsowedbytheborrower.ConclusionWhileborrowersmaybeabletoobtainlargerloansonmoredesirabletermsfromasyndicateoflendersthatspreadtheexposureamongthegroupborrowersshouldcarefullyconsiderthemyriadissuesthatarisewhendealingwithaconsortiumoflenders.Withknowledgeofthepitfallsborrowersshouldbeabletonegotiateprovi-sionstominimizeoreveneliminatetherisksinvolvedinsyndicatedloans.nREsourceSummer2013 601SouthFigueroaStreet41stFloorLosAngelesCalifornia90017AGOODWINPROCTERPUBLICATIONFORTHEREALESTATEINDUSTRYRETURNSERVICEREQUESTEDBostonHongKongLondonLosAngelesNewYorkSanFranciscoSiliconValleyWashingtonDCwww.goodwinprocter.comGOODWINLONDONLondonBase.GlobalReach.Superiorbreadthanddepthofmarketknowledgeandexpertisewithinadedicatedrealestatesectoroffering.RealEstateFundsandFundFormationInvestmentManagementFinanceSeparateAccountsRealEstateMACross-BorderTransactionsRealEstateInvestmentAcquisitionsandDisposalsAtAssetandSPVsUnitTrustLevelsDevelopmentDevelopmentFundingandLettingsGlobalHospitalityandLeisureUKandCross-BorderTaxRegulatoryandComplianceVISITUSGoodwinProcterUKLLPTower4225OldBroadStreetLondonEC2N1HQUnitedKingdomPhone442074474200Fax442074474201PrintedWithGreenInk
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AGOODWINPROCTERPUBLICATIONFORTHEREALESTATEINDUSTRYSUMMER2013SOURCEnAIFMDWhatNon-EuropeanManagersMustKnownTheCMBSMarketRebootABalancingActnStageTwoCaliforniaRedevelopmentAgenciesPreparetoSellPropertynSyndicationNationBorrowerIssuesinSyndicatedLoans SOURCESUMMER2013AGoodwinProcterPublicationForTheRealEstateIndustryEditor-in-ChiefRobertM.HaightJr.EditorsLewisG.FeldmanJohnM.FergusonJohnT.HaggertyDouglasA.PrawChristopherB.PriceAndrewC.SucoProductionJessicaHekmatjahNathanG.LeonardDesignTheCastlePresswww.goodwinprocter.comCopyright2013byGoodwinProcterLLP.Allrightsreserved.Reproductioninwholeorpartwithoutpermissionisprohibited.Thispublicationmaybeconsideredadvertisingundertheethicalrulesofcertainjurisdictionsandshouldnotbeconsideredlegaladvice.ToensurecompliancewithrequirementsunderTreasuryDepartmentCircular230weinformyouthatthecontentsofthispublicationarenotintendedorwrittentobeusedandmaynotbeusedforthepurposeofiavoidingU.S.federaltaxpenaltiesoriipromotingmarketingorrecom-mendingtoanotherpartyanymatteraddressedherein.Eachtaxpayershouldseekadvicebasedonthetaxpayersparticularcircumstancesfromanindependenttaxadviser.MilkenInstituteGlobalConferenceGoodwinProcterwasaproudsponsorofthisyears16thAnnualMilkenInstituteGlobalConferenceApril28-May12013inLosAngelesCalifornia.Ourattorneysandclientswerealongside3000participantsfrommorethan50countrieswhoengagedwith550panelistscoveringtheworldsofnancerealestategovernmenteducationenergyenvironmenthealthmedicalresearchandmedia.PartnerandChairoftheLosAngelesOceLewFeldmanmoderatedapowerhousepanelofrealestateindustryleaderswhosharedtheircandidviewsoftodayscommercialrealestatemarketsrecovery.VisitGoodwinProcter.comtowatchthepanelandlearnmoreaboutourinvolvementinthecommunity.GOODNEWSIn1985afteralmost100yearsTheCoca-ColaCompanyreplacedtheoriginalformulaforitsnamesakesoftdrinkforanewformuladubbedNewCoke.Itisunclearwhythecompanyreplaceditscentury-oldformulabutonethingisclearthenewandimprovedbrandwasabust.LessthanthreemonthslaterthecompanyannouncedthereturnoftheoriginalformulawhichwasrebrandedasCokeClassicuntilNewCokewasociallydiscontinuedin2002.TheFordMotorCompanywasfoundedin1903survivedtheGreatDepressionandhasbeenanationalandworldwideleaderinautomobilemanufacturing.Initsrst50yearsFordintroducedseveraldozendierentmakesofcarseachwithvaryinglevelsofsuccess.Butin1957ForddecidedthatitsnewestproducttheEdselwasworthyofFordsmostelaborateproductlaunchinits50-yearhistory.September41957wasdubbedEDaytointroducethenewbrandtotheU.S.market.OnOctober131957FordsponsoredTheEdselShowtoshowcaseitsnewcar.Itopped.FordceasedproductionoftheEdselin1960havinglost350milliononthecarin1950dollars.NewandImprovedissometimesneither.Emergingfromthecrashof2008andthedicultyearsthatfollowedtherealestatemarketisattemptingitscomeback.Unlikeaproductthatisimprovedwithnewpackagingtasteorcolorweexploreinthesepageswhetherrealestateisimprovedthroughnewregulationsandstricterunderwriting.ThefourarticlesinthiseditionofREsourcehighlightthevariouschangesthatmakeupaportionofthenewandimprovedrealestatemarket.ChrisPriceandMarkLochiattodescribethenewCMBSmarketwithacomparisontothepriorCMBSmarketthatsueredsomuchduringtherecession.SamanthaLakeCoghlanandGlynnBarwickexploreEuropeanlegislationimpactingthemarketingandmanagingofrealestatefundsprovidinghelpfulinformationtothosenon-Europeanmanagersseekingtoinvestoverseas.CaliforniareactedtotherecessionbyeliminatingredevelopmentagenciesandLewFeldmanandDougPrawillustratetheopportunitythatawaitsinvestorsastheformerredevelopmentagenciesselltheirrealpropertyassets.SyndicationofloansisawayofreducingtherisksofholdingloansonthebooksandDeanPappasandAlisonWaisdiscussborrowerissuesinthesesyndicatedloans.Therealestatemarketisattemptingtoxtheperceivedproblemsthatledtoorwasaconsequenceoftherecessionbyrollingoutitsnewandimprovedproducts.WilltheseproductsyotheshelvescausingustocelebrateastrongermoreprosperousmarketOrwillwebesippingNewCokeinourEdselsOnlytimewilltell.RobertM.HaightJr.Editor-in-Chief 3REsourceSummer2013byChristopherB.PriceandMarkJ.LochiattoAtitspeakin2007priortothemeltdownof2008themarketforcommercialmortgage-backedsecuritiesCMBSwasfundingmorethan40ofcommercialrealestatemortgagelendingintheUnitedStatesincludingmorethan200billioninthatyearalone.Asloansfromthepre-meltdownperiodwhichisoftenreferredtoasCMBS1.0begintoreachmaturitytherewillbesignicantandincreasingdemandbyborrowersforrenancingproceeds.AresethealthyandgrowingCMBSmarketwillbeimportanttoaddressthisborrowerdemand.WilltheCMBSmarketinitscurrentcongurationi.e.CMBS2.0continuetogrowandavoidtheexcessesofCMBS1.0Thisgrowthwillbecriticalforcontinuedimprove-mentoftherealestatemarketgenerally.So-calledconduitlendersintheCMBSmarketoriginatemortgageloanstoborrowersthatarethenbundledandcarvedupintomultiplelevelsortranchesofdebtforwhichpublicandprivatesecuritiesareissuedandsoldtoinvestors.Asignicantamountoftheblameforthe2008marketmeltdownwasplacedwiththeCMBSmarket.Laxunderwritingresultedinexcessivefrothwhichallowedoriginatorstoreceiveoriginationfeesandthenpassalongrisktotheinvestors.AcomparisonofCMBS1.0andCMBS2.0reectsthevariousattemptsinthemarkettobetteralignriskspromotegrowthofconduitlendingandavoidtheexcessesofCMBS1.0allofwhichwillaecttheabilityofborrowerstotapintothemarket.Changesincludemorestringentunderwritingandrevisedborrowerandloandocumentationrequirementsaswellasincreasedregulatoryoversight.MoreStringentUnderwritingMoreconservativeunder-writingisakeyfeatureofCMBS2.0.Thetablebelowprovidesacomparisonoftypicalunder-writingstandardsunderCMBS1.0versusthoseunderCMBS2.0thedatainthetabledonotreectvariationsattributabletopropertytypesandmarkets.CMBS2.0incomparisontoCMBS1.0generallyreectssignicantlylowerloan-to-valueratiosLTVhigherdebtservicecoverageratiosDSCRandfewerloansthatareinterestonlywithoutanyprincipalamortization.ThedebtCMBS1.0CMBS2.0LoantoValueRatioOftenExceeding8080orlessDebtServiceCoverageRatio1.05x1.25xorgreaterInterestOnly55.59.3DebtYieldNA10-12CMBS2.0vs.CMBS1.0InadditiontofacingmorestringentunderwritingsponsorsofborrowersofCMBS2.0debtwillfaceexpandedrecourseobligationsundernon-recoursecarveoutguaranties.Thelistofso-calledbadactsthatcouldtriggerliabilityundernon-recoursecarveoutguarantieshasbeenexpandedfromwhatwasseeninCMBS1.0. 4AlsoCMBS2.0onlyunderwritesstabilizedin-placeincomegeneratedbyapropertybasedontrailingcashowandexcludesproformaincomebasedonborrowersprojectionsthatoftenwasincludedinCMBS1.0under-writing.MostCMBS2.0debtatoriginationhasnotincludedsubordinatedebtintheformofmezzaninedebtorB-notesandoftenprohibitsfuturemezzaninedebt.AlthoughCMBS2.0underwritingismoreconservativethanCMBS1.0itisnonethelessprovidinganalternativesourceofnancingtoborrowerswhoseprimarysourceofmortgagenancingsincethemarketmeltdownhasbeenlimitedtoinsurancecompaniesandcommercialbankswhichhavemorestringentunder-writingthanthatofCMBS2.0.BorrowersunderCMBS2.0havetheabilitytoaccessnon-recoursedebtwithhigherloan-to-valueratiostypicallyupto80permittedbyportfoliolendersupto70andtouseitforpropertytypesandmarketsthatportfoliolendersarenotunderwriting.HoweverdespitethestricturesofearlyunderwritingwithincreasedCMBSmarketvolumeandcompetitionamonglendersCMBSunderwritingstandardshavebeenlooseninginrecentyearssincetheCMBSmarketresumedinthewakeofthemeltdown.DSCRistrendingbackdownLTVratiosaretrendinguplendersareunderwritingsomeproformaincomeandthereisanincreaseduseofsubordinateB-noteandmezzaninenancing.Thislooseningofstandardsraisesyieldstandardi.e.netoperatingincomedividedbythemortgageloanamountwasnotsignicantinCMBS1.0butisplayingaprominentroleinCMBS2.0becauselowinterestratesinthecurrentmarketcaprateuctuationandprincipalamortizationlimittheusefulnessoftheDSCRstandardasametricforcomparingdierentCMBSissuancesandforprojectingtherenancingeligi-blityofamortgageloan. 5ChristopherB.PriceisapartnerintheNewYorkoceofGoodwinProcterandcanbereachedat212813-8951orcbpricegoodwinprocter.com.MarkJ.LochiattoisanassociateintheBostonoceofGoodwinProcterandcanbereachedat617570-8159ormlochiattogoodwinprocter.com.thequestionabouthowthemarketwillrespondandhoweectivetheotherfeaturesofCMBS2.0willbetocontroltheexcessesofCMBS1.0.RecourseObligationsandLoanCovenantsInadditiontofacingmorestringentunderwritingsponsorsofborrowersofCMBS2.0debtwillfaceexpandedrecourseobligationsundernon-recoursecarveoutguaran-ties.Thelistofso-calledbadactsthatcouldtriggerliabilityundernon-recoursecarveoutguarantieshasbeenexpandedfromwhatwasseeninCMBS1.0.Forexampleinreactiontothesignicantcostsanddelaysincurredbylendersinthemarketmeltdownasaresultofborrowersinterferingwithlenderspursuitofremediesoriginatorsareaddingsuchborrowerinterferencefollowinganeventofdefaulttothelistofbadactstriggeringfullrecourse.OtherexamplesofactionssometimesaddedtothelistofbadactstriggeringrecourseunderCMBS2.0includefailuretodelivertolenderinformationonthepropertyorprovidelenderaccesstotheproperty.InadditiontoexpandingthelistofbadactsCMBS2.0alsoaectstheconsequencesofsomebadacts.ForexampleintheeventofavoluntarybankruptcylingbyaborrowerunderCMBS1.0recoursemightthroughnegotiationbelimitedtotheactuallossesincurredbylenderbutunderCMBS2.0fullrecoursewouldmostlikelybetriggeredfortheentireamountdueundertheloan.BorrowersofCMBS2.0debtwillencounteradditionalloanandborrowerorganizationaldocumentationrequire-mentsthatwerepresentbutoftenwaivedinCMBS1.0.Originatorswillrequiredetailedreportingcovenantsoftheborroweranditssponsoraswellasnetworthandliquiditycovenants.DriveninlargepartbytheGeneralGrowthPropertiesbankruptcycasein2009borrowerswillalmostalwaysberequiredtoenterintoacashmanagementarrangementthatrequiresallcashfromthepropertytoowtoanaccountinwhichthelenderhasaperfectedsecurityinterest.ThestructuremaybeeitherahardlockboxmeaningthatthelendercontrolstheaccountREsourceSummer2013andtheapplicationofcashproceedsinaccordancewiththewaterfallintheloandocumentsoraspringinglockboxwhichcreatesahardlockboxuponcertaintriggeringeventstypicallyaneventofdefaultorfailuretomeetaDSCRtest.Fundingcashreservesupfrontatloanoriginationaswellasduringthetermoftheloanmayalsoberequiredforcapitalrequirementstenantimprovementcostsandleasingcommissions.Alsowithrespecttoindependentdirectorswhosear-mativevoteisnecessarytotakecertainmaterialactionslikeavoluntarybankruptcylingborrowersinCMBS2.0arebeingrequiredtouseindependentdirectorsfromnationally-recognizedcompaniesandtoobtainlenderapprovalpriortotheirremovalandreplacement.EvolvingStructureCMBSloanvolumewasvirtuallynon-existentin2008and2009inthewakeofthedownturnbutwiththere-emergenceoftheCMBSmarketandtheimplementa-tionofCMBS2.0volumehasincreasedmodestlysince2009reachingmorethan45billionin2012andmorethan13billioninthersttwomonthsof2013.Itisprojectedtoexceed65billionfor2013.ThemarketwillcontinuetotestCMBS2.0asunderwritingstandardsvarysecuritizationstructuringevolvesandregulatoryreformsareimplemented.ForCMBS2.0togrowasasourceofmortgagenancingaproperbalancebetweenadditionalcostsandrestrictionstoavoidpreviousexcessesmustbestruck.nHoweverdespitethestricturesofearlyunderwritingwithincreasedCMBSmarketvolumeandcompetitionamonglendersCMBSunderwritingstandardshavebeenlooseninginrecentyearssincetheCMBSmarketresumedinthewakeofthemeltdown. bySamanthaLakeCoghlanandGlynnBarwickTheAlternativeInvestmentFundManagersDirec-tiveAIFMDisEuropeanlegislationintendedtocreateauniedregulatoryframeworkthroughoutEuropeforthemarketingandmanagingoffundsthatwillinduecoursereplacethecurrentpatchworkofprivateplacementregimes.Itwillaectthebusinessofallnon-EuropeanfundsandtheirmanagersthatwishtoattractinvestorsfromtheEuropeanEconomicAreaEEAi.e.mostofEuropeexceptSwitzerlandandtheChannelIslands.Sowhatdonon-EuropeanmanagersneedtoknowaboutAIFMDWhoistheManagerTheAIFMDappliestothemanagerofanyfundthatisbeingmarketedtoinvestorsintheEEA.EachfundmusthaveoneandonlyonemanagerwhoisresponsibleforthefundscompliancewiththeAIFMDandwhocarriesoutatleastoneoftheinvestmentmanagementandriskmanagementfunctions.Themanagermaydelegatetheday-to-dayfunctionsforwhichithasresponsibilityofteninvestmentmanagementtoaportfoliomanagerprovidedthatitneverthelessretainsrealsubstanceandstillcarriesoutatleastoneofinvestmentmanagementorriskmanagement.Inanon-EuropeancontextthemanagerforafundintheformofapartnershipisoftenthegeneralpartnerGP.Forfundsintheformofaninvestmentcompanythemanagerwilloftenbethefunditselfwhereitisself-managed.Inbothcaseshoweveritispermissibleforthefundifitwishestotransfertheresponsibilityofmanage-menttoathirdpartyinwhichcasethatentitywouldbethemanagerinstead.Carewillneedtobetakenbyfundsthereforetoensurethatthecorrectmanagerisidentiedespeciallyifthetransitionalprovisionsaretobeusedasdiscussedbelow.WhatTriggerstheAIFMDTheAIFMDistriggeredbymarketingintheEEA.TheAIFMDdenesmarketingasdirectorindirectoeringorplacementattheinitiativeofthemanagerofunitsorsharesinafund.Therearehoweverdierentinterpreta-tionsofthedenitionofmarketingthatafundmanagershouldfullyunderstand.FirsttheAIFMDprovidesthatreversesolicitationisnotmarketingthatiswheretheinitiativefortheinvestmentcomesfromtheinvestorratherthanfromthemanager.ThisapproachmaybeusefulforamanagerwhohasasmallnumberofrepeatEuropeaninvestorsinaseriesofitsfundsalthoughthemanagerwillneedtobecarefulnottoabusetheprovisionandtomaintainproperrecords.AIFMDWhatNon-EuropeanManagersMustKnow6 7SamanthaLakeCoghlanisapartnerintheLondonoceofGoodwinProcterandcanbereachedat4402074474203orslakecoghlangoodwinprocter.com.GlynnBarwickisacounselintheLondonoceofGoodwinProcterandcanbereachedat4402074474226orgbarwickgoodwinprocter.com.SecondtheUKtakestheviewthatafundismarketedonlywhenaspecicoerthatiscapableofacceptanceismadetoaninvestor.OnthisbasissoftmarketingsuchaspresentingdraftdocumentationthatisstillsubjecttonegotiationorapitchbookisnotmarketingforthepurposeoftheAIFMDandallowsamanagertotestthewatersinacountrybeforetakingthenalstepsrequiredbytheAIFMD.ThisinterpretationisspecicfortheUKalthoughothercountriesmayfollowsuit.WherethereisnomarketingintheEEAtheAIFMDwillnotapply.ThismeansthatfundswhichareclosedtonewinvestorsforexamplewillnotfallwithintheAIFMDevenwheretheyhaveEuropeaninvestors.HowDoesaManagerMarketItsFundWheresharesorunitsinafundaremarketedintheEEAamanagermustdothreethingsunderAIFMD1.Makecertainpre-investmentdisclosurestoinvestors.MostofthesewillnotbecontroversialandlikelyalreadyexistinproperlypreparedprivateplacementmemorandaPPMs.FundsthatdonothavePPMsmayneedtoprepareaseparateAIFMDdisclosurestatement.Oneofthecontroversialpre-investmentdisclosurerequirementsisthedescriptiontoinvestorsofhowotherinvestorsmayreceivepreferentialtreatmentundersideletters.2.Insomecountriesregistereachfundwiththeapplicablecountrysregulator.TheAIFMDdoesnotmandatestatestorequirethispre-marketingregistrationandonlytheUKandGermanyhaveintro-ducedapre-registrationregime.Theburdenofpre-registrationisnottheadministrationandcostofdoingsoalthoughtheseshouldnotbeunderesti-matedbuttheinabilityofthemanagertomarketandthereforeclosethetransactionuntilregistrationhasbeenmadeandapprovalgrantedbythelocalauthority.3.Providepost-investmentdisclosuretoinvestorsandtothelocalauthoritiesineachcountrywherethefundhasbeenmarketed.Mostoftheinforma-tionthatmustbedisclosedislikelyalreadydisclosedtoinvestorsalthoughtheremaybesomesensitivitytodisclosinggeneralinformationregardingremuner-ationofthemanagersemployeesandocers.Thisdisclosureisquitesimilartothatrequiredundertherulesapplicabletopublicly-listedcompanies.WhenisAIFMDEectiveTheimplementationdateofAIFMDisociallyJuly222013ImplementationDate.HowevertheAIFMDprovidesforatransitionalperiodofoneyearto2014formanagerswhoareperformingactivitiesundertheAIFMDasoftheImplementationDate.ThistransitionalexemptionappliestofundsthatthemanagermanagesontheImplementa-tionDateandalsotoanynewfundsthatthemanagerestablishesbeforeJuly222014.Forafundtotakeadvan-tageofthetransitionrulesitiscrucialasdiscussedabovetoidentifycorrectlythemanagerofeachfundontheImplementationDate.Forexamplewhereamanageristhegeneralpartnerofapartnershipandthepracticeistocreateanewgeneralpartnershipforeachnewfundthetransi-tionalprovisionwillnotbeusefulforfundsestablishedaftertheImplementationDatesincethenewGPwillnothavebeenmanagingasoftheImplementationDate.ItisalsonotyetclearwhetherallmemberstatesofEEAwillimplementthistransitionalprovisionfornon-Europeanmanagers.AlthoughtheUKandGermanyhavesaidthattheywillothercountrieshavenotyetcommitted.ConclusionTheAIFMDwillhavesignicantconsequencesforamanagerwhowishestoobtainaccesstoEuropeaninves-tors.Therearestepshoweverthatmaybetakenbyamanagertoreduceitsburdenunderthisnewlaw.Onestrategyistocreateahybridmarketingstrategythatrequiresdierentactionsindierentcountriesagreeonregistrationinsomecountriestakeadvantageofreversesolicitationinothercountriesandtestthewatersthroughsoftmarketingintherest.Likeanystrategythehybridstrategydependsonthefactsapplicabletoaspecicmanagerandrequirescarefulconsideration.nREsourceSummer2013 creatinganinventoryofallpropertyownedbytheRDAoverwhichitandtheOBhavejurisdictionexaminingongoingdevelopmentsaccountingforbondproceedsandunderstandingtheenforceableobligationstowhichtheSAislegallybound.TheSAsandOBsrolesincludecompletingorother-wisesatisfyingallRDAactivitiesandobtainingaFindingofCompletionFOCfromtheStateDepart-mentofFinanceDOF.TheFOCresemblesanorderliftinganautomaticstayinbankruptcysinceitallowsanSAtoidisposeofpropertyinaccor-dancewithitsPropertyManagementPlanPMPiispendproceedsofbondsthatwereissuedonorbeforeDecember212010andiiireinstateloanagree-mentsformerlybetweenanRDAanditshostjurisdiction.TodatetheDOFhasprovidedover200FOCstotheSAsofformerRDAsthroughouttheState.WithaFOCinhandtheSAmovesintoapost-complianceperiodthatbeginswithimplementingitsPMPandendswithdispositionofallRDAproperty.WhatDoesAPMPLookLikePMPssetforththemannerofdispositionofeachofthepropertieswithintheSAsjurisdiction.PMPsmustbepreparedwithinsixmonthsfollowingcompletionoftheFOC.PMPsmustdivideRDApropertyintothreebucketsandthendividethelastbucketintothreemoreBucket1-EconomicDevelopmentParcelsAnSAcanusethePMPforlongrangeplanningandcontinuetoownpropertysuitedforeconomicdevelopment.Bucket2-GovernmentPurposeandEnforceableObligationParcelsAnSAcanlistpropertyonaPMPfortransfertoacityorcountywherethereisagovern-mentalorfuturedevelopmentuseforit.TheSAcanalsolistpropertyunderacategorythatallowsittoretainorsellpropertytosatisfyanenforceableobliga-tioncreatedbyaformerRDA.byLewisG.FeldmanandDouglasA.PrawOverthenextfewyearsrecently-dissolvedCaliforniaRedevelopmentAgenciesRDAswillbesellingtheirinventoryofrealpropertyassets.Thispresentsalong-awaitedopportu-nityforrealestatedevelopers.AshasbeenwidelypublishedonJanuary312012CaliforniaGovernorJerryBrownsucceededinhiscampaigntoeliminateover400CaliforniaRedevelopmentAgenciesandthroughtheunwindingprocessreturnpropertytaxestolocaltaxingagencies.Thenalstepoftheprocessincludesprocessinganddisposingofthousandsofparcelsofformer-RDArealestate.Thecharacteristicsandqualityoftheseassetsvaryfromstrategicurbaninllparcelswithdevelopmentpoten-tialtolessdesirablesurplusorheavilyblightedproperties.ThesaleofRDApropertyrequirestheeortsandapprovalsofthreegovernmentalentities.TheSuccessorAgencySAoftheformerRDAservesasthepropertyliquidatorwhiletheOversightBoardOBservesasacreditcommitteeofsorts.BoththeSAandOBarecreaturesofStatelawwithlimitedbutimportantresponsibilities.SinceFebruary12012eachSAhasbeenchargedwith8 LewisG.FeldmanisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2688orlfeldmangoodwinprocter.com.DouglasA.PrawisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2664ordprawgoodwinprocter.com.9Bucket3-FreeRangeChickenParcelsTherestofthepropertieswillbeoeredforsaleafterbeingplacedintooneofthreeadditionalbasketsApropertiesarestrategicpropertiesthatcanbeusedfordevelopment.EntitlementswillvarybutApropertiesmaybeaccompaniedbyapprovedentitle-ments.Bpropertiesarethosethatrequirezoningapprovalsorotherentitlementsbeforedevelopment.Cpropertiesarethestoryparcelstheirregularandtheblightedwithlittleoroutdatedentitlements.APMPshouldbeinstructivetoapotentialbuyerbecauseitwillincludespecicinformationabouteachparcelfordispositionincludingthevalueofthepropertyonthedateofacquisitionandanestimateofthecurrentvaluethepurposeforwhichtheRDAoriginallyacquiredthepropertylotsizecurrentzoninganestimateofleaserentalorotherrevenuesgener-atedbythepropertyandadescriptionofthecontractualrequirementsforthedispositionofthosefundsthehistoryofenvironmentalcontaminationincludingdesignationasabrowneldsiteandthehistoryofanyremediationeortandadescriptionoftheparcelspotentialfortransit-orienteddevelopmentandabriefhistoryofallpreviousdevelopmentproposalsandactivitiesfortheparcel.WhenWillPMPPropertyDealFlowBeginCurrentlawdoesnotprovidethetimeframebywhich-whenthepropertydescribedinaPMPwillgotomarket.RatherSAsareworkingtogureoutthebestwaytoavoidre-salepricingbyoodingthemarketwithformerRDAparcels.GiventhatOBsneedtoapproveofdispositionREsourceSummer2013plansitislikelythateachdispositionwillneedtobesupportedbyanMAIappraisal.ThustheprocessforthedispositionoftheAandBbucketsofpropertywilltaketimebeheavilydocumentedandbehighlycompetitiveoncedealshitthemarket.SomerealestatebrokeragesandonlineauctionhousesarealreadytryingtogetaheadoftheprocessandfunnelPMPdispositionsthroughauctionsites.OthersaremeetingdirectlywitheachSAtoensuretheabilitytobidonpropertycomingtomarket.UniqueOpportunityDespitethebureaucraticmorassandred-tapemanyRDAsholdfairlylargeparcelsofpropertywhichintherighthandscouldturnintosignicantopportunities.DevelopersandotherrealestateinvestmentprofessionalsarecarefullywatchingthePMPsinthehopesofacquiringpropertyreadyfordevelopment.nCurrentlawdoesnotdescribethetimeparametersofwhenthepropertydescribedinaPMPwillgotomarket.RatherSAsareworkingtogureoutthebestwaytoavoidre-salepricingbyoodingthemarketwithformerRDAparcels. loanorimposeminimumqualicationrequirementsforsuchlenders.Somelenderswillagreetolimitthepoolofpotentiallenderstoeligibleassigneesthataredenedasotherlendersinthesyndicatelenderaliatesandfundsmanagedbyalenderoritsaliate.LenderConsentAnumberofdecisionsandactionsonthepartofthelendersinasyndicatedloanrequirethemajoritysupermajorityorunanimousconsentofthelendersinthelendergroup.Thesedecisionsandactionsincludeconsenttodirectandindirectequitytransfersintheborrowerapprovalofandchangestobudgetschangesintheidentityofthepropertymanageroradeveloperplansandspecicationsandreplacementofaguarantorparticularlyincaseswheretheguarantorisindefaultofitscovenantsinitsguaranty.Whenaloaninvolvesmanylendersitisextremelyimportantfortheborrowertonegotiateforthelenderspre-approvalofcertainactionsintheloandocumentsincludingprovidingforthefollowingFlexiblepermittedtransferprovisionsallowingtheborrowertomakecertaintransferswithouttheconsentoftheadministrativeagentorthelenderssuchasthosetransfersthatdonotresultinachangeofcontroloftheborrower.Anobjectivestandardforthereplacementofthepropertymanagerordeveloperuponadefaulttoavoidproblemsanddelays.Criteriaforidentifyingandengagingreplacementpropertymanagersanddeveloperswithoutlenderconsent.Thelenderspre-approvalbasedontheestablishmentofminimumnancialrequirementsofreplacementbyDeanC.PappasandAlisonJ.WaisToavoidholdingloansontheirbalancesheetsonalong-termbasislenderswilloftensyndicatelargecommercialloansthroughco-lenderandparticipationarrangements.Thesesyndicationscanbecomprisedofasfewastwoorasmanyasadozendierentlenders.Theadministrativeagentfortheloantypicallyoneofthesyndicatelendershandlesallloandocumentnegotiationsandistheinterme-diarybetweentheborrowerandthelendergroup.Howevercertaincriticallenderdecisionsandactionsimpactingtheloanrequiretheapprovalmajoritysupermajorityorunanimousdependingupontheissueofthelendergroup.Thusfortheborrowerasyndicatedloanbegetsahostofissuesthatmustbeconsidered.KnowYourLendersTheborrowershouldinitiallyasktheadministrativeagenttoidentifythelenderswhowillco-lendorpartici-pateintheloanasthelendinggroupmayimpacttheloaninanumberofways.Manytimesthesyndicationisaccom-plishedatclosingoftheloanandtheborrowercanevaluatethelendersthatcomprisethelendergroupandaddressanyconcernsregardingeachlenderscredit-worthinessoridentitybeforetheloancloses.Howeverthesyndicationisoftencompletedafterloanclosing.Inadditioneveniftheloanissyndicatedpriortotheclosingthesyndicatelendersmaylaterassigntheirinterestsintheloantoalenderunknownatthetimeofclosing.Inbothsituationsitbehoovestheborrowertonegotiateprovi-sionsthataddressthesecircumstances.Theborrowermaymitigatetheriskofanunwantedlenderjoiningthesyndicationbynegotiatingforcertaincontrolsonorqualicationrequirementswithrespecttothelendersthatmayacquireaninterestintheloan.Forexampletheborrowermaynegotiateforapprovalrightswithrespecttoanylenderacquiringaninterestinthe10 11DeanC.PappasisapartnerintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2525ordpappasgoodwinprocter.com.AlisonJ.WaisisanassociateintheLosAngelesoceofGoodwinProcterandcanbereachedat213426-2517orawaisgoodwinprocter.com.guarantorsuponadefaultundertheloancausedbyaguarantor.Approvalofcertainmatterslimitedtothatofjusttheadministrativeagentorinlimitedcasesamajorityoflenders.Ifconsentofallofthelendersasupermajorityorevenamajorityoflendersisrequiredtheborrowersabilitytooperateconstructdevelopandmanagethepropertycanbesignicantlyimpacted.Howevercomprisingthesyndicatewithlendersholdingamajorityorsupermajoritywithwhomtheborrowerhasagoodworkingrelationshipandregularlydoesbusinesswithcouldmitigatetheimpactsubstantiallyandallowtheborrowermaximumexibilitytooperateitsproperty.FutureAdvancesAnytimeaborrowerobtainsaloanthatrequiresfutureadvancessuchasaconstructionloantheborrowertakesariskthatthelendersmaynotbeabletofundtheadvance.Aborrowercanminimizethisriskbycontrollingthelenderswhomayparticipateintheloanbuttheborrowerdoesnotalwayshavetheleveragetonegotiatesuchcontrols.Insomecasestheadministrativeagentmaymakeadvancestotheborroweronbehalfofthelendersinrelianceontheotherlendersagreementtopaytheadministrativeagent.Ifthelendersfailtomakepaymentstotheadministra-tiveagentitmayhaveanunfetteredrighttorecallthefundsadvancedfromtheborrowertogetherwithanyapplicableinterestthereon.Therecalloftheadvancesisproblematicfortheborrowerwhohasalreadycommittedorusedthesefundstopaycontractorsvendorssuppliersorotherthirdparties.Toaddressthisproblemaborrowershouldconsiderirequiringalllenderstofundanydisbursementupfronttherebyeliminatingtheriskthatanyfundswouldberecalledbytheadministrativeagentiiprovidingthattheadminis-trativeagentcannotrecallfundsafteranoutsidedatee.g.30daysandiiirequiringimmediatenoticefromtheadministrativeagentifanylenderfailstofunditsproratashareofanyportionoftheloan.Theborrowershouldalsofocusonprovisionsintheloandocumentssettingforththeconsequencestoadefaultinglenderforafailuretofund.Forexampletheotherlendersshouldbegiventheoptiontofundadefaultinglendersamount.Asanotherexampletheconsequencestothedefaultinglendershouldbesevereincludingprovisionsrequiringadefaultinglendertoassignitsinterestintheloantoanexistinglenderorsubordinatingthedefaultinglendersportionoftheloantotheotherportionsoftheloanandpossiblyprovidingthatthedefaultinglendersloanceasestoaccrueinterest.ForeignLendersBorrowersshouldbecognizantofloanassignmentstoforeignlenders.Newlawsbeingphasedinoverthenextfewyearsrequiresignicantwithholdingtaxesimposedonforeignlendersthatdonotmeetcertainrequirements.Iftheborrowerisrequiredunderthetermsoftheloandocumentstogross-upforwithholdingtaxesthentheassignmenttoaforeignlenderthatissubjecttosuchwithholdingtaxwouldbeverycostly.Theloandocumentsshouldprovideforeitherconsenttoassignmentsoverforeignlendersorshouldexcludesuchwithholdingtaxesfromthegross-uppaymentsowedbytheborrower.ConclusionWhileborrowersmaybeabletoobtainlargerloansonmoredesirabletermsfromasyndicateoflendersthatspreadtheexposureamongthegroupborrowersshouldcarefullyconsiderthemyriadissuesthatarisewhendealingwithaconsortiumoflenders.Withknowledgeofthepitfallsborrowersshouldbeabletonegotiateprovi-sionstominimizeoreveneliminatetherisksinvolvedinsyndicatedloans.nREsourceSummer2013 601SouthFigueroaStreet41stFloorLosAngelesCalifornia90017AGOODWINPROCTERPUBLICATIONFORTHEREALESTATEINDUSTRYRETURNSERVICEREQUESTEDBostonHongKongLondonLosAngelesNewYorkSanFranciscoSiliconValleyWashingtonDCwww.goodwinprocter.comGOODWINLONDONLondonBase.GlobalReach.Superiorbreadthanddepthofmarketknowledgeandexpertisewithinadedicatedrealestatesectoroffering.RealEstateFundsandFundFormationInvestmentManagementFinanceSeparateAccountsRealEstateMACross-BorderTransactionsRealEstateInvestmentAcquisitionsandDisposalsAtAssetandSPVsUnitTrustLevelsDevelopmentDevelopmentFundingandLettingsGlobalHospitalityandLeisureUKandCross-BorderTaxRegulatoryandComplianceVISITUSGoodwinProcterUKLLPTower4225OldBroadStreetLondonEC2N1HQUnitedKingdomPhone442074474200Fax442074474201PrintedWithGreenInk