Scotsman Guide - May 2009 Commercial Edition

Special-Purpose Entities

Continued from Page 22

any individual or other corporate entity;

n Prohibit dissolving the entity except in the event of specific enumerated occurrences and allow the independent manager or director the specific authority to continue the life of the SPE; and

n Prohibit the amendment of the organi-
zational document without the lender’s
consent.

The independent manager or director should not be affiliated with the SPE; its owners, managers or directors; or the lender. Because of the expanding need for independent managers and directors, a cottage industry has developed in which numerous companies and individuals have implemented comprehensive and efficient systems and procedures for offering their services as independent managers or directors. Fees for these services are relatively nominal and may range from $1,200 to $2,500 per year.

Keep in mind that the independent manager or director is not involved in the SPE’s daily operations. This individual’s authority should be limited to the approval of specific acts of the SPE that affect its viability, such as the approval of voluntary petitions in bankruptcy, the continuation of its life upon dissolution and the approval of the transfer of the entity’s assets.

By limiting the independent manager’s or director’s authority, SPE-owners may alleviate concerns they might have about their ability to control the entity’s direction, day-to-day operations and assets while also providing the lender with the protections it requires.

Minimizing risk

An SPE often gives a lender increased protection against potential borrower bankruptcies and potential delays in its collection efforts, but it will not eliminate all bankruptcy risks.

Although the entity’s organizational documents often contain language and provisions that prohibit the filing of a bankruptcy require the independent manager’s or director’s approval to file for voluntary bankruptcy, SPE-owners may disregard such provisions.

There is no legal way to prevent an entity or an individual from filing for bankruptcy. The bankruptcy court likely will be unaware of the requirements contained in the SPE’s organizational documents. It is the lender’s task to bring the lack-of-authority issue to the court’s attention as part of the bankruptcy proceedings.

Another unavoidable bankruptcy risk is involuntary bankruptcy initiated by the SPE’s other creditors. Granted, because of its limited purpose and the restrictive nature of the lender-required provisions in its organizational documents, the SPE should have limited creditors. As with the prohibition on filing bankruptcy, however, SPE-owners may disregard those provisions and acquire additional financing or credit, thus increasing the possibility of an involuntary bankruptcy.

Risks continue to expand in the lending world. Creative solutions to limit those risks will be vital in the years to come. An SPE may not be the perfect solution, but lenders may increasingly use this tool to protect themselves from watching their portfolios deteriorate again in the future.

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Bridge over Troubled Water
Continued from Page 24

Tenants, on the other hand, are typically not in the real estate business. They may look at their lease every five to seven years if issues arise or when renewal options come around. Familiarity with the lease is a matter of mutual importance, however.

The truth is that tenants are defaulting more often than most commercial real estate professionals have ever seen. So it’s time to dust off the documents and look at the default provisions.

“Before offering creative
solutions ... your
clients should run the
numbers to ensure that
the economics warrant
these concessions.”

When do they kick in? Is there a cure period in which the tenant can remedy the cause of the default? Is the cure period different for monetary and nonmonetary defaults? Once a default is established, what are each party’s remedies and obligations to mitigate damages?

Also, do not overlook the bigger picture: Is the document enforceable? Make sure that whoever executed the governing document still exists and that there has been a proper paper trail for all of its assignments and assumptions — even if a transfer occurred by corporate merger.

This caution applies not only to the

primary governing document’s signatory but also to the ancillary documents, including the guarantee, the letter of credit and any amendments.

Plus, advise your clients to clean up any administrative issues that are not documented properly. It’s much easier to do so when a tenant is in good standing than when the landlord is serving a default or eviction notice.

Be proactive

Once clients have analyzed their assets and the risks associated with each tenant thoroughly, they should be proactive in devising solutions to keep the revenue stream flowing.

It is easier to address these issues with tenants before they default on their lease or before they file for bankruptcy, which makes the lease subject to acceptance or rejection by the bankruptcy trustee.

Sound business judgment should guide any solutions that your clients derive. Tenants have a significant amount of leverage, and many landlords are offering concessions like never before.

Before offering creative solutions to a tenant in the hopes of keeping the building occupied, however, your clients should run the numbers to ensure that the economics warrant these concessions.

n n n

Amid the financial market’s turmoil and the deal drought in the commercial real estate market, brokers who take time to do their homework, to assess the risks, and to protect and preserve their clients’ current assets will help keep their company and their clients’ businesses afloat.