Acquisition of Distressed Actual Property Mezzanine Debt — Gravel2Gavel Development & Actual Property Regulation Weblog — November 21, 2022

We just lately offered an overview of things to diligence when buying a mortgage mortgage in misery—and individually additionally mentioned points to diligence when buying a mezzanine mortgage in misery. This submit (the third on this collection) outlines Uniform Industrial Code (UCC) foreclosures usually phrases and describes key concerns for mezzanine lenders (and the purchasers of distressed mezzanine loans) considering or planning a UCC foreclosures.

In our prior posts, we’ve emphasised how diligence is vital. On this installment, we are going to discover how and why planning is additionally essential!

As we’ve defined in earlier posts, a mezzanine mortgage is secured by a pledge of pursuits in a property proprietor, and enforcement of a mezzanine mortgage falls below the UCC. On this regard, observe that whereas every State has a UCC, and sure States have enacted the “mannequin UCC” (that means reference ought to be made to every State’s UCC when crafting a UCC foreclosures), this submit will describe sure overarching “rules” and greatest practices which can be typically relevant throughout States.

Additionally, observe that whereas the UCC does permit for judicial foreclosures (not not like foreclosures on an actual property mortgage), right here we are going to concentrate on the “self-help” cures which can be out there to lenders below the UCC and which can be extra expeditious (i.e., sooner and cheaper) to finish. These cures—that are topic to UCC necessities that complement (and infrequently override) provisions within the mezzanine mortgage safety paperwork—are:

  • A public sale
  • A non-public sale
  • Strict foreclosures

The basic and tenet that ought to inform the planning and execution of any UCC foreclosures is the requirement below the UCC that “[e]very facet of a disposition of collateral, together with the strategy, method, time, place, and different phrases, have to be commercially affordable.” On this regard, observe that what’s commercially affordable is fact-specific and depending on market circumstances. Additionally observe that any after-the-fact evaluation by a court docket will concentrate on the course of and process employed by the foreclosing lender. Consequently, expertise and market consciousness are key, and cautious planning is crucial!

Allow us to start with a brief description of the “public sale.” A public sale is one the place there’s a significant alternative for aggressive bidding and requires some type of commercial (a discover of sale) to most of the people—resembling in trade publications the place UCC foreclosures are sometimes marketed. Notice that the UCC has a number of guidelines regarding the type and content material of the discover of sale that have to be given—and that whereas the UCC supplies for a 10-day discover interval as a protected harbor, longer durations of 30 days or extra are widespread. On this regard, observe that personal events could agree by contract (in a pledge and safety settlement) to procedures or requirements for public sale. If ever litigated, that settlement typically will likely be enforced by a court docket offered its phrases usually are not manifestly unreasonable or inconsistent with categorical provisions of the UCC.

The secured lender could bid on the collateral in a public sale (not like personal gross sales). This can be a key benefit for mezzanine lenders with a loan-to-own technique.

In creating a commercially affordable sale course of—and protecting in thoughts the overarching precept that “[e]very facet of a disposition of collateral, together with the strategy, method, time, place, and different phrases, have to be commercially affordable”—a mezzanine lender ought to take into account:

  • Retaining advisors, together with a dealer and/or auctioneer. Notice that these professionals could also be sources of data for these seeking to purchase mezzanine debt or property by a mortgage to personal technique;
  • Outreach to potential purchasers by a number of channels (for instance, brokers will sometimes attain out to focus on lists of purchasers/contacts they assume could also be energetic out there);
  • Info and time out there for diligence, together with the institution of an information room;
  • Permitting potential bidders to have entry to the property earlier than the public sale, if attainable;
  • Public discover necessities; and
  • Bidding procedures.

On the subject of the general public discover necessities, the statutory necessities contained in sections 9-613 and 9-614 of the UCC require that the secured lender (within the discover):

  • Embody details about the debtor and the secured celebration, an outline of the collateral, and the time and place of the public sale; and
  • Present for:
    • entry to information web site (sometimes upon execution of confidentiality agreements); and
    • deposit and shutting timing points and formal phrases of sale.

Recall, in structuring any sale, that there could also be “Certified Transferee” and different necessities imposed by any Intercreditor Settlement (see prior posts on ICAs right here and right here)—the settlement that sometimes exists between a mortgage lender and a mezzanine lender. These could embody necessities relating to who could be a foreclosing lender—and can seemingly additionally embody necessities about actions that have to be taken and deliveries that have to be happy (such because the requirement to ship supplemental ensures)—all of which have to be thought-about in getting ready a public discover (and structuring any sale).

As soon as the planning levels are accomplished and the discover is positioned, it’s time for the sale. Concerning the sale, observe that:

  • An public sale could also be digital;
  • The secured celebration doesn’t essentially want to just accept the best bid (e.g., it might be higher to just accept a lower cost that’s all-cash than the next value that’s half money, half notes);
  • It isn’t obligatory to point out that the public sale value was the perfect value out there out there; and
  • An public sale can at all times be adjourned with out a sale.

Additionally observe, relating to credit score bidding, {that a} mezzanine lender has the best to credit score bid as much as the complete quantity of its debt (and might bid extra quantities in money) if desired. The credit score bid quantity can embody all curiosity, charges and prices offered for within the mezzanine mortgage paperwork. Additionally observe that the mezzanine lender ought to take into account bidding lower than the complete quantity of its debt to protect its rights to pursue guarantors and different collateral.

We observe that, as a sensible matter, by the point of the public sale, the mezzanine lender is prone to have an excellent sense of any market curiosity within the collateral in order that it might probably construction its credit score bid accordingly.

Apart from a public sale, a secured lender could construction the sale as a “personal sale,” a sale by which there has not been an commercial that gave the general public a significant alternative to take part. In a non-public sale, the secured celebration can’t be the client of the collateral (apart from sure collateral sorts with publicly quoted market costs). As with a public sale, a non-public sale have to be performed in a commercially affordable method. In any other case, the creditor dangers exposing itself to legal responsibility. Right here, too, there is no such thing as a have to exhibit that the personal sale yielded the perfect value out there.

As well as, a secured lender could take into account “strict foreclosures.” In a strict foreclosures, the secured celebration could make a proposal to the mezzanine borrower to just accept the collateral in full or partial satisfaction of the mezzanine mortgage. The proposal have to be consented to by the mezzanine borrower after the default has occurred. Strict foreclosures agreements usually are not topic to the “industrial reasonableness” customary, however have to be made in “good religion.” This can be a distinction with out a distinction and suggests retaining appraisers or different professionals is warranted.

A mezzanine lender whose enforcement efforts usually are not commercially affordable or in any other case violate the UCC’s phrases could expose itself to legal responsibility below the UCC. For instance, and whereas we observe that the next provisions may be altered by contract, a debtor or obligor could possibly search injunctive aid towards a sale which isn’t commercially affordable (below UCC 9-625(a)). Equally, a debtor or one other junior secured creditor could search a declare for damages towards the lender (below UCC 9-625(b)-(c)) or could search restoration of damages for lack of surplus (below UCC 9-625(d)).

To keep away from such penalties, at all times consider the requirement for industrial reasonableness and put together rigorously. Planning is vital!

As a result of planning is vital, an understanding of potential chapter methods and points is required—and would be the matter of the following submit in our collection on the acquisition of distressed actual property debt.


Buying Distressed Actual Property Mezzanine Debt: A Diligence Guidelines

Buying Distressed Industrial Mortgage Loans: A Diligence Guidelines

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