Timothy J. Boyce

1. Real Estate Loan Workouts: What Lenders and Borrowers Both Want and NeedABA Section of Business Law (Real Estate Financing Subcommittee)2009 Spring Meeting Timothy J. Boyce April 18, 2009

2. Summary of CMBS Issuance Source: Commercial Mortgage Alert

3. Holders of Commercial & Multifamily Mortgage Loans Source: CMSA, Flow of Funds Accounts of the United States Federal Reserve Release Z.1

4. Overview of a Securitization

5. Modifications, Waivers, Amendments and Consents • What modifications, waivers, amendments and consents (a “modification”) can the Master Servicer agree to without the consent of any of the Special Servicer, the Trustee or any Certificateholder? • The Master Servicer can agree to modifications so long as all of the following conditions are met: 1) The loan must be a non-Specially Serviced loan 2) All modifications must be in writing • All modifications must comply with the Servicing Standard • The modification does not violate the REMIC rules

6. Understanding REMICs • Real Estate Mortgage Investment Conduits • The purpose of a REMIC is to create multiple interests in a pool of mortgages without adding an additional layer of tax on the overall transaction (a “pass-through” entity) • Substantially all of REMIC’s assets must be a static pool of qualified mortgages

7. Consequences of Loan Modification • Modification: any alteration of a legal right or obligation of the issuer or a holder of a debt instrument • Significant Modification: generally any change in the terms of an obligation that would be treated as an exchange of obligations under IRC § 1001

8. If a loan is “significantly modified,” the REMIC is treated as though the unmodified loan were paid off and a “new” modified loan were made as a replacement If a significant modification occurs after the obligation has been contributed to the REMIC, the modified obligation will not be a qualified mortgage Other rules apply if the loan is in default or in imminent danger of defaulting REMIC allows any kind of modification (no restrictions) A defaulted loan will be transferred from the master servicer to the special servicer ─ remember ─ it is still subject to the servicing standard Consequences of Loan Modification(cont’d)

9. Consequences of Loan Modification(cont’d) • There are about 25 types of modifications to loans that typically do not present a problem • The “original terms” exception (discussed below) • Most assumptions • Non material modifications: • Changes in the terms of a loan due to default (or reasonably foreseeable default) • Waivers of “due-on-sale” clauses • Waivers of “due-on-encumbrance” clauses • Lender’s stay or temporary waiver (up to 2 years) • Substitution of substantially similar credit enhancement contracts • Amendments to the financial covenants • Subdivision of parcel without changing total collateral • Most changes to a lease

10. Modifications That Do Not Pose a Problem • A small change in yield: the yield must not vary from the annual yield on the unmodified instrument by more than the greater of-- • 1/4 of one percent (25 basis points); or • 5 percent of the annual yield of the unmodified instrument (.05 x annual yield) • Substitution of new obligor: for non-recourse debt, such substitution does not constitute a significant modification • Certain changes in timing of payments: must not result in a material deferral of scheduled payments. • Addition/deletion of co-obligor: must not result in a change in payment expectations • If the addition/deletion is part of a transaction that results in the substitution of a new obligor, the transaction is treated as a substitution of a new obligor, rather than as an addition/deletion of a co-obligor • A minor change in security or credit enhancement: must not release, substitute, add, or alter a substantial amount of collateral on a non-recourse debt instrument • Defeasance: If already permitted by the loan documents (can’t add the provision later)

11. Modifications That Do Not Pose a Problem (cont’d) • Original Terms Exception: an alteration of a legal right or obligation that occurs by operation of the original terms of a debt instrument is not a “modification” • Can occur automatically (e.g., an annual resetting of the interest rate based on the value of an index); or • Alteration due to the exercise of an option is a modification unless-- • The option is “unilateral”; and • The holder’s exercise does not result in a deferral of, or a reduction in, any scheduled payment of interest or principal

12. Modifications That Do Not Pose a Problem (cont’d) • An option is unilateral only if-- • The other party does not have a right to alter or terminate the instrument or put the instrument to a related person • Exercise of the option does not require the consent of the other party, a related party, or a court or arbiter • Exercise does not require consideration, unless the consideration is a de minimis amount, a specified amount, or an amount based on objective financial information

13. Examples of Significant Modifications • Substantial Change in Security or Credit Enhancement: if modification releases, substitutes, adds, or alters a substantial amount of collateral on a non-recourse debt instrument, it is a significant modification • Change in Priority of Debt: is a significant modification if it results in a change in payment expectations • Modification Changing Status as Debt: if modification results in an investment that is not debt for federal income tax purposes, it is a significant modification • Change in Recourse Nature: if modification changes the debt from recourse (or substantially all recourse) to non-recourse (or substantially all non-recourse), or vice versa, it is a significant modification

14. THANK YOU