Troutman Sanders Report: Due Diligence During Strange Times

Mark Halloron, Director GRS | Corteq

Mark Halloron, Director
GRS | Corteq
(732) 450-8960
mhalloran@grs-global.com

It was an interesting day for a commercial real estate convention.

Troutman Sanders’ Annual New York Lending Conference took place on Nov. 9, the day after we found out that Donald Trump will be our next president.

Needless to say, it was a bit of a distraction. The speakers really did not weigh in on the results, and even now, a couple weeks later, it’s still hard to know what the impact is going to be on commercial real estate.

Despite the rigmarole taking place on the political front, though, we did hear about plenty of interesting topics regarding lending and due diligence.

The opening panel focused on how to structure finance deals during the “credit craze.” In addition to the quality and current valuation of an asset, the whole panel noted the importance of the sponsor’s track record as a major factor in structuring a transaction. There was a very lively discussion about the use of a bankruptcy (BK) filing as a tool for a borrower. The panel agreed that a BK filing in the past does not preclude contemplating or originating a new loan for that sponsor, and even for the property that was the subject of the BK. The panel noted that there’s a clear risk for the abuse of BK protection by sponsors simply trying to escape from financial obligations. The lenders noted that a BK filing, as part of the restricting of the debt package of a property, is a useful tool for both lenders and borrowers.

The filing by U-Haul, and the subsequent reorganization of the company, was touted as a proper use of BK protection. An attendee asked the panel about the appropriateness of an unnamed (but thinly-veiled) wealthy sponsor over leveraging properties, taking fees when the property does not perform, and the subsequently filing for BK. This approach was widely panned by the panel, which also included one sponsor, as an abuse of the system.

I also attended a panel on the role of environmental due diligence in CRE lending. Much of the discussion focused on the impact of the 2013 changes to the ASTM standard for Phase I ESAs, which provided environmental professionals (EPs) with additional ways to categorize the risk, or Recognized Environmental Conditions (REC), at property. The panel of consultants seemed in general agreement that the 2013 changes allowed the EP greater discretion in determining RECs, but that the overall approach to Phase I due diligence was not greatly altered. Of significant importance was confirmation of the necessity of understanding your client’s risk tolerance and to craft and follow a scope of work that meets those parameters. The ASTM standard sets for minimum due-diligence guidance should then be tailored to the needs of the transaction and the end user.

Surprisingly, proper flood insurance documentation is an issue that another panel of Troutman attorneys noted can severely hamper proceedings at the closing table. The panel noted that some of the requirements seem archaic and maybe aren’t keeping up with changing regulations. The best prescription is to understand the requirements of this seemingly basic component of a loan commitment, well before getting to the closing table.

Finally, during the closing session, which forecasted how 2017 will shape up for commercial real estate, all of the panelists recognized the challenges faced by the CMBS sector, especially with risk-retention provisions that go into effect as a dubious early holiday present on Dec. 24 of this year. That noted, the upside for 2017 and beyond is the ample liquidity in the debt and equity markets, the continued improvement in the metrics for the economy as a whole, and increased foreign interest in investment in trophy assets in gateways cites (and maybe beyond). Multifamily demand still remains very strong, and the risk of over-building in this current cycle seems somewhat mitigated by lenders requiring a much higher level of equity in the deals done pre-2008. With a full-suite of nationwide CRE services from pre-acquisition due diligence to title and closing services, the GRS Group family of companies is committed to understanding the challenges and opportunities in our industry, and looks forward to continuing to serve our client’s needs in 2017.

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