www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Risk Management Strategies for Troubled Real Estate Projects

James F. Dulcich

Darien S. Loiselle

Shareholders

Schwabe Williamson & Wyatt

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

The Stupid Engineer Awards*

*http://onlyfunnyjokes.com

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Risk Management Strategies for Troubled Real Estate Projects

James F. Dulcich

Darien S. Loiselle

Shareholders

Schwabe Williamson & Wyatt

www.schwabe.com

Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Challenging Times for Lenders and Borrowers

• Estimated value of distressed U.S. commercial real estate – $187 billion – up 33% from November 2009

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Lender’s Options for Recovering on Troubled Real Estate Loans• Foreclosure

• Deed in Lieu of Foreclosure

• Action on the Debt

• Workout Agreement/Loan Restructure

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Foreclosure• Judicial Foreclosure

– It is the only foreclosure remedy available for mortgages– Advantages

• Allows lender to obtain deficiency judgment• Provides forum for resolution of title disputes• Can be used for reformation of the security instrument

– Disadvantages• Delays associated with litigation• Mortgagor, trust deed grantor, and junior lien holders have

redemption rights

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

• Non-Judicial Foreclosure– This remedy is available only for trust deeds– Advantages

• Avoids litigation delays• No redemption rights can be exercised• Generally less expensive

– Disadvantages• Lender has no right to a deficiency

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

• Deed in Lieu of Foreclosure– Advantages

• Most efficient means of recovering the collateral

– Disadvantages• Does not extinguish junior encumbrances

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

• Action on the Debt

• Workout/Loan Restructure– Lender does not assume ownership of the

collateral– Borrower can be required to release claims

and waive defenses– Lender can add new collateral and guarantors

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Due Diligence Before Acquiring Real Property Collateral

• Title• Zoning

– Communicate with planning staff– Retain land use specialist

• Permits and Other Entitlements– Make sure that key permits and entitlements

have not expired– Communicate with borrower and local

jurisdiction

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Due Diligence Before Acquiring Real Property Collateral• Access

• Environmental– Obtain Phase I environmental site assessment– CERCLA exemptions may apply

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Risks of Third-Party Liability

• Environmental

• Condominium Projects

• Partially-completed Projects

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

What is the Problem?

• Litigation is expensive– That is not going to change

• Litigation is complex– Lawyers speak in Greek and operate in a

different universe

• Litigation often destroys business relationships, and almost always impairs them

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Major Challenges for Resolving Construction Disputes• A “perfect storm” for lawyers, not for owners

– Construction disputes generally involve multiple parties

– Construction disputes generally have complex responsibility issues

– Construction disputes generally involve complex insurance questions, both from defense and coverage

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Major Challenges for Resolving Construction Disputes

– Construction disputes generally require mounds of discovery through the written record by folks (lawyers) who do not understand how projects are constructed

– Construction disputes often are resolved by individuals (judges and juries) who never have driven a nail with a hammer

– Construction disputes are often handled by "litigators" rather than "problem solvers”

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

Where do owners/developers/contractorsoften go wrong with these matters

• Surprisingly, many do not have THEIR own counsel

• Many do not have the right team of experts

• Many simply think it is about winning and losing, rather than mitigating a business loss

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Bend, OR | Portland, OR | Salem, OR | Seattle, WA | Vancouver, WA | Washington D.C.

What are the creative solutions?