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Workout seminar shows pitfalls abound.

The problems involved in a workout deal are immense. Protecting your interest in a project can be time consuming and ultimatedly unsuccessful, if you aren't aware of the pitfalls, several lawyers demonstrated recently during a mock negotiation of a workout deal.

The negotiations were the focus of a seminar, sponsored by the Association of the Bar of the City of New York and moderated by Kenneth Block of LePatner, Block Pawa & Rivelis.

The subject of negotiation was a condominium development in New York City that had a toxic waste site on the land and had a construction loan from a bank suffering from a number of defaults.

Jonathan L. Mechanic, the lawyer representing the pseudo developer, offered a plan which would shift a fair amount of the burden of the cost to the lender and whose major feature was the sale of a number of units to a local hospital.

"We've already begun discussions with a hospital to have a bulk sale of the units," Mechanic told the seminar's audience. "Once we settle that, we'll lbe able to make a substantial payment on the loan."

The sale of the units, according to Mechanic's projections, in addition to the sale of large commercial units would bring about $66 million.

Since the loan outstanding was $109 million, Mechanic suggested that the amount of monies raised, minus taxes, commissions and ancillary fees, would settle more than half of the $109 million dollar loan. In exchange for these sales, Mechanic asked for several concessions to be made by the lender, which included $750,000 for the toxic waste clean up and expected litigation and a $500,000 capital working fund and a modification in payments on the interest.

Gregory P. Pressman of Schulte Roth & Zabel, representing the constrution lender, questioned the payment of a working fund and several of Mechanic's assumptions. "We don't want to see you walk away with money," Pressman said. "We're not going to agree this unless I get a guaranteed loan.

"Also, I'm not impressed with the bulk sale to the hospital," he added. "Nobody's going to buy into a building with a whole lot of orderlies and nurses walking around in uniform."

Pressman's main objective is to avoid giving the developer a "war chest" to use in possible litigation. "We also have no reason to cap any interest payment," Pressman replied to his proposal. Pressman also specified that a certificate of occupancy must be obtained before the lender would risk any more money.

Mechanic countered, saying "if you don't reach an accord, the $46 million purchase is not going to buy ... If we fight, the bulk buyer and the permanent lender is gone and $(66) million is out of the window."

Pressman then said he didn't care.

"Nothing you've said to me concerns me today," he said. "The hospital isn't going anywhere. We are not going to give up our personal guarantees."

Then K.C. McDaniel of Jones Day Reavis & Pogue, representing the bank regulator, said they would be extremely interested in getting the money back.

"The Federal Deposit Insurance Corporation (FDIC) would be very interested in the negotiations. They would have some problems about letting the loan guarantees walk. Asking for the release from the guarantees is aking the bank to take a 'hit'.

"We also don't care about cash flow coverage," she added "It has to be true equity."

George Thomas Griffith, associate regional counsel, The Prudential Insurance Company, representing the Permanent lender, wants to keep his company out of the entire process. "We don't want to be part of any workout," Griffith said, "and we would not be interested in an equity workout." Griffith wanted to keep his company totally out of the problems involving the lender and didn't want to put up any guarantees or additional loans to help the project along or bail out the developer.

Steven Horowitz of Clearly, Gottlieb, Steen & Hamilton, representing the limited partners said he would want his clients to be consulted about any changes in the status of the loans. "There could be legal problems created by this, -- he said. "What rights do the limited partners have? I'm not sure that I will allow the general partners to permit."

He's trying to limit his clients liability to any claims against the development general partners and prevent their involvement in any environmental clean up.

"Pursuing my clients will be a waste of time," Horowitz said. "Fortunately, my clients, didn't provide a letter of credit. Now the conversation shifted to talk of foreclosure and bankruptcy.

Terrence Dugan of Simpson Thatcher & Bartlett handled the bankruptcy issues. He said a bankruptcy for the developer would ba an attractive option if the construction lender opted to foreclose on the property. "Once we go for a bankruptcy, the foreclosure is forestalled," Dugan said. "All the developer has to do is prove that the assets are less than the debts. At the minimum, we're talking about six to nine months before a foreclosure could take place and the shortest case we've had in New York we was 11 months."

Richard Fries of Bachner Talley Polevoy & Misher handled the foreclosure. "Once you go into foreclosure it isn't a private matter. You have to file a notice," Fries said. "Any prospects for sales are gone because it is a piece of distressed property. But the problem is once any party files for bankruptcy, it's stayed. Also, each lien could b a nightmare for years.

"But once the lender takes the property, they will step in and manage it," he said. "That is something that more lenders are willing to do."

Richard Leland of Rosenman & Colin said no matter what happens to the land, the construction lender has the responsibility to clean up the site. "They must cleain it up and the must do it responsibility. And once they start, they'll always find something else. Once that happens, you'll be responsible for a total clean up."

Also speaking at the seminar was Paul J. Colleti, vice president and senior counsel, Security Title & Guaranty co., Steven Ziegler of Lowenthal Laudau Fischer & Ziegler and Herbert Koslov of Parker Duryee Rosff & Haft.
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Gilliard, Stephen
Publication:Real Estate Weekly
Date:May 22, 1991
Words:1020
Previous Article:Helping brokerage make its mark.
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