presents

Receiverships: An Effective Remedy for Distressed Commercial Real Estate

presents

Maximizing Property Values and Minimizing Legal RiskThrough Court-Appointed Receivers

A Li 90 Mi t T l f /W bi ith I t ti Q&A

Today's panel features:Richard T. Arrowsmith, Senior Vice President, Special Assets Group, GE Capital, Healthcare Financial Services, Bethesda, Md.

Thomas A. Seaman, CFA, Principal, Thomas Seaman Company, Irvine, Calif.

A Live 90-Minute Teleconference/Webinar with Interactive Q&A

, , p , p y, ,Daniel Brozost, Partner, Raines Law Group, Beverly Hills, Calif.

Thursday, September 9, 2010

The conference begins at:The conference begins at:1 pm Eastern12 pm Central

11 am Mountain10 P ifi10 am Pacific

You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrants.

For CLE purposes, please let us know how many people are listening at your location by y

• closing the notification box • and typing in the chat box your• and typing in the chat box your

company name and the number of attendeesattendees.

• Then click the blue icon beside the box to sendto send.

For live event only.For live event only.

• If you are listening via your computerIf you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and

lit f i t t tiquality of your internet connection.• If the sound quality is not satisfactory and you

li t i i t kare listening via your computer speakers, please dial 1-866-871-8924 and enter your PIN when prompted. Otherwise, please send e p o p ed O e se, p ease se dus a chat or e-mail sound@straffordpub.comimmediately so we can address the problem.

• If you dialed in and have any difficulties during the call, press *0 for assistance.

RECEIVERSHIPS: AN EFFECTIVE REMEDY FOR DISTRESSED COMMERCIAL REAL ESTATE

Maximizing Property Values and Minimizing Legal Risk Through Court-Appointed Receivers

Webinar Panelists:•Rick Arrowsmith – GE Capital

•Thomas Seaman – Thomas Seaman Company•Daniel S. Brozost, Esq. – Raines Law Group LLP

September 9, 2010

4Thomas Seaman

Company

Rick ArrowsmithRick is a Senior Vice President in the Special Assets Group of GE Capital, Healthcare Financial Services, a premier provider of financing to the healthcare industry with focus areas in Corporate Finance, Real Estate and Life Sciences. In this capacity, he is responsible for all aspects of loan workout and restructuring.

Rick is also the GE Capital, Healthcare Financial Services instructor for “Problem Loan Management and Workout Process Overview”, an internal Risk training class that he co-g , gdeveloped. He also co-instructs the “Problem Loan Detection” class and other risk management training classes.

Prior to his current role Rick was a Vice President at First Union responsible for a portfolioPrior to his current role, Rick was a Vice President at First Union responsible for a portfolio of subperforming and non-performing commercial real estate loans. He joined GE through the acquisition of Heller Financial in 2001 and subsequently led a quality project to ascertain the root causes of problem loans that resulted in green belt certification in 2004.

Rick received his Bachelor of Science degree in Finance from University of Maryland, in College Park, MD. He also received a Master of Science degree in Real Estate and Urban Development from American University in Washington, D.C.

5

eve op e o e c U ve s y W s g o , .C.

Thomas Seaman

Thomas A. Seaman is a Judicial Receiver and Principal of Thomas Seaman Company, which assists him in the execution of his duties as a court appointed fiduciary. Thomas Seaman Company provides business management services in civil matters which require a neutral third party to serve p g q p yas receiver, referee, provisional director, or administrator. Thomas Seaman Company has the capability to manage and administer a broad range of asset classes including operating companies, financial assets, real property and construction projects.

Mr. Seaman has over 30 years of business experience both in private industry and as a court-i t d fid i H i f CFO d C t ll d i Ch t d Fi i l A l tappointed fiduciary. He is a former CFO and Controller, and is a Chartered Financial Analyst

(CFA). Mr. Seaman entered the insolvency arena in 1989 and has served has receiver in over 175 matters since formation of Thomas Seaman Company. He has operated distressed businesses that were the subject of a State Court Receivership, Chapter 11 Bankruptcy estate, Federal regulatory action, partnership dispute, partition action, dissolution proceeding, probate matter, or in other litigation requiring a fiduciary. Thomas Seaman Company has operated companies in numerous i d t i i l di l t t f t i t ti h lth i t d li i iindustries including real estate, manufacturing, construction, healthcare, assisted living, service, hospitality and others. Mr. Seaman is experienced at seizing assets, stabilizing operations, and formulating & implementing business solutions.

Mr. Seaman earned a Bachelor of Science degree in Finance from the University of Illinois in 1979 and was awarded a CFA charter in 1993 Mr Seaman’s firm is licensed by the State of1979, and was awarded a CFA charter in 1993. Mr. Seaman s firm is licensed by the State of California as a Registered Investment Adviser and as a California Real Estate Broker. He is a member of the Institute of Chartered Financial Analysts, the Los Angeles Society of Financial Analysts, the California Receiver’s Forum, and the Orange County Bar Association, as a non-lawyer.

6 Thomas Seaman Company

Daniel S. Brozost, Esq.

Dan is a partner at Raines Law Group LLP, with a practice focused p p , pprimarily on transactional real estate matters, including asset and real property acquisitions and dispositions, finance, commercial leasing, formation and structuring of joint ventures, investment funds, syndications and other investment entities and private placements of debt and equity securities Dan represents a wideplacements of debt and equity securities. Dan represents a wide range of clients, including real estate investment funds, developers and syndication groups, institutional landlords and asset managers, commercial lenders, receivers, hedge funds, private equity investment firms, entrepreneurs and high-net worth families and i di id l

gindividuals.

Dan received his undergraduate degree from Cornell University, with a concentration in Industrial and Labor Relations. He received his Juris Doctorate from the University of Virginia School of Law. Prior to joining Raines Law Group LLP in 2007, Dan worked in the Los Angeles offices of Latham & Watkins LLP and Allen Matkins Leck Gamble Mallory & Natsis LLP.

7

Definition of ReceiverDefinition of Receiver “A receiver is a ministerial officer, agent, creature, hand or arm,

and temporary occupant and caretaker of property for, the court. And he represents the court appointing him, and he is the medium through which the court acts.” Pacific Indep. Co. v. W k ’ C ti A l Bd 258 C l A 2d 35Workman’s Compensation Appeals Bd., 258 Cal. App. 2d 35 (1968)

Receivership is an equitable remedy imposed by a court where a neutral third-party takes possession of real and personal property to prevent deterioration, waste or dissipation in value of that property.

A receiver holds assets for the court and not for the plaintiff or

8

pthe defendant.

Types of ReceivershipsTypes of Receiverships Real estate/rents and profits Operating companies Judgment enforcement Protection of property Marital disputes Environmental remediation Regulatory

9

Basis for AppointmentBasis for Appointment Statutory Specific to government agencies or industries, such

as SEC receiverships or those relating to insolvent insurance companies and bank or other thriftinsurance companies and bank or other thrift institutions.

Equity Equitable remedy imposed by a court in which an

action or proceeding is pending, such as (a) a breach of contract action (b) an action by a lenderbreach of contract action, (b) an action by a lender for judicial foreclosure, or to enforce an assignment of rents provision, or (c) an action to enforce a j d t

10

judgment.

Fiduciary DutyFiduciary Duty A receiver is a fiduciary, which means he/she owes duties of good

faith and loyalty to the court and to the parties that hold claims against the receivership estateagainst the receivership estate.

A receiver must not favor one creditor over another, engage in self dealing, or take any action that is not in the best interests of the receivership estate.

Cal Rule of Court 3 1179(b): The receiver may not enter into any Cal. Rule of Court 3.1179(b): The receiver may not enter into any contract, arrangement, agreement, or understanding with the appointing party concerning:

(1) The role of the receiver with respect to the property following termination of the receivership, without specific court g p, ppermission;

(2) How the receiver will administer the receivership or how much the receiver will charge for services or pay for services to appropriate or approved third parties hired to provide services;

(3) Wh h i ill hi k l hi(3) Who the receiver will hire, or seek approval to hire, to perform necessary services; or

(4) What capital expenditures will be made on the property.

11

Receiver QualificationsReceiver Qualifications Must be an individual Cannot be a party to the underlying action, nor an

attorney for a party Cannot be a relative of any judge of the appointing Cannot be a relative of any judge of the appointing

court Ability to file bond and oath of disinterestedness Judgment, trust, experience relevant to the proposed

appointmentN f l t i i li i i d No formal training or licensing required

12

Jurisdictional ConsiderationsJurisdictional Considerations California governing statutes Cal. Code of Civil Procedure, Sections 564 – 570 Cal. Rules of Court, Section 3.1175, et seq.Oth t t Other states

Federal court Many state receivership laws are modeled on the Many state receivership laws are modeled on the

Federal Bankruptcy Code’s reorganization provisionsp

13

Reasons for Appointing ReceiverReasons for Appointing Receiver Defaulted loan Allows lender to protect cash flow prior to foreclosureAllows lender to protect cash flow prior to foreclosure Gives lender head start on stabilizing collateral prior to

foreclosure and maximization of recovery value Pre-foreclosure remedy

Ability to inject cash into collateral without funding to Ability to inject cash into collateral without funding to borrower

Prevent waste and/or mismanagement; protection of collateralC Complete construction

Other Reasons Enforcement of a judgment

Partnership dispute Partnership dispute Corporate dissolution SEC or other governmental enforcement actions

14

Practical ConsiderationsPractical Considerations Lender/movant becomes financially responsible if insufficient y p

funds Allows lender input in the management of the asset

Select a financially responsible receiver that will manage the Select a financially responsible receiver that will manage the property in the manner you would as lender

Closure/shutdown considerations Secured lender internal approvals and other issues for

advancing new money on a defaulted loan Managing and interfacing with other stakeholders Managing and interfacing with other stakeholders,

governmental agencies (taxing authorities, licensing bureaus, adjoining property owners, politicos, unions, judicial branch representatives

15

representatives.

Receivership ExamplesReceivership Examples Borrower has no equity to recover

(abandonment, “throwing the keys”, “walking away”)

/ Tenants/residents are jeopardized Protection of collateral from sabotage Stalemate in negotiations on restructuring

16

Choosing a ReceiverChoosing a Receiver Asset type Asset location The defaulting party Other considerations relating to the secured

transaction (i.e. nature of the exit strategy) Skills of a good receiver How are receiver candidates chosen?

17

Procedure for AppointmentProcedure for Appointment Underlying action in which the court is authorized

to appoint a receiver Application for appointment

E t Ex parte Standard notice Stipulated appointmentStipulated appointment

Notice and hearing, if applicable Court approval of order appointing receiverpp pp g Receiver files declaration, bond and oath

18

Order Appointing Receiver

Sets forth in detail the receiver’s specific powers, such as: Employment of management company and at what rate Employment of attorney and at what rate Leasing parameters Sale/disposition parameters General duties of the receiver Parameters for other expenditures relating the receivership estate Borrowing funds from the lender Use of the borrower’s taxpayer ID number Receivership bank accounts Seizure of books and records and bank accounts Continuing operations of an ongoing business

Disclosures of pre-existing relationships Amount of receiver’s bondAmount of receiver s bond Receiver’s fees Reporting requirements Receiver’s duties upon borrower filing bankruptcy

19

Order Appointing ReceiverOrder Appointing Receiver Forms of orders May be required in certain jurisdictions May be required in certain jurisdictions If form not required, usually better to tailor an order to

the specific situation Other considerations Other considerations As receiver, specifically include any power that receiver

needs in order to successfully operate and manage the asset

As receiver, disclose anything that may be held to compromise the neutrality of the receivership

As tenant or purchaser, review the order to ensure receiver’s authorityreceiver s authority

Anything not specifically authorized by the order will require court authorization

20

Powers of the ReceiverPowers of the Receiver Authorized actions – specifically set forth in the

order (leasing, contracts, management, attorneys, power to sue, etc.)

Prohibited actions pre arranged agreements Prohibited actions – pre-arranged agreements, lender influence

Mandatory actions – reporting requirements,Mandatory actions reporting requirements, payment of taxes

21

Amending the Order/Further Instr ctionsInstructions Anything not authorized by the order will require

additional authorization from the court Time and expense considerations

P id t it f i t t Provides an opportunity for opposing party to object

22

The Take Over ProcessThe Take-Over Process Take control of the real property by delivering a letter of

instruction to all tenants for the payment of rent andinstruction to all tenants for the payment of rent and property maintenance requests

Review insurance to ensure that it is in full force and effect, review coverage levels confirm that lender is listed as areview coverage levels, confirm that lender is listed as a loss payee and additional insured, and that the receiver is also a named insured

Obtain borrower’s tax ID number to open a bank account Obtain borrower s tax ID number to open a bank account for the receivership estate

Demand turnover of property books & records from borrowerborrower

Demand turnover of property operating income in borrower’s bank accountA h i l diti f ll t l

23

Assess physical condition of collateral Assess current vendors and retain or replace accordingly Abstract all leases and enforce their terms

Day to Day OperationsDay-to-Day Operations Retain and direct property manager Retain and manage leasing broker Negotiate new leases and lease renewals Construction management, if applicable

24

Receivership CostsReceivership Costs Property operating costs and receiver’s fees Paid from the receivership estate or if insufficient

funds, by applicantR i ’ tifi t Receiver’s certificates

25

Reporting and Disclosure Req irementsRequirements File written inventory with court Monthly financial reports to the parties which

include property operations, financial statementsand receiver’s statement of feesand receiver s statement of fees

26

Interaction with Lenders and Borro ersBorrowers Financial reporting to all parties Coordinate stipulations and give notice of motions Lender Keep informed about property operations Coordinate pre-foreclosure inspections; appraiser,

environmental and property conditionenvironmental and property condition Seek approval where appropriate, i.e., leasing

Borrower Turnover of books and records, and funds in bank

accountsS k f b h i t

27

Seek concurrence of borrower where appropriate

Leasing and Disposition Issues –Recei er Perspecti eReceiver Perspective Market-based business terms Court approval Approval of the parties to the action

D t id & ti Do not provide reps & warranties Legal drafting considerations

Al id th i ’ fid i d t d Always consider the receiver’s fiduciary duty and potential liability

28

Termination EventsTermination Events Court order Foreclosure Disposition of property Fulfillment of receivership purpose

29

Termination ProcessTermination Process Turnover possession of property Payment of all accrued but unpaid bills Noticed motion or stipulation of all parties Final report and accounting Request for discharge and exoneration of

i ’ b dreceiver’s bond Court order to discharge receiver

30

Liability Issues Lender liability

Avoid becoming “mortgagee in possession” – potential for significantAvoid becoming mortgagee in possession potential for significant liability Premises liability Environmental liability Liability to borrower Liability to borrower

Avoid improper communications with the receiver and/or the receiver’s professionals.

Receiver liability Liable for acting outside of authority granted by the appoint court. Liability for unpaid taxes Must disclose to court and parties any relationships with

professionals/vendors that the receiver will retain.p Claims against the receiver:

Must be pursued by separate lawsuit with approval of the court appointing the receiver.

Must be brought prior to the receiver being discharged

31

Must be brought prior to the receiver being discharged Avoid improper communications with parties. Avoid conflicts of interest. If unsure, ask court for further instructions/guidance.

Leasing and Disposition Issues –Tenant/B er Perspecti eTenant/Buyer Perspective Carefully review order regarding receiver’s

powers and authority Non-controversial decisions may be subject to

court approvalcourt approval The defaulting party’s rights Expect delays timing considerations Expect delays – timing considerations Incomplete information “As is” transactions – no reps & warranties As is transactions no reps & warranties Communications with parties to the action Don’t assume favorable business terms

32

Don t assume favorable business terms

Borrower BankruptcyBorrower Bankruptcy 11 U.S.C. Section 543 addresses what happens

when debtor files a bankruptcy petition after a receiver is appointed Any custodian (including receiver) appointed pre- Any custodian (including receiver) appointed pre-

petition who becomes aware of a bankruptcy filing by the debtor must: Not make any disbursements from or of receivership assets Take any action to administer the receivership estate unless

necessary to preserve property Deliver to the trustee any property of the debtor held by

receiver Prepare and file with the bankruptcy court an accounting of

33

any property of the debtor (and proceeds thereof) that came into the receiver’s possession at any time

Borrower BankruptcyBorrower Bankruptcy Bankruptcy court may excuse the receiver from the

f i if th dit ’ b t i t t ld bforegoing if the creditors’ best interests would be served by the receiver remaining in control Factors

Debtor’s misconduct or incompetence Duration of receivership Receiver’s experience in bankruptcy cases Receiver s experience in bankruptcy cases

Pending motion for relief from section 543’s requirements, receiver may remain in possession of property, but may not make disbursements of dispose of propertymake disbursements of dispose of property

34

Advantages of ReceivershipAdvantages of Receivership Allows for secured lender to preserve collateral value

d l d th / i i l fand precludes the money sponsor/principal from pillaging the business.

Affords the secured lender a better insight into theAffords the secured lender a better insight into the financial performance and thus ascertain a true evaluation of the value of the collateral.

Provides a judicial oversight structure that will drive a resolution more quickly.

Brings an un-conflicted third party rationale to the Brings an un conflicted third party rationale to the investment (sponsors aren’t always motivated in the secured lender’s best interests).

35

Disadvantages of ReceivershipDisadvantages of Receivership It’s your money and might even be good

money after bad. It’s your money. Asset management is time consuming Potential for lender liability or counter-claims

increased Receivership liability and the attendant

i d itindemnity

36

Contact InformationRick Arrowsmith

GE Capital2 Bethesda Metro Center, Suite 600

Bethesda MD 20814Bethesda, MD 20814(301) 347-3124

richard.arrowsmith@ge.com

Thomas SeamanThomas Seaman Company

3 Park Plaza, Suite 550Irvine CA 92614Irvine, CA 92614

(949) 222-0551tom@thomasseaman.com

Daniel S. BrozostRaines Law Group LLP

9720 Wilshire Blvd., Fifth FloorBeverly Hills CA 90212

37

Beverly Hills, CA 90212(310) 440-4100

dbrozost@raineslawgroup.com