For Want Of A Parenthesis A King’s Ransom Could Have Been Lost

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What is every document writer’s nightmare (or at least one of their nightmares)? How about a mere “typo”? “Typo,” short for “typographical error,” is (as all readers already know), “an error (as of spelling) in typed or typeset material.” Count both the “open” and “close” parentheses in the following recital from a 17-1/2 million dollar loan guaranty:

WHEREAS, NNN Cypresswood Drive, LLC, NNN Cypresswood Drive 1, LLC, NNN Cypresswood Drive 3, LLC, NNN Cypresswood Drive 4, LLC, NNN Cypresswood Drive 5, LLC, NNN Cypresswood Drive 6, LLC, NNN Cypresswood Drive 7, LLC, NNN Cypresswood Drive 9, LLC, NNN Cypresswood Drive 10, LLC, NNN Cypresswood Drive 11, LLC, NNN Cypresswood Drive 12, LLC, NNN Cypresswood Drive 13, LLC, NNN Cypresswood Drive 14, LLC, NNN Cypresswood Drive 17, LLC, NNN Cypresswood Drive 18, LLC, NNN Cypresswood Drive 19, LLC, and NNN Cypresswood Drive 20, LLC, each a Delaware limited liability company (as defined in the Security Instrument), the “Borrower”), have obtained a loan (the “Loan”) in the principal amount of Seventeen Million Five Hundred Thousand and No/100 Dollars ($17,500,000.00) from ….

The counts don’t match. Most likely you think there is a missing parentheses. Why aren’t you thinking that there is an extra one? [Read more…]

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Guarantors, Take Notice!

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Last week, we explored some of the “why” behind those oh, so many words in today’s lease guaranties. Today, we’ll switch gears and cover some risk-related issues, nuts and bolts, so to speak.

[To see last week’s posting, click HERE. For some earlier postings, click HERE, and HERE, and HERE, and HERE.]

Last week, we wrote about the reasons why actions taken by a landlord with respect to the tenant or the lease could injure the lease’s guarantor. We didn’t give any examples, but most are obvious. They would include modifying a lease in a way that increases the guarantied obligations. Other actions or inactions that a landlord could take are those that weaken the financial strength of the tenant. Those could include post-lease agreements that allow the landlord to keep the deposit or even to allow a rent deferral. We realize that it isn’t obvious how allowing a rent deferral can weaken a tenant financially. To understand how, we need to look through the eyes of a guarantor. Last week, we discussed the tri-partite relationship between the landlord, the tenant, and the guarantor, explaining how the tenant is really obligated to both the landlord and the guarantor, Basically, if the guarantor steps up to “cover” the tenant’s obligations to the landlord, it has the right to seek reimbursement (legally, “contribution”) from the tenant. So, if the reason a tenant got a rent deferral is because it was “sinking,” to the guarantor that means that the tenant’s ability to make the reimbursement is sinking as well. The landlord, on the other hand, is somewhat indifferent if the tenant drowns. After all, it is getting part of the rent along the way and it still has a guarantor to cover the loss. [Read more…]

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How To Lose Your Lease Guaranty

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As a business matter, a lease guaranty is almost always intended to be enforceable “come heck or high water,” no “ifs, ands or buts.” In a particular situation, that might not turn out to be the case, but that’s what people expect. But saying “no ifs, ands or buts,” doesn’t mean that any particular guaranty covers all circumstances for all of time. They are defined by their scope and can be limited by amount or time. We’ve written about limitations before and we’ll try not to cover that ground today. If any reader is interested, those earlier blog postings can be seen by clicking: HERE and HERE.

Today, we’re going to raise some kinds of things that could let a guarantor off the hook, in which case it wouldn’t matter how “tight” the guaranty was written. Regardless of whether space permitted, we couldn’t list every set of circumstances that could cause that result, even if we were good enough to know them all. So, we’ll just lay out some principles. Hopefully they will sensitize readers such that they will be able to look at any situation and know whether there is a possibility that the guaranty will turn out to be nothing more than a used piece of paper. [Read more…]

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What’s In A Name? That Which We Call A Tenant…

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We titled today’s posting with apologies to Shakespeare, who wrote for this line for Juliet: “What’s in a name? That which we call a rose; By any other name would smell as sweet.” Ruminations has wanted to explore this issue for quite some time, but hasn’t found a “handle” to latch onto until now. What issue, you ask? It should be obvious, ABC, so to speak, that when you look at a lease (or any other agreement), you should be able to know who the landlord and tenant are. Amazingly, that isn’t always the case. Allow us to continue.

But, before we begin, we’ll explain that when the problem arises, we’ve only seen it concern the identity of the tenant, not the landlord. That’s never been discomforting because lack of care or lack of knowledge is more common when the lease involves a small space and, in most of those cases, the form used comes from the landlord and the landlord knows its own name even if it isn’t already built into the form itself. [Read more…]

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Who Treats A Non-Recourse Loan As A Full Recourse Loan? Your Uncle Might.

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We very much doubt that the Internal Revenue Service took note of our the blog posting that follows, but on April 15, 2016, two weeks after we wrote about the significant change to the tax treatment of non-recourse carve-outs, it published a “backtracking,” some might call it a reversal, of its earlier position. You can see how it essentially reversed its earlier position by clicking: HERE.

So, the text that begins in the paragraph below the shaded one is mostly of historical significance, hopefully only an aberration. Nonetheless, we leave it posted not only to preserve history, but also for how it explains the effect of “recourse debt,” an arcane topic.

Here is the latest position of the Internal Revenue Service, as of March 31, 2016:

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as a nonrecourse liability of the partnership … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

If a partner’s guarantee of a partnership’s nonrecourse obligation is conditioned on the occurrence of certain “nonrecourse carve-out” events described below, the guarantee will not cause the obligation to fail to qualify as qualified nonrecourse financing … until such time as one of those events actually occurs and causes the guarantor to become personally liable for the partnership debt under local law.

Today’s blog posting was written with more than a little trepidation. Before we reveal its topic, Ruminations needs to emphasize two of our recurrent themes. The first is that the prime skill in counseling clients or bosses is not to know the answer, but to figure out the question – to identify possible issues, problems or opportunities. With the question in hand, most answers are easily found. Without knowing the question, the answer is useless even if in your own head.

The second highlighted theme is that you don’t need to know all of the answers or even all of the questions if you have an expert source available to you. We’ve touted the need to have a “Rolodex” (for those more recently arrived on Earth, that’s a trademark for a conveniently arranged set of cards holding names and contact information for easy retrieval). Your Rolodex should have contacts for construction issues, utility issues, insurance issues, and whatever other experts you can gather in your data base. After wading through the labyrinth of today’s technical and boring posting, you’ll want to find one or more tax experts to add to your Rolodex, probably a tax-focused accountant and even a (business) tax attorney. Today, our sole mission is to sensitize readers to a narrow tax issue brought to mind by an October 15, 2015 Tax Memorandum from your friend and ours, the Internal Revenue Service. Yes, there will be a useful, but (probably) esoteric, “fact” revealed someplace near the end of today’s posting. But, that is only to scare readers into yielding up their egos and get better connected with experts. [Read more…]

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Bargaining Power: If You Don’t Ask, You’ve Already Got Your Answer. It Is: “No.”

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In the course of preparing last week’s blog posting about small (bargaining power) tenants being entitled to assurance that their leased spaces are as physically accessible and visible as when the lease was signed, we got to thinking about “why this comes up in the first place.” No, we weren’t thinking as a philosopher might think; we were much more at the nuts and bolts level. Basically, we framed the question thusly: “What do tenants look for in landlord-form leases that just don’t seem to be there?” Today, we aren’t listing things that are commonly in such lease forms, but written in a way that should make a tenant unhappy. We’re talking about items tenants need to ask for. [This isn’t bait and switch our part.. We’ll tie this in with today’s blog posting’s title later.] [Read more…]

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But, The Lease Guaranty Had All Of The Right Words – What Happened?

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“I guarantee the full performance of the Lease by the Tenant. This Guarantee is absolute and without any conditions. … This guarantee will not be affected by any change in the Lease whatsoever, including, but not limited to any extension of time or renewals.” “The Guarantor further agrees that this guaranty shall remain and continue in full force and effect as to any renewal, change or extension of the Lease.”

Those were two ways in which two different landlord’s forms of guaranty were intended to give the landlord comfort that a guarantor would not weasel out of the guarantee based upon amendments, extensions, etc. to the guaranteed lease. They didn’t work.

What went wrong? Basically, including such language in a guarantee helps make the guarantee bullet-resistant, not bullet-proof. [Read more…]

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Mortgage Loan Term Sheets Are So Long; So, Why Are They Missing All Of The Provisions Borrowers Should Be Looking For? Part 2.

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Last week, we started a list of loan terms that regularly seem to be left out of Loan Term Sheets prepared by lenders despite those term sheets using up an entire tree for what is included. If you didn’t see that posting and you are compelled to start at the beginning of our Ruminations, click HERE to start at the beginning. Today, we continue and then conclude our list. Don’t confuse “conclude our list” with “conclude the complete list,” because we know the limits of our ability and experience. A further caveat would be – every deal has its own factors to consider, but most loan term sheets attempt to fit all shape pegs into a round hole.

So, here we go with the rest of our list of “missing” terms in the common Loan Term Sheet:

Cash Management Accounts. If a borrower can avoid a “clearing account” (essentially, a “lock box”), it should. For those unfamiliar with how those work, the lender “owns” an account at the bank you choose and all rent checks go to that account. Your bank agrees, with the lender, to “sweep” all money out of that account every night and put the swept funds in your own account. That is, it will do that sweep until the lender notifies the bank to sweep the money into the lender’s regular bank account (at whatever bank the lender uses). That allows the lender to interrupt the cash flowing to the borrower when the lender thinks a “Trigger Event” has occurred. A Trigger Event could be the borrower’s default or it could be that the rental income, though exceeding the debt service payments, doesn’t exceed it by enough. It could also be when a key tenant has left the property. In fact, it could be anything the loan documents say it is, including receipt of a report of alien abduction signed by two adults. Though the last example is unlikely, it does illustrate that if the Loan Term Sheet calls for a cash management account, it should state what the Trigger Events would be. [Read more…]

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