Non-Recourse Carve-Out Guaranties Revisited DON’T BE A “BAD BOY” Non-Recourse Carve-Out Guaranties Revisited Michael Goler, Moderator Kathleen Hopkins, Kenneth Miller and Catherine Bray A presentation for ACMA Annual Meeting, September 23, 2016

Cast of Characters Lender: Big Bank, N.A. Borrower: Mixed Use Tall Tower, LLC (MUTT) Members are GotNo Money and Digger Developer Co., Inc. Digger Developer is MUTT’s sole manager Guarantors: Digger Developer Co., Inc. (Digger) GotNo Money LLC (Money)

Loan Documents Borrower: Loan Agreement, Note, Deed of Trust, Assignment of Rents, Fixture Filing Joint and Several Bad Boy “Carve Out Guaranty: Digger and Money Full Recourse Joint and Several Guaranty: Digger (cap $500K), Money (cap $2M) Construction Completion Guaranty: Digger Environmental Indemnity: Borrower, Digger, Money

Two Types of Bad Boys: Recourse Exceptions – Partial Recovery or Recovery Limited by Actual Damaged including Attorneys’ Fees and Costs - Really indemnifying Lender for loss or damages arising from certain events, acts or omissions Full Recourse Events - When certain events, acts or omissions are just so awful that the Lender can sue the guarantor and seek a judgement against guarantor’s assets for full amount of indebtedness

Before Diving in, Know Your Lender & Borrower: If Lender is part of CMBS or Freddie Mac, will be darn near impossible to get changes If Lender is a portfolio lender, insurance company or bank, a borrower is more likely to be able to negotiate some changes For Borrower – try and get the list of “usual carve outs” when you negotiate the commitment and attach (modified versions) to the commitment

Partial Recovery (indemnity for damages to Lender) Usual Carve Outs: Given the time limit, we cannot cover all the variations (they are discussed in the materials), so we are going to focus on 4 types: Fraud or intentional misrepresentations Misapplying the Money Misapplication of security deposits, tenant tax and insurance escrows, insurance proceeds, condemnation proceeds Failure to timely insure collateral as required under loan documents Failure to pay property taxes and other assessments Failure to pay for labor or materials Harming Collateral Impeding Lender Enforcement

Full Recourse (guarantor 100% liable for loan) Full recourse means someone has been a very, very bad boy – When certain events, acts or omissions are just so awful, that the Lender can sue the guarantor and seek a judgment against guarantor’s assets for full amount of indebtedness 4 big ones: Unpermitted Transfers of Collateral or Interest in Borrower Fraud Insolvency Events: Receivership, Bankruptcy or Equivalent SPE Violations

Default Scenario MUTT misses loan payment Big Bank learns MUTT used loan for exterior work not in plans MUTT did not finish exterior work Property vandalized Bank claims no proper security MUTT claims force majeure – student protest Bank starts non-judicial foreclosure, ask for property surrender or consent to receiver Money consents to surrender MUTT wants time to fix vandalism first, but won’t give a timetable Big Bank pretty annoyed Big Bank files receivership action MUTT does not object, but requests and receives from the state court a 30 day continuance to finish repairs before the appointment of the receiver MUTT finishes repairs Before Big Bank can get receiver, Money’s owner (Mark) and some of MUTT’s creditors file involuntary bankruptcy Now Big Bank really annoyed and assessing its options against MUTT, Digger and Money