1. 1 © 2009 Venable LLP Real Estate Financing— Workouts in Interesting Times Joseph T. Lynyak III Venable LLP jtlynyak@venable.com April 18, 2009

2. 2 © 2009 Venable LLP The Starting Point for Banks—Real Estate Lending Procedures  Section 1828(o) of the FDI Act –Requires the Establishment of Real Estate Lending Policies and Procedures by Banks Lending Policies Underwriting LTVs Workouts  12 CFR 34  12 CFR 208.50  12 CFR 365 et seq.  12 CFR 560.100 et seq.

3. 3 © 2009 Venable LLP Interagency Guidance on Concentrations in CRE  71 Fed. Reg. 74580 (Dec. 6, 2006)  http://www.occ.treas.gov/fr/fedregister/71fr74580.pdf  Establishes Safety and Soundness “Guidelines”— –Board and Management Oversight –Portfolio Management –Management Information Systems –Market Analysis –Portfolio Stress Testing and Sensitivity Analysis –Credit Underwriting Standards –Credit Risk Review Functions

4. 4 © 2009 Venable LLP Managing Commercial Real Estate Concentrations in a Challenging Environment  FDIC FIL-22-2008 (March 17, 2008)  http://www.fdic.gov/news/news/financial/2008/fil08022. html  Five Key Risk Management Processes— –Maintainence Strong Capital Levels –Ensuring that Loan Allowances are Appropriately Strong –Managing C&D and CRE Loan Portfolios Closely –Maintaining Updated Financial and Analytical Information –Bolstering Loan Workout Infrastructure

5. 5 © 2009 Venable LLP Interagency Policy Statement on the Allowance for Loan and Lease Losses  www.fdic.gov/news/news/press/2006/pr06115.html www.fdic.gov/news/news/press/2006/pr06115.html  Establishment of ALLL –Responsibility of Board and Management –Responsibility of Bank Examiners –Reflecting ALLL in Regulatory Reports  Loan Review Systems –Loan Classification or Grading Systems Qualifications of Personnel Independence of Loan Review Personnel Frequency of Reviews Scope of Reviews Review Follow-up Maintenance of Work Papers

6. 6 © 2009 Venable LLP ALLL Methodology and Process  A Q&A Published Simultaneously –http://www.fdic.gov/news/news/press/2006/pr0 6115a.pdf  Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Institutions and Savings Institutions –July 6, 2001 –www.fdic.gov/news/news/financial/2001/fil016 3a/htmlwww.fdic.gov/news/news/financial/2001/fil016 3a/html

7. 7 © 2009 Venable LLP The Bank’s Goal—Well Capitalized Status  Prompt Corrective Action—Section 38 of FDIA  The Three Capital Rules— –The Total Risk-Based Capital Ratio –The Tier 1 Risk-Based Capital Ratio –The Leverage Ratio  Well Capitalized –Total Risk-Based Capital Ratio-10% –Tier 1 Risk-Based Capital Ratio-6% –Leverage Ratio-5% –No C&D, Capital Directive or PCA Order

8. 8 © 2009 Venable LLP The Impact of the Corrective Action Capital Levels  Well Capitalized—The Bank is OK  Adequately Capitalized—The Bank is Being Closely Watched  Undercapitalized—The Bank is on Probation  Significantly Undercapitalized—The Bank is on Super Secret Probation  Critically Undercapitalized—The Bank is Dead  There is also a De Facto “Super-Capitalized” Level—You Want to be Here

9. 9 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Bank Supervision of a CRE Loan is the Starting Point— –Loan Documents Typically Provide Authority Review of Financial Statements Property Inspection Monitoring Affiliated Companies

10. 10 © 2009 Venable LLP Commercial Real Estate Loan— Workouts  Review and Understand the Bank’s Authority and Obligations Under the CRE Loan Documents –Legal Analysis of Loan Defects –Syndication and Participation Analysis –Review Servicing and Course of Conduct –Understand Corporate Structure of the Borrower –Guarantors –Third Party Management –Statutory Notice and Cure Rights and Obligations –Insurance –Evaluation of Unique Issues

11. 11 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Evaluate Default and Financial Status –Reason for Default Management Regional Market Conditions –Appraisal and Market Analysis –Legal Searches –On-Site Property Inspection –Environmental Review –Update of Financial Statements –Re-underwriting of Loan

12. 12 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Strategically Evaluate Options to the Bank –Aggregate Cost to the Bank –Required Interaction with Other Lenders –Candid Evaluation of the Bank’s Ability to Manage the Asset –Accounting Effect on Bank’s Financial Statements (Call Reports) –Reliability and Motivation of Borrower

13. 13 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Loan Workout –Use of Pre-Negotiation Agreements Correct Existing Deficiencies Preserve Remedies –Junior Lienors Considerations  Deed-in-Lieu –May Preserve Borrower’s Reputation –Caution Needed to Preserve Mortgage Lien –Typically Agreed to by Borrower in Exchange for Waiver of Deficiency Judgment

14. 14 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Legal Remedies –Judicial Foreclosure –Non-Judicial Foreclosure –Action Against Guarantors –Bankruptcy  Sale of Property to Third Party –Property Management Contracts and Costs –Insurance and Taxes –Costs of Sale

15. 15 © 2009 Venable LLP Commercial Real Estate Loans— Workouts  Troublesome Legal Concerns –Lender Liability Lender Control Property Control Actions in Anticipation of Foreclosure –Monitoring of Written Correspondence and Email –Oral Communications with Borrower –Document Control