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CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS.
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Material Adverse Change Clauses in Commercial Real Estate Loans and Loan Renewals
Negotiating and Managing Loans in a Distressed Credit Marketpresents
Today's panel features:Susan C. Tarnower, Attorney, McGuire Woods, Atlanta
Douglas S. Buck, Partner, Foley & Lardner, Madison, Wis.Christopher T. Nixon, Shareholder, Winstead, Dallas
Thursday, August 27, 2009
The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 am Pacific
The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions emailed to registrants to access the audio portion of the conference.
A Live 90-Minute Audio Conference with Interactive Q&A
MATERIAL ADVERSE CHANGE CLAUSES IN COMMERCIAL REAL ESTATE LOANS
SECTION I - COMMON ELEMENTS OF MAC CLAUSES
PRESENTED BY:
SUSAN C. TARNOWER McGuireWoods LLP
The Proscenium 1170 Peachtree Street N.E., Suite 2100
Atlanta, Georgia 30309-7649 T: 404.443.5736 F: 404.443.5772
McGuireWoods LLP – www.mcguirewoods.com
1
I. EXAMPLES OF MATERIAL ADVERSE CHANGE LANGUAGE IN COMMITMENTS
EXAMPLE A: Voidability of Commitment. This commitment shall be voidable at the option of
Lender should any of the following events occur:
1. A material adverse change in Borrower’s business, or financial condition, or
disposal of a material portion of its assets other than in the ordinary course
of business.
2. A proceeding is commenced by or against Borrower under any bankruptcy
or insolvency law.
3. A default by Borrower or any Guarantor on any other obligation they may
have for money borrowed.
4. Any change in management or ownership of Borrower unacceptable to
Lender.
5. Should any law or regulation affecting Lender entering into the financial
transactions contemplated hereby impose any potential obligation, fee,
liability, loss, claim, cost, expense, or damage which is not contemplated
herein.
6. Any violation or breach by Borrower of the terms of this commitment.
EXAMPLE B:
1. no material adverse change in or material disruption of conditions in the
financial, banking or capital markets generally shall have occurred that, in
the judgment of Lender, would impair the syndication of the Credit Facility;
2. (a) no development or change occurring after the date hereof, and no
information becoming known after the date hereof, that, in Lender’s
judgment, (i) results in or could reasonably be expected to result in a
material change in, or material deviation from, the Information (as
hereinafter defined), including, without limitation, any material change in
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2
the terms of the Transaction or in the legal, tax, accounting or financial
aspects of the Transaction, or in the post-Transaction corporate and
capitalization structure of the Borrower and its subsidiaries contemplated in
this Commitment Letter and in the Information, or (ii) has had or could be
reasonably expected to have a Material Adverse Effect (as defined in the
Summary of Terms) in which case (as to each of subclauses (i) and (ii))
Lender may, in its sole and absolute discretion, suggest alternative financing
amounts or structures that ensure adequate protection for Lender or
terminate its commitment and undertaking under this Commitment Letter.
3. There shall not have occurred since ________________, 200_ any event or
condition that has had or could be reasonably expected, either individually
or in the aggregate, to have a Material Adverse Effect. “Material Adverse
Effect” means (A) a material adverse change in, or a material adverse effect
on, the operations, business, properties, liabilities (actual or contingent),
condition (financial or otherwise) or prospects of the Borrower and its
subsidiaries, taken as a whole; (B) a material impairment of the rights and
remedies of the Administrative Agent or Lender under any loan
documentation, or of the ability of any Loan Party to perform its obligations
under any loan documentation to which it is a party; or (C) a material
adverse effect upon the legality, validity, binding effect or enforceability
against any Loan Party of any loan documentation to which it is a party.
4. The final Loan Agreement and such other agreements, instruments and
documents relating to the Transaction shall not be altered, amended or
otherwise changed or supplemented or any condition therein waived from
the draft Loan Documents, except in each case to the extent that any such
alteration, amendment, change or supplement could not reasonably be
expected to have a Material Adverse Effect without the prior written consent
of the Lender.
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EXAMPLE C:
Lender may terminate its obligations under this letter if the terms of the transaction
are changed in any material respect, if any material information submitted to Lender
proves to have been inaccurate or incomplete in any material respect, or if any material
adverse change occurs, or any additional information is disclosed to or discovered by
Lender which Lender deems materially adverse in respect of the condition, financial or
otherwise, business, operations, assets, nature of assets, liabilities or prospects of the
Borrower.
EXAMPLE D:
This commitment is subject to the execution by Borrower and each Indemnitor of
Loan Documents satisfactory to Lender. All information and representations are and will
be accurate at closing. Lender may terminate this commitment prior to the closing of the
Loan by notice to the Borrower in the event that (i) Borrower shall fail or refuse to comply
in a timely manner with any of the terms, provisions or conditions of this commitment; (ii)
Lender determines in its sole discretion that the Borrower or any Indemnitor has failed to
maintain a condition satisfactory to the Lender, including without limitation any change in
the management, structure, or ownership of Borrower, any adverse change in the financial
condition of the Borrower or any Indemnitor, any default by the Borrower or any
Indemnitor on any obligation to Lender or to any third party and any material change in
the status or condition of the Collateral; (iii) any of the information, data, representations,
exhibits, and other materials submitted to the Lender by the Borrower or any Indemnitor
shall contain any material inaccuracy or misrepresentation or shall omit to set forth any
information that is material to the completeness and accuracy of such information, data,
representations, exhibits and other materials or to the Lender’s decision to issue this
commitment; or (iv) the Borrower or any Indemnitor files bankruptcy, or has a bankruptcy
petition filed against it or him, makes an assignment for the benefit of creditors, or seeks
an action for the appointment of a receiver or has a receiver appointed, or becomes
insolvent however evidenced. Upon giving of such notice by the Lender, the obligations
and liabilities of the Lender under this commitment shall cease and terminate without
further act, and the Borrower shall pay to the Lender all sums required hereunder.
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This commitment is further subject to the condition that no material adverse
change shall have occurred in the condition (financial or otherwise), operations, assets,
nature of assets, prospects, and liabilities of Borrower or any Indemnitor prior to closing.
EXAMPLE E:
Each Agent’s commitment hereunder, and its agreement to perform the services
described herein, are subject to (a) there not occurring or becoming known to any Agent
any event, change, condition, occurrence or circumstance which, either individually or in
the aggregate, has had, or could reasonably be expected to have, a material adverse effect
on (v) the Transaction, (w) the property, assets, business, operations, liabilities or condition
(financial or otherwise) of (I) Holdings, the Borrower and their respective subsidiaries,
taken as a whole since the date hereof, or the Sponsor, (x) the Project, or (y) the rights or
remedies of the Lenders or the ability of Holdings, the Borrower and their respective
subsidiaries to perform their obligations to the Lenders under the Credit Facilities (each, a
“Material Adverse Effect”), (b) no Agent becoming aware (whether as a result of its due
diligence analyses and review or otherwise) after the date hereof of any information not
previously known to such Agent which such Agent reasonably believes is materially
negative information with respect to the Transaction, the Project or the property, assets,
business, operations, liabilities or condition (financial or otherwise) of (I) Holdings, the
Borrower and their respective subsidiaries taken as a whole, or (II) the Sponsor or which is
inconsistent in a material and adverse manner with any such information or other matter
disclosed to such Agent prior to the date hereof and would reasonably be expected to
have a material adverse effect on the Sponsor’s ability to perform its obligations under its
guarantee and (c) there not having occurred after the date hereof (x) a material adverse
change to the syndication market for credit facilities similar in nature to the Credit
Facilities contemplated herein or (y) a disruption of, or an adverse change in, financial,
banking or capital markets that could materially impair the syndication of the Credit
Facilities, in each case as determined by the Lead Arranger in its sole discretion.
McGuireWoods LLP – www.mcguirewoods.com
5
II. EXAMPLES OF MATERIAL ADVERSE CHANGE LANGUAGE IN LOAN DOCUMENTS
EXAMPLE A: 1. Events of Default. The occurrence of any of the following events shall
constitute an “Event of Default” under this Agreement, and Borrower shall give Lender
prompt written notice thereof.
(a) any warranty, representation, statement, report or certificate made or
delivered to Lender by Borrower or any of Borrower’s managers, officers, employees or
agents, now or in the future, shall be untrue or misleading in a material respect when
made or (except with respect to those expressly made as of an earlier date) deemed to be
made; or
(b) Borrower shall fail to pay when due any Loan or any interest thereon
or any other monetary Obligation; or
(c) [reserved]; or
(d) Borrower shall fail to comply with any of the financial covenants set
forth in the Schedule, or shall fail to perform any other non-monetary Obligation which by
its nature cannot be cured, or shall fail to permit Lender to conduct an inspection or audit
as specified in Section 5.4 hereof; or
(e) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within ten (10) Business Days after the date due; or
(f) any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral or the Real Estate
which is not cured within ten (10) Business Days after the occurrence of the same; or
(g) any event of default occurs under any obligation (in excess of
$200,000) secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(h) (i) Borrower breaches in any material respect any contract or
obligation, in respect of any Material Financing (and all applicable cure periods, if any,
have lapsed); as used herein, the term “Material Financing” means any loan, note, lease,
or other financing, as to which Borrower is an obligor and the outstanding principal
McGuireWoods LLP – www.mcguirewoods.com
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amount thereof is at least $200,000; or (ii) Borrower breaches in any material respect any
material contract or obligation (other than relating to any Material Financing), which has
resulted or may reasonably be expected to result in a Material Adverse Change; or
(i) dissolution, termination of existence, temporary or permanent
suspension of business, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of, assignment for the
benefit of creditors by, or the commencement of any proceeding by Borrower under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect; or
(j) the commencement of any proceeding against Borrower or any
Guarantor under any reorganization, bankruptcy, insolvency, arrangement, readjustment
of debt, dissolution or liquidation law or statute of any jurisdiction, now or in the future in
effect, which is not cured by the dismissal thereof within forty-five (45) days after the date
commenced; or
(k) revocation or termination of, or limitation or denial of liability upon,
any guaranty of the Obligations or any attempt to do any of the foregoing, or
commencement of proceedings by any Guarantor under any bankruptcy or insolvency
law, or death of any Guarantor; or
(l) revocation or termination of, or limitation or denial of liability upon,
any pledge of any certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any attempt to do any
of the foregoing, or commencement of proceedings by or against any such third party
under any bankruptcy or insolvency law; or
(m) Borrower makes any payment on account of any indebtedness or
obligation which has been subordinated to the Obligations other than as permitted in the
applicable subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination agreement;
or
(n) without the prior written consent of Lender, (i) Approved Party shall
cease to own, beneficially and of record, 100% of all issued and outstanding equity
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7
interests of Parent, or (ii) Parent shall cease to own, beneficially and of record, 100% of all
issued and outstanding capital stock of Borrower, or (iii) there shall exist a lien on more
than 20% of the capital stock of Parent, or (iv) there shall exist a lien on any of the equity
interests of Borrower; or
(o) there shall be a change in the manager, President, Chief Executive
Officer, or Chief Financial Officer, of the Borrower, and such person is not replaced with
another person reasonably acceptable to Lender in its good faith business judgment within
sixty (60) days thereafter; or
(p) Borrower shall generally not pay its debts as they become due or
Borrower shall conceal, remove or transfer any part of its property, with intent to hinder,
delay or defraud its creditors, or make or suffer any transfer of any of its property which
may be fraudulent under any bankruptcy, fraudulent conveyance or similar law; or
(q) any one or more events of default shall occur and be continuing
under the Loan Documents (after giving effect to all applicable cure periods, if any); or
(r) a Material Adverse Change shall occur.
Lender may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred and is continuing.
2. “Material Adverse Change” means any of the following: (i) a material
adverse change in the business, operations, or financial or other condition of the
Borrower; or (ii) a material impairment of the prospect of repayment of any portion of the
Obligations; or (iii) a material impairment of the value or priority of Lender’s security
interests in the Collateral.
EXAMPLE B:
1. Material Adverse Effect. Without waiving any of Lender’s rights and
remedies pursuant to the Loan Documents or Borrower’s obligations therein, the Lender
shall have no further obligations pursuant to the Loan Documents if a Material Adverse
Effect should occur.
2. “Material Adverse Effect” means individually and collectively as determined
by Lender in its sole discretion: (i) a material adverse effect on the financial condition or
creditworthiness of the Borrower or any Guarantor, (ii) a material adverse effect relating to
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the Borrower’s ability to perform its obligations or responsibilities under the Loan
Documents, (iii) a material adverse effect concerning the validity or enforceability of the
Loan Documents or (iv) a material adverse change to or disruption in the financial and/or
banking markets wherein the Lender cannot be expected to continue to advance funds
pursuant to the terms and provision of the Loan Documents.
EXAMPLE C:
1. (a) Defaults. For purposes of this Agreement, “Default” means the
occurrence of any of the following events: (i) non-payment when due of any amount
payable on any of the Obligations and such non-payment continues for three (3) days, or
breach of any other covenant or failure to perform any other agreement or failure to meet
any of Borrower’s or any other Obligor’s obligations contained herein, in any other Loan
Document, which breach or failure continues for thirty (30) days after notice thereof; (ii)
non-payment when due of the premium on any insurance policy required to be
maintained hereunder; (iii) any statement, representation, or warranty made in writing in
this Agreement, any other Loan Document or in any other writing or statement at any time
furnished or made by Borrower or any other Obligor to Lender proves to have been untrue
in any material respect as of the date furnished or made or deemed furnished or made; (iv)
Borrower’s default under any other agreement for borrowed money (including with
respect to the Equipment Loan and the Real Estate Loan) or any other agreement involving
more than the amount set forth on Item 28 of the Schedule after giving effect to applicable
grace periods; (v) suspension of the operation of Borrower’s present business; (vi) any
Obligor becomes insolvent or unable to pay its debts as they mature, or admits in writing
that it is insolvent or unable to pay its debts, makes an assignment for the benefit of
creditors, makes a conveyance fraudulent as to creditors under any state or federal law, or
a proceeding is instituted by or against any Obligor alleging that such Obligor is insolvent
or unable to pay debts as they mature, or a petition under any provision of Title 11 of the
United States Code, as amended, is filed by or against any Obligor; provided, however,
that Borrower shall have sixty (60) days to cause the dismissal of any involuntary petition
filed against any Obligor; (vii) entry of any judgment not covered by insurance in excess of
the amount set forth on Item 29 of the Schedule against any Obligor or creation, assertion,
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or filing of any judgment or tax Lien against the property of any Obligor in excess of the
amount on Item 29 of the Schedule, in each case which remains undischarged or
unstayed for thirty (30) days under such entry or filing; (viii) death of any Obligor who was
a natural person, or death or withdrawal of any partner of any Obligor which is a
partnership, or dissolution, merger, or consolidation of any Obligor which is a
corporation, partnership or limited liability company and the failure to provide additional
equity or guaranty reasonably acceptable to Lender, within ninety (90) days of the date of
such death; (ix) transfer of a substantial part (determined by market value) of the property
of any Obligor (other than in the case of an individual Obligor to a trust or entity
controlled by such Obligor); (x) sale, transfer or exchange, either directly or indirectly, of a
controlling stock or equity ownership interest of any Obligor (other than to a trust or entity
controlled by such Obligor); (xi) termination, unenforceability or withdrawal of any
guaranty or validity guaranty for the Obligations, or failure of any Obligor to perform any
of its obligations under such guaranty or validity guaranty or assertion by any Obligor that
it has no liability or obligation under such a guaranty or validity guaranty; (xii)
appointment of a receiver for the Collateral or for any other property in which Borrower
has an interest; (xiii) seizure of any material portion of the Collateral by any Person other
than Lender; (xiv) any person identified on Item 30 of the Schedule shall for any reason
cease to hold the office of Borrower set forth opposite such person’s name on Item 30 of
the Schedule (or any such person shall cease to perform the duties generally associated
with such office) and a replacement satisfactory to Lender shall not be appointed within
ninety (90) days; (xv) the occurrence of any act, omission, event or circumstance which
has or could reasonably be expected to have a materially adverse effect on Borrower or
any other Obligor; (xvi) payment by Borrower on any Subordinated Debt in violation of
the applicable subordination agreement or (xvii) the Pension Benefit Guaranty Corporation
or the Department of Labor commences proceedings under ERISA to terminate any of
Borrower’s employee pension benefit plans.
EXAMPLE D:
Since Borrower's formation, no Material Adverse Change shall have occurred with
respect to Guarantor; since its formation, no Material Adverse Change shall have occurred
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with respect to Borrower and there shall have been no material change in the
management of Borrower; and there shall have been delivered to Agent for the benefit of
each lender a certificate dated as of the Closing Date and signed by an authorized
manager or director of Borrower to each such effect.
"Material Adverse Change" shall mean any set of circumstances or events which:
(a) has or could reasonably be expected to have any material adverse effect whatsoever
upon the validity or enforceability of any Credit Document or the Collateral, (b) is or
could reasonably be expected to be material and adverse to the business, properties,
assets, liabilities, condition (financial or otherwise), or results of operations of Borrower,
(c) impairs materially or could reasonably be expected to impair materially the ability of
Borrower to duly and punctually pay or perform its Indebtedness, or (d) impairs materially
or could reasonably be expected to impair materially the ability of Agent or any Lender, to
the extent permitted, to enforce their legal remedies pursuant to any Credit Document.
EXAMPLE E:
The MAC clause in Countrywide's merger agreement with Bank of America. That
agreement defines a material adverse change as: a material adverse effect on (i) the
financial condition, results of operations or business of such party and its Subsidiaries
taken as a whole (provided, however, that, with respect this clause (i), a "Material Adverse
Effect" shall not be deemed to include effects to the extent resulting from (A) changes, after
the date hereof, in GAAP or regulatory accounting requirements applicable generally to
companies in the industries in which such party and its Subsidiaries operate, (B) changes,
after the date hereof, in laws, rules or regulations of general applicability to companies in
the industries in which such party and its Subsidiaries operate, (C) actions or omissions
taken with the prior written consent of the other party, (D) changes, after the date hereof,
in global or national political conditions or general economic or market conditions
generally affecting other companies in the industries in which such party and its
Subsidiaries operate or (E) the public disclosure of this Agreement or the transactions
contemplated hereby, except, with respect to Clauses (A) and (B), to the extent that the
effects of such change are disproportionately adverse to the financial condition, results of
operations or business of such party and its Subsidiaries, taken as a whole, as compared to
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11
other companies in the industry in which such party and its Subsidiaries operate) or (ii) the
ability of such party to timely consummate the transactions contemplated by this
Agreement.
LegalNews AlertREAL ESTATE
TM
Legal News Alert is part of ourongoing commitment to providing up-to-the minute information aboutpressing concerns or industry issues affecting our real estate clientsand colleagues.
If you have any questions about thisalert or would like to discuss this topicfurther, please contact your Foleyattorney or the following individuals:
Douglas S. BuckMadison, [email protected]
Elizabeth L. Corey, ChairChicago, [email protected]
Erick S. HarrisMadison, [email protected]
A Foley & Lardner LLP Client Alert DATE
CMBS Lenders Begin Invoking MAC Clauses With Investors
Many commercial real estate loans originated in the United States are resold to investors as
commercial mortgage-backed securities (CMBSs). Under these programs, lenders originate
the loans, but then later resell them as parts of larger pools into the CMBS market. In the
fourth quarter of 2007, the national crisis in residential subprime lending spilled over into the
commercial real estate loan arena, causing increased volatility in the CMBS market. As a
result, many lenders are experiencing difficulties reselling their commercial real estate loans
into the CMBS market. In this new lending environment, lenders are increasingly seeking to
renegotiate, or even back out of, their loan commitments and/or rate lock agreements with
investors. Lenders often use the material adverse change, or so-called “MAC” clauses, in
their documents to renegotiate investors’ loan commitments and/or rate lock agreements.
Market Background
Driven by the combination of highly valued commercial real estate and low interest
mortgages, national lenders were — up until the recent subprime lending crisis — utilizing
CMBSs in ever-increasing numbers. In 2000, CMBSs represented around 14 percent of the
outstanding domestic commercial real estate loans; by 2006, this percentage had risen to
26 percent. In fact, by November 2007, the outstanding volume of domestic CMBSs was
estimated to be approximately $870 billion.1
The CMBS market provides a profitable secondary market for commercial real estate
debt, which in turn, has spurred national lenders to originate ever-increasing numbers of
commercial real estate loans. It also has meant that lenders who resell their loans in
this market do not need to use their own deposits to back their mortgage loans, since
the loans ultimately are funded through money borrowed from Wall Street investors
and investment banks.
Unfortunately, toward the end of last year, the crisis in residential subprime lending resulted
in a volatile CMBS market. For instance, the benchmark CMBX-NA-AAA index of derivatives
FEBRUARY 5, 2008
©2008 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60610 • 312.832.4500
1 “Ups and Downs for CPDOs,” Structured Credit Investor, November 14, 2007.
Page 2 of 4 FEBRUARY 5, 2008
tied to the safest commercial mortgage securities rose to 102 basis
points in November 2007 from 44 in September 2007.2 This means
that the cost of derivatives protecting investors from defaults on the
highest rated bonds backed by properties more than doubled.
According to data collated from New York-based Citigroup, Inc., banks
were holding $54 billion of commercial mortgages last November that
they could not resell into the CMBS market.3
This volatility in the CMBS market is resulting in increased risks to real
estate investors, particularly when dealing with lenders that plan to
resell their loans into the CMBS market. Prior to the recent subprime
lending crisis, lenders were flooding the loan markets with liquidity.
This surplus of liquidity helped push down the spreads between 10-
year treasury notes and the interest rates charged in CMBS loan
programs. As recently as six months ago, the spread between a 10-
year Treasury and a loan packaged for the CMBS market was as low
as 1.2 percent or 120 basis points. However, with the recent CMBS
market volatility, these spreads have increased dramatically. For
instance, in the period between September and November of 2007,
these spreads rose as much as 150 basis points. Now, in light of the
potential credit crunch, these spreads are increasing quickly. In
response, lenders are renegotiating commitment and rate lock
agreements, scrutinizing the collateral used to secure these loans,
and in some cases, looking to back out of loan commitments and rate
lock agreements with investors.
The Dilemma
Most real estate investors purchase properties subject to the
satisfactory completion of a due diligence investigation. These due
diligence periods often include a financing contingency period, during
which the investors work with a lender toward securing a loan for a
large portion of the property’s acquisition price. Typically, once the
lender issues its loan commitment and the other due diligence is
satisfactorily completed, the investor waives its contingencies and is
contractually obligated to close.
After the expiration of the due diligence period, the typical real estate
investor stands to lose a substantial amount of earnest money if, in
breach of its purchase agreement, it is unable to close on the
property’s acquisition. Without a loan, many commercial real estate
investors are unable to come up with the proceeds to close on their
acquisitions. Thus, the lender’s commitment to fund a property’s
acquisition is a crucial factor in an investor’s ability to perform under
its purchase contract.
Often, investors also will enter into rate lock agreements with their
lenders prior to closing. Under these arrangements, the lender
agrees to lock, in advance of the closing, the investor’s interest rate
in exchange for certain fees. Once the rate lock fee is deposited, the
lender enters into hedging transactions that allow it to commit to
make the loan at the locked interest rate. Rate lock agreements help
investors ensure that they can realize their anticipated rates of
return, by removing the risk that their lenders’ interest rates will rise
before the closing.
The Risks
Traditionally, most loan commitments contain some form of a MAC
clause. Such clauses provide that the lender’s commitment to lend to an
investor is contingent upon the absence of a material adverse change in
either the property itself or the financial markets prior to the closing.
For instance, a loan commitment often will contain a MAC clause stating
that the “issuance of a commitment and the closing of the loan is
subject to the absence of any material adverse change, as determined
by the lender, in the tenants, property, borrower or key principals.”
Similarly, many rate lock agreements contain MAC clauses stating that
“the rate lock is contingent upon the absence of a material adverse
change in the financial, real estate, banking or capital markets, including
the mortgage-backed securities markets, and that the lender reserves
the right to increase the spread at any time prior to the loan closing
based on a material adverse change to the then current CMBS or CMBS
market conditions as determined by lender.”
©2008 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60610 • 312.832.4500
TM
Legal News Alert
2 Deadbeat Developers Signaled by Commercial Property Derivatives, November 28, 2007.3 Id.
Page 3 of 4 FEBRUARY 5, 2008
With the volatility in the CMBS market, lenders are using the MAC
clauses contained in loan commitments and rate lock agreements to
back out of, or at least renegotiate, their loans to investors. See, for
example, Whitnall Glen, LLC et al v. Citigroup Global Markets RealtyCorp. et al, recently filed in the U.S. District Court for the Eastern
District of Wisconsin, Case No. 08-C-0023. In this environment,
investors should be aware that these clauses provide their lenders
with a potentially costly “out” to funding a loan. For instance, if a
tenant misses a rent payment, a casualty occurs at the property,
spreads in the CMBS market change, or the borrower’s principals
suffer losses, MAC clauses may give a lender the potential opportunity
to revisit its commitments to the investor.
Suggestions
Given this background, it is important for investors to carefully
negotiate the MAC clauses contained in their loan commitments in an
attempt to narrow their application. For instance, MAC clauses can be
modified to include reasonableness and good faith standards as well
as financial thresholds above which an adverse change must be
valued in order for the lender to back out of the transaction. Thus, if a
material adverse change is defined as something that would cost the
investor over $250,000 to cure in any one year, the lender would be
obligated to still close even if a tenant simply missed one month’s rent
payment or the property was subject to a casualty that could be cured
for less than $250,000. Also, investors can attempt to retain the
express right to recover damages from their lenders in the event the
lenders back out of transactions based on material adverse changes
outside of the investors’ control.
Similar to loan commitments, rate lock agreements could quantify the
material adverse change that would allow the lender to reprice the
loan. For example, a rate lock agreement could contain a MAC clause
that states a material adverse change in the financial markets would
only occur in the event that the CMBS market spreads increased more
than two percent, or 200 basis points, according to an index (such as
the RBS Greenwich Capital Index). Furthermore, investors could
attempt to have their rate lock fees and loan fees refunded if
their lenders invoke the MAC clause due to market conditions
beyond the investors’ control.
MAC Clause Case Law
If a lender does choose to invoke the MAC clause in a loan
commitment or a rate lock agreement, investors also can refer to the
case law involving the use of such clauses. The success of a lender’s
attempt to back out of a loan commitment or rate lock agreement by
invoking a MAC clause will be based upon the event that the lender
cites as having had a “material adverse effect” on the investor. For
instance, the 9/11 terrorist attacks gave rise to numerous cases
involving material adverse changes clauses. See for instance, RiverTerrace Associates, LLC v. Bank of New York, a case involving an
$83 million construction loan.
A review of recent case law dealing with MAC clauses shows that very
few judges have developed a standard test to determine when a
“materially adverse” event has occurred. However, some courts seem
to be questioning lenders’ use of the MAC clause. For instance, in the
recent case Langley v. Prudential Mortgage, the plaintiff/borrower
sought to enjoin its lender from collecting payments under a rate lock
agreement where the lender refused to honor a rate lock agreement at
6.3 percent, but offered to fund the loan at the higher rate of 6.9
percent. In this case, the lender argued that the loan application clearly
set forth that the interest rates were subject to change. The lender
relied on the MAC clause to further its argument that the disruption of
the capital markets, which occurred in 2007, allowed for the change in
interest rates. The borrower/plaintiff acknowledged that it was aware of
the MAC provision, but considered the rate lock agreements to remove
the risk that adverse changes in the capital markets could affect the
interest rates on its loans. In ruling for the borrower/plaintiff and
enjoining the lender’s collection of fees, the judge noted that for the
bank to “claim the rate was not locked smacks of fraud.” While this
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Legal News Alert
Page 4 of 4 FEBRUARY 5, 2008
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ruling dealt only with a preliminary injunction and was not a dispositive ruling on the parties’
dispute, it does demonstrate the climate of increased tension between borrowers and lenders in
these times of interest rate volatility.
Conclusion
The increased volatility in the CMBS market has trickled down to real estate investors, making the
MAC clause in such investors’ loan commitments and/or rate lock agreements more important
than ever. Real estate investors (and their legal counsel) should be particularly careful of such MAC
clauses and devote extra attention to the drafting of MAC clauses in the future.
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Legal NewsTM
Material Adverse Change Clauses in Commercial Real Estate Loans
Christopher T. Nixon August 27, 2009
Negotiating and Managing Loans in a Distressed Credit Market
Winstead PC1201 Elm StreetSuite 5400Dallas, Texas 75270214.745.5357 phone214.745.5390 [email protected]
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Section III - BEST PRACTICES
A. Mitigating RisksWhat are the Risks to be Mitigated?
Typical Scenarios:
1. Loan Commitment
2. Rate Lock Agreement
3. Loan Documents
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Purpose of the MAC Clause:
How to Mitigate the Risk that the MAC Clause will be Interpreted as Intended:
There is no rule or "iron-clad" MAC Clause language. A party should be sensitive to the following issues in negotiating or evaluating a MAC Clause in a financial document.
The MAC Clause is a self-help provision to provide the Lender a manner in which to terminate the financial arrangement due to unpredictable circumstances.
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1. Be specific about conditions constituting a "Material Adverse Condition”.
Courts are generally presented with the following questions in litigation concerning a MAC Clause:
While determining whether an event was "adverse" is somewhat easy, determining whether an event is "material" may be difficult.
■ Was the event “adverse”?
■ Was the event “material”?
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A. "Material"
"Material" is rarely defined in the MAC Clause.
This is intentional. Why?
■ Materiality is a fact-based determination.
■ There is no magic percentage or amount threshold that is deemed to be "material", absent specific language in the document.
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B. Broad v. Specific MAC Clauses
(i) More Broadly Drafted = Uncertainty as to when the MAC Clause is applicable
(ii) More Specifically Drafted = Certainty as to when the MAC Clause is applicable, but the MAC Clause is likely to not cover all unpredictable circumstances (which defeats the purpose of the clause)
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C. Broad MAC Clause with Specific Exclusions
“The Lender may terminate this Loan Commitment upon any material adverse change; provided, however, the following shall NOT constitute a material adverse change: ____________________.”
Problems with this Approach?
Practice Tip:Carefully consider whether to present a broad MAC Clause exclusion list at the beginning of negotiations with the expectation that not all of them will be accepted.
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2. Include reasonableness and good faith standards.
Objective v. Subjective
Is the determination as to what constitutes a "material adverse change":
(i) objective, based on an definable standard, or
(ii) subjective, based on the Lender's determination?
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3. Include a financial threshold.
A. In a loan document, consider defining a "material adverse change" as a change that cannot be cured by the Borrower for less than $___________. This allows an objective threshold as to when the MAC Clause is effective.
B. For Rate Lock Agreements, define a "material adverse change" as an increase in market spreads of more than ________ basis points.
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4. Watch language construction.
"may"/"might" – less than a 1% likelihood is enough
"will" – 100% certainty is required
"likely to" – better than an even chance of likelihood
■ Exacting language is particularly critical with respect to any negotiated carve-outs from the MAC Clause.
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5. Be Sensitive to the Dual Purpose MAC Clause.
Lenders prefer to use a broad MAC Clause.
Problem: Uncertainty exists as to when the MAC Clause is applicable.
Solution:A Lender may consider using a broad-reaching catch-all MAC Clause together with a provision of specific events that will trigger the Lender's right to terminate a Loan Commitment/Rate Lock Agreement.
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6. Seek Fee reimbursements from the Lender if the Loan Commitment/Rate Lock Agreement is canceled as a result of the MAC Clause.
A. Difficult to Obtain.
B. When should reimbursements be applicable?
C. Capped amount of reimbursements?
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B. Lender’s Assertion of the MAC Clause
■ Lender Risks?
■ Lender Practical Solution
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C. MAC Clause in Loan Documents
■ Use the tips above
■ Is the requirement in the Loan Application/Commitment?
■ Conform to Property Purchase Agreement
Christopher T. NixonWinstead PC1201 Elm StreetSuite 5400Dallas, Texas 75270214.745.5357 phone214.745.5390 [email protected]