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COLORADO REAL ESTATE JOURNAL
— May 18-May 31, 2016
Finance
by John Rebchook
In the fall of 2000, about 300
Denver area commercial real
estate brokers gathered in a
field before boarding a five-
seat helicopter, to provide them
with an aerial view of what
today is the 293,394-square-
foot Lafayette Corporate Cam-
pus.
“Once you're up in the air,
it’s a no-brainer,” Bruce Etkin,
principal of Etkin Johnson, the
developer of the 77-acre center,
said at the time of the appeal
of the industrial and flex-space
campus.
The next year, the first build-
ing in the center off U.S. 287,
just east of U.S. 36, opened.
Etkin Johnson recently refi-
nanced the campus.
Jeff Riggs, a principal at
Essex Financial Group, missed
that helicopter ride.
However, his relationship
with Etkin Johnson predates
that helicopter tour. By a lot.
“We have done business
with Etkin Johnson for over 30
years,” Riggs said.
Most recently, Riggs and Sam
Makings, an analyst at Essex,
arranged a $24 million loan on
behalf of Etkin Johnson for the
Lafayette Corporate Campus.
The nonrecourse loan was
made by a Midwestern life
insurance company.
The 15-year loan, amortized
over 30 years, includes two
years of interest only.
“This financing achieves our
goal of utilizing conservative
leverage at favorable terms for
an asset we plan to hold long-
term,” said Derek Conn, direc-
tor of finance for Etkin John-
son. “We think this debt will
look very good for many years
to come.”
There were a number of lend-
ers willing to make the loan,
given the location of the Lafay-
ette Corporate Campus, the
strength and history of Etkin
Johnson, and the quality of the
tenants at the campus, which
include GE Health Care and
Epsilon, according to Riggs.
“All were interested, but
Etkin wanted a 15-year loan
term and that eliminated most
banks and CMBS sources,”
Riggs said.
The lender, like Riggs, has a
relationship with Etkin John-
son.
“The winning lender was
able to forgo any structure pro-
visions related to tenant roll-
over occurring over the first
three years of the loan,” Riggs
said.
“They had done loans for
Etkin Johnson in the past and
relied upon their experience
and integrity,” Riggs said.
During the past three
decades, Essex has financed
several projects for Etkin John-
son.
The latest was not its biggest
by a longshot.
In the past, Essex had
financed a 20-building, 2 mil-
lion-sf portfolio of industrial
properties for Etkin Johnson.
“That was an $85 million
credit facility with a major life
company, TIAA,” Riggs said.
Other News
n
Michael Kelly
and
Michael
Stordahl
of
Q10 Realty Mort-
gage & Investment Co.
arranged $6.8 million financ-
ing for the 79,435-square-foot
Panorama Point office build-
ing at 9100 E. Panorama Drive
along the southeast suburban
corridor.
“Panorama Point Office
Building was perfectly posi-
tioned for this new financing
after the owner had done an
excellent job of retenanting the
building and making signifi-
cant capital improvements,”
Kelly said.
“This building is now in a
strong competitive position
to take advantage of increas-
ing demand and rents in the
southeast Denver submarket,”
he said.
s
Shown is the Lafayette Corporate Campus.
C
ommercial real estate
investors and devel-
opers need to be
aware of the implications of
obtaining a commercial real
estate loan with recourse as
opposed to obtaining a loan
that does not require recourse.
Recourse loans, which are
the norm for almost all bank-
funded commercial real estate
loans, require a personal
guaranty. If the borrower is
an individual, then the act of
signing the promissory note
creates personal liability (i.e.,
recourse) on their part. If the
borrower is a limited liability
company (which is typical for
most commercial real estate
loans), then the individuals
behind the real estate deal sign
a guaranty agreement creating
personal liability to the lender
on the part of the individuals
who have signed the guaranty
agreement.
On the other hand, most
institutional lenders, such as
life insurance companies, do
not require recourse. These
loans tend to be much larger
than typical bank commercial
real estate loans. It is relative-
ly easy to get a nonrecourse
loan for $25 million from a life
insurance company, whereas it
is difficult to get a $2.5 million
nonrecourse loan from a bank.
Banks consider the finan-
cial strength of the guaran-
tor for a loan as one of the
most important factors in their
loan approval process. If the
developer or investor does not
have a strong enough personal
financial statement, then the
prospective borrower often has
to offer part
of their equi-
ty to some-
one with a
strong per-
sonal finan-
cial
state-
ment in order
to
obtain
bank approv-
al.
Giving
up
equity
to a guaran-
tor may be a
less desirable
a l t e r na t i ve
than paying higher rates to a
bridge lender in exchange for
keeping most, or all, of the
equity.
A guarantor agrees to put
their entire financial net worth
behind their bank loan. If the
loan goes bad, then the bank
has the choice of whether to
only accept the property to sat-
isfy their loan or to file a law-
suit against the guarantor and
attempt to collect on his or her
personal guaranty. Obviously,
having a bank obtain a judg-
ment against all of the guaran-
tor’s personal assets is a very
serious matter. Lenders are not
obligated to prove a deficiency
in order to pursue a personal
guaranty. Rather, the lender
must make a decision at the
beginning of the collection pro-
cess between the two collection
procedures. They can decide
to file foreclosure immediate-
ly upon a default and deter-
mine prior to the foreclosure
sale date whether to bid an
amount lower than the sum
they are owed. If they choose
this option, they can still pur-
sue the personal guaranty
for any deficiency. However,
the lender also has the alter-
native to skip the foreclosure
process and immediately take
legal action to collect under
the personal guaranty. If they
are successful and judgment is
entered, they can then proceed
to foreclose the judgment. This
is a less common choice for
lenders, but foreclosing a judg-
ment is very similar to foreclos-
ing on a deed of trust with the
potential advantage of allow-
ing the lender to begin collec-
tion efforts against any and all
of their guarantor’s personal
assets as soon as the judgment
is entered.
An alternative that is some-
times overlooked is to find
a lender that will provide a
nonrecourse loan. Private capi-
tal lenders, sometimes called
bridge lenders, are more like-
ly to consider a nonrecourse
loan on commercial real estate
than banks. However, there are
many complex factors to con-
sider in nonrecourse financ-
ing. One important factor is
to carefully review what are
called carve-out provisions in
the loan documents. Carve-
out provisions, also known as
“bad boy” guaranties, spell out
certain factors that may allow
the lender to pursue a guaran-
tor’s personal assets in spite
of the fact that the loan itself
is referred to as a nonrecourse
loan.
Actions such as filing for
bankruptcy, perpetrating fraud
or misrepresentation, failing to
maintain the required insur-
ance, failing to pay property
taxes, performing any envi-
ronmental indemnification or
committing a criminal act may
allow the lender to pursue the
guarantor individually. These
carve-out exceptions are com-
plex legal issues and any bor-
rower/guarantor should care-
fully review the carve-out lan-
guage with their legal counsel
to make sure they understand
its implications.
If the lender chooses to fore-
close against the property,
whether the loan is recourse
or nonrecourse has important
ramifications. In Colorado, a
lender must provide a bid to
the public trustee as the fore-
closure moves forward. If the
loan principal and delinquent
interest and loan costs com-
bined equal $1 million (for
example), then the lender may
bid $1 million and, as a result,
will not be able to pursue the
guarantor individually for any
shortfall. However, if the loan
is a recourse loan and the lend-
er decides that the property is
not worth $1 million and bids
only $900,000, then the lender
may (in the case of a recourse
loan) take steps to obtain a
judgment against the guaran-
tor for the $100,000 deficiency.
With a nonrecourse loan, this
is not possible. The borrower/
guarantor may raise certain
defenses to prevent the lender
from obtaining a personal judg-
ment for the deficiency, but
with a nonrecourse loan this
issue would not arise (unless a
carve-out issue is raised by the
lender).
In a perfect world, all bor-
rowers/guarantors
would
have nonrecourse loans and
not have to risk their personal
assets in order to get a bank-
funded commercial real estate
loan. Unfortunately, in the
real world, this issue needs to
be addressed by the borrow-
er. Does the ability to obtain
nonrecourse financing from a
bridge lender (at a higher inter-
est rate) offset the advantage
that bank financing with its
record low interest rates can
provide? This is a case-by-case
decision that real estate devel-
opers and investors need to
carefully consider.
s
Robert J. Amter
President, Montegra
Capital Resources
Ltd., Denver
In a perfect
world, all
borrowers/
guarantors would
have nonrecourse
loans and not
have to risk their
personal assets in
order to get a bank-
funded commercial
real estate loan.
Unfortunately, in
the real world, this
issue needs to be
addressed by the
borrower.
