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REAL ESTATE be recovering, there's trouble in store for developers whose low- cost high loan-to-value ratio loans will soon be up for renewal. They'll likely end up paying a lot more for smaller loans and thus need to find alternate financing to meet the shortfall and cover the added expense, says Leor Margulies, a partner at Toronto's Robins Appleby & Taub LLP. "It's a big problem that hasn't really surfaced yet," he says. So how are commercial real estate lawyers handling these issues? What can they do to help clients get their projects off the ground? Margulies says many of his clients need more than legal advice. They need help in finding new partners, investors, or alternate financing. To this end, his firm has established a real estate advisory group to assist in making these connections. While lawyers at other firms say they may help with this kind of networking informally, many of them also observe that clients are more apt to rely on mortgage brokers and other real estate advisers to find alternate funding sources. The various alternatives involve a wide range of legal work, says Margulies. "It runs the gamut from sale of an interest, to a loan facility, to a restructuring, to creation of a limited partner- ship that would involve tax planning and could stretch to litiga- tion if you're involved with a lender and need to hold them off while you're doing this type of thing." Robert Stemp, a BLG partner in Calgary, says the credit crunch and the quest for alternate funding are giving many developers and lenders a new appreciation for the role that lawyers can play. "They are looking to lawyers more because many of them haven't seen such a downturn before. So they're depending on us more than in the past." In many cases, the alternate funding takes the form of a bridge loan or second mortgage, often at higher interest rates and with stringent conditions regarding security and repay- ment. Borrowers may be asked to secure the loan with personal property, provide a guarantor, or risk linking the loan to their interest in other property developments. There's often room for negotiation in such arrangements and lawyers can play a key role in that regard, says Kahn. For example, the borrowers and their lawyers may say, "I'll give you security against another project I have, but I don't want to put all my assets at risk so I don't want to give a personal guarantee." Or, "I'll give a personal guarantee, but once the loan is paid off to a certain extent that guarantee should fall off." Another funding solution is a vendor take-back whereby the seller of the property assumes a second mortgage. Sullivan notes that a variation on this involves a major tenant assum- ing the mortgage. Whether the new mortgage is held by the vendor or the tenant, such arrangements will likely involve negotiations over various proposed covenants that would put new constraints on the borrower, he says. For example, if the tenant puts up the money, there would likely be terms that would put the future tenant mix of the development under greater scrutiny. Mydske says another creative option is a participation loan whereby the lender will receive a percentage of any subsequent increase in value of the property or a percentage of the sale price if the property is sold. "In order to get financing at a cost that the Happy clerk, Happy work. Our software improves quality of life. Industry leader in legal software for real estate, corporate and estates for over a decade The choice of 2500 law firms, The Conveyancer generates required documents (including lender forms), tracks undertakings, exchanges data with Teraview® (ON) and SPIN (AB) and integrates with four title insurers. Comprehensive corporate records software tracks changes and generates prescribed forms, registers, ledgers, share certificates, resolutions, minutes, correspondence, etc. Integrated e-filing and extracts. The Estate Administration module automates Rule 74/75 forms plus scores of letters and documents. The Estate Accounting module simplifies recording of financial transactions, and generates reports in "passing of accounts" format. developer can live with, he may be prepared to give some sort of a participation in the upside of the property," he says. Developers are also looking at raising funds through joint ventures or co-ownerships whereby they sell an interest in their properties. As Sullivan points out, "This comes with a price tag attached — the developer is no longer entirely in control of the destiny of his project." All such arrangements are inevitably complicated and involve a significant amount of legal work, says Mydske. Often, the lawyer will have an opportunity to demonstrate his or her creativity and come up with alternate solutions, he says, not in the broad strokes of strategy, but in negotiating the technical details of contracts and other documents. For example, a lender may require a new survey certificate, but may agree to using the old one and making a statutory declaration. Strong relationships are the key to making deals in today's difficult marketplace, says Sullivan, who observes that well- established lenders, borrowers, and their lawyers generally share a commonality of interest and have a track record of working together, even though they may have conflicting agendas with respect to each individual deal. "Although the market is certainly slower than it has been, wherever a deal can get done, it does get done," he says. Freelance journalist and business writer Kevin Marron can be reached at kevin@kevinmarron.com Tel: 416.322.6111 Toll-free: 1.866.367.7648 www.doprocess.com www. 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