i need help with the below assignment use the pdf attached to work it out

1. Why is the loan in default? Explain which reasons are most relevant to Drive.What economic factors contributed to the default? What about financing factors? Were there other reasons for the default? What about reasons personal to Burton? Which reasons are most relevant to Drive?
2. For each option available to Schey to resolve the loan, describe the qualitative benefits and costs. What would be risks of legal action to foreclose or appoint a receiver? If Drive were to take legal action, what could it do to mitigate the risks? What would be the impact of a discounted payoff on the overall recovery effort? What impact would it have on Burton?s stake? Would Burton be likely to agree to a workout? Can Drive take actions to give him additional incentive to accept a loan modification? Would another buyer be likely to pay more for the loan than Drive did? Why?
3. Calculate the expected return (IRR) to drive for each option. Ignore Drive?s partnership and assume that the initial cost of the distressed note was incurred entirely by Drive, that it was paid today, and that Drive will receive all future cash flows. Clearly state any other assumptions. What is the current value of Northwinds Community Crossing? Should Drive rely on the valuation provided by CB Richard Ellis? What assumptions would you make in doing your own valuation? Which assumptions are most relevant to the future value of the property?
4. What type of resolution would you recommend Schey pursue? Explain why this is or is not the option that maximizes Drive?s expected IRR.

8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 Revised October 16, 2012 CRAIG FURFINE Working at Workouts: Commercial Real Estate Debt in Distress Sam Schey, asset manager at Drive Property Solutions, came into his office on Monday, May 10, 2010. He had just returned from a weeklong tour of distressed retail properties in the southeastern United States. Touring commercial properties at various stages of distress was the most fascinating part of Schey's career. His specialty was \"special servicing\"the resolution of defaulting commercial real estate loansa niche industry that had recently become big business in the wake of the severe downturn in commercial real estate. On his voicemail Schey heard a message from Jonathan Stewart, a lawyer representing Michael Burton, the current owner of Northwinds Community Crossing, one of the distressed properties Schey was overseeing. After deciphering the lawyer-speak, Schey believed that Stewart was offering a financial settlement. With an interest in resolving as many of the distressed properties as possible at the greatest value to Drive and its outside investor partners, Schey anticipated some long days ahead preparing for a protracted negotiation to resolve the problems with Northwinds. Distressed Debt During the commercial property boom of 2005-2006, owners of commercial property borrowed huge amounts of money directly from commercial banks and indirectly from sophisticated investors through the sale of commercial mortgage-backed securitiesa trend that would soon reverse itself (Exhibit 1). As the economy began to weaken in the latter half of 2007, commercial property owners were faced with rising vacancies and lower rents ( Exhibit 2). In an increasing number of cases, property owners were left in the unenviable position of not being able to meet loan obligations. Delinquent loansthose in obvious financial distressrose dramatically (Exhibit 3). Traditionally, lenders negotiated bilaterally with a borrower in distress and tried to work out the loan in a way that was mutually beneficial to both borrower and lender. Although the approaches varied from borrower to borrower, workouts typically involved some sort of payment made by the borrower in exchange for some concession on existing loan terms made by the lender. Failing such a workout, lenders had the right to take ownership of the property through the legal process of foreclosure. While within their legal rights, this put bankers in the position of property ownersa less than desirable position in which they had no particular expertise. 2012 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009 graduates of the Executive MBA Program (EMP-73). This case was prepared by Professor Craig Furfine and Sam Schey '13. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail custserv@hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of the Kellogg School of Management. This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 1/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Although this approach to managing nonperforming mortgage loans worked well for lenders under normal circumstances, the financial crisis of 2008 and the subsequent dramatic decline in the value of both residential and commercial property led to an unprecedented increase in loan delinquencies. At the extreme, banks burdened with excessive exposure to real estate often failed. As a result, many of the bad real estate loans came to be owned by the Federal Deposit Insurance Company (FDIC), an independent agency of the U.S. government in charge of finding acquirers for the assets and liabilities of failed banks. By May 2010, the FDIC had closed or facilitated the acquisition of 245 banks since the onset of the financial crisis. 1 As a result, the FDIC had amassed a portfolio of more than $7 billion of largely nonperforming mortgage loans, much of which was secured by commercial real estate properties. The influx of loans was overwhelming and, more often than not, the receivers put in place by the FDIC simply monitored payments while the government agency assembled portfolios of loans to market to bidders for their large note auctions. These auctions were marketed to a dozen or so approved bidders, who would be equity partners in joint-venture relationships with the FDIC for the liquidation of these pools of assets. These investors would assume the risk of nonpayment on the loan in exchange for purchasing the distressed notes at a discount. For example, a bidder might be willing to pay $650,000 for a loan (mortgage note) that carried a face value (promised repayment) of $2 million. Drive Property Solutions Once investors purchased these distressed notes, their interest was to maximize their financial recovery. Because distressed commercial property was a unique asset, investors often looked to special servicers to try to maximize their recoveries from the nonperforming loans. Drive Property Solutions was a special servicing firm employing seventeen people in downtown Chicago. The company's primary function was to resolve distressed debt in the commercial real estate space. Drive's proficiency in resolving nonperforming commercial real estate debt stemmed from its knowledge and expertise in legal remedies (e.g., foreclosure, receiverships); property management should it ultimately own the distressed property; and the working out of distressed loans. Schey was relatively new at Drive. He had previously worked at a \"too big to fail\" commercial bank where he monitored regulatory policies and seemed to answer to federal auditors at every turn. Looking for greater career growth, Schey pursued his MBA at the Kellogg School of Management, focusing on finance and real estate. He would not have predicted his career would turn to restructuring nonperforming debt and foreclosing on delinquent commercial borrowers, but this was the bottom of a deep recession, and Schey felt privileged to have been recruited from a big bank to a thriving new entity such as Drive. As special servicer, Drive was currently managing a pool of 1,000 notes secured by commercial real estate across the country. With the recent boom in distressed commercial properties, however, Drive began investing in the debt as a principal, often in partnerships with private equity firms that supplied most of the capital in exchange for Drive's expertise in dealing with the debt. As such, Drive was one of the few approved bidders for assets auctioned by the FDIC. 1 Federal Deposit Insurance Corporation, \"FDIC: Failed Bank List,\" http://fdic.gov/bank/individual/failed/banklist.html. 2 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 2/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS With the business of distress booming, Drive recruited Schey as a new asset manager to reconcile distressed debts. Schey was directly responsible for a portfolio of ninety-eight loans, involving sixty-four different borrower relationships. Within a week of joining Drive, Schey had diligently combed through loan documentation, FDIC reports, appraisals, and excerpts of conversations between the FDIC and the borrowers. As he sifted through the documents in each file, he made sure to take careful note of payment history, collateral status, guarantor financials, operating performance, and any other indicative information. Schey then felt ready to focus on his ultimate taskthe resolution of these credit relationships with the goal of turning commercial real estate notes into cash. Property Detail The task at hand was to deal with Northwinds Community Crossing ( Figure 1 ). This property, located at 1701 Northwinds Boulevard in suburban Savannah, Georgia, was a wellmaintained 12,209-square-foot retail strip mall situated on 0.97 acres of land. The retail center was configured into seven tenant spaces, three of which had been combined into a single unit. Figure 1: Northwinds Community Crossing Source: CB Richard Ellis. As he reviewed the building's rent roll, Schey noticed that all tenants had triple net leases, meaning that the tenants paid virtually all property expenses other than property taxes. Somewhat surprisingly, the strip center was 100 percent occupied despite the severe economic downturn (Table 1 ). Of some concern, however, was the fact that the property's cash flow seemed to be particularly tied to the success of the local community. Schey noticed that the property was located in a predominantly Hispanic market, and that most of the center's tenants catered to that particular market. Due to the collapse in the construction industry as well as stricter immigration laws in Georgia, all of the tenants had suffered a decline in their sales. As a result, Northwinds' current owner, Michael Burton, had allowed his tenants to pay him far less than their contracted rent. KELLOGG SCHOOL OF MANAGEMENT 3 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 3/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Table 1: Rent Roll of Northwinds Community Crossing, May 2010 Suite Tenant SF $/SF Expiration Base Rent ($) Received Rent per Operator ($) A-C D Mercado Real De La Villa A&Y Metals 5,160 1,834 15.50 15.50 9/31/2013 11/30/2012 79,980 28,427 50,824 20,725 E F Gerry's Cake Supplies Tortas Gigantes 1,849 1,590 15.00 16.63 11/1/2011 12/31/2012 27,735 26,442 20,031 18,205 G Osvelia's Briada 1,776 16.00 1/31/2012 28,416 19,236 Schey noticed in the file that Northwinds Community Crossing had been appraised in May 2008 for $1,350,000. His friend, Marina McFadden of CB Richard Ellis, had recently sent him an opinion of value on the property suggesting that currently, the property would fetch somewhere in the neighborhood of $805,000-$906,000, representing sales prices between $66 and $74 per square foot. Schey instinctively knew that CBRE's valuation was only one data point. It was based on recent comparable sales in a depressed market and did not reflect the income generation potential of the property. Sam knew that he needed to be confident of the property's worth before beginning his negotiations. This would mean analyzing the data himself, so he began by reviewing the most recent CoStar data on the Savannah retail market (Table 2). He paused, thinking back to his Kellogg real estate finance class, where his professor always cautioned, \"Skilled financial analysts can make a spreadsheet to justify anythingso think carefully about your assumptions.\" Table 2: Total Retail Market Statistics: Savannah, GA Existing Inventory Vacancy Vac (%) Net Absorption Quoted Rates ($) Period # Blds Total GLA Total SF 2010 1q 1,814 21,439,737 1,496,512 7.0 40,645 14.37 2009 4q 2009 3q 2009 2q 1,812 1,809 1,808 21,389,393 21,334,836 21,320,016 1,486,813 1,479,273 1,409,017 7.0 6.9 6.6 47,017 (55,436) (208,782) 14.91 15.75 16.00 2009 1q 2008 4q 1,806 1,804 21,297,016 21,279,756 1,177,235 1,054,645 5.5 5.0 (105,330) 31,027 16.54 16.65 2008 3q 2008 2q 1,801 1,799 21,187,106 21,167,228 993,022 1,041,950 4.7 4.9 68,806 151,553 16.60 16.39 2008 1q 1,798 21,159,858 1,186,133 5.6 61,138 16.32 Source: CoStar. The Borrower The borrower, Burton Properties, LLC, had been formed in early 2003 by Michael Burton for the purpose of operating a convenience store in Atlanta. But after four years of running the store and simultaneously building up a reasonable portfolio of similar properties, Burton, a general contractor by training, had changed paths, taking a job at a local high school as the varsity men's basketball coach in his hometown of Savannah. 4 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 4/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS While he no longer had interest in operating retail outlets, Burton understood the value of real estate holdings as an inflationary hedge for his retirement fund. With the help of his attorney, Jonathan Stewart, Burton sold some of his real estate holdings, and in the spring of 2008 used the proceeds to purchase Northwinds Community Crossing, a property he believed would generate significantly more cash flow and require far less day-to-day management. The Note In reviewing the loan documentation, Schey realized that the note on Northwinds had followed a circuitous route before landing on his desk. Originally, Burton had arranged financing after contacting his personal banker at Colonial National, describing the property as \"a can't-miss opportunity.\" Considering his track record with successful real estate ventures over the previous few years and his longstanding commercial relationship with Colonial, Burton had no trouble securing a commercial mortgage. As Schey looked at the numbers, he was amused by Colonial's loose underwriting: Original Balance: Amortization: Term: Initial Interest Rate: Interest Type: Initial Payments: Initial Annual Debt Service: Maturity Date: Default Rate: Recourse: $1,250,000 20 years 3 years 7% After 1st year, adjusts monthly to WSJ Prime + 2% with a floor of 6% and a ceiling of 9% $9,691.24/month $116,294.88 May 25, 2011 10% above note rate Unlimited guarantee of the sole member of the LLC, Michael Burton Based on the $1,350,000 appraisal, Colonial had been willing to lend $1,250,000 for a whopping 92.6 percent loan-to-value ratio. With underwriting standards like this, it was no wonder that Colonial had ultimately failed and been taken over by the FDIC in early 2009. Although the FDIC became his lender, Burton was still obligated to make payments on the note. Before the FDIC's structured note sale, Burton had tried to negotiate lower payments to no avail (Exhibit 4). Drive, in partnership with Spiner Capital, a small private equity shop that had raised money to invest in distressed debt, had won the auction that contained the note, effectively paying $465,000 to become the new lender.2 As was typical of the firm's new partnerships, Drive 2 Spiner/Drive won the auction for a portfolio of loans, paying a price approximately equal to 36 cents for each dollar of outstanding loan balance. KELLOGG SCHOOL OF MANAGEMENT 5 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 5/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 used its experience as a special servicer and took responsibility for maximizing the recovery on the partnership's investments. Thus, Schey was responsible for its resolution. Schey began his due diligence, determining that the Burton had made eighteen payments on the original loan, twelve at the original interest rate and six at the reduced floor rate of 6 percent. This had reduced the amount owed to $1,202,760.61. The relationship had since been in default due to nonpayment for six months, with the last payment recorded in November 2009. Schey assembled a quick loan summary by making calculations based on the loan terms, information from the Spiner/Drive bid at auction, and his contact with the county assessor's office, keeper of the ever-important property tax records: Six Months Accrued Interest: Target Recovery: 3 Late Charges: Tier:4 Escrow Total Payoff: Property Taxes: $36,082.80 $60,138.06 (default interest) $1,250,000.00 $1,460.25 1 $0.00 $1,300,441.72 $31,500.44 (past due for 2010 and 2009; $15,028.69/year) He noticed that Spiner had targeted a $1,250,000 recovery and expected to resolve this loan within two years. Those dollar and timing assumptions nagged at Schey, as he suspected Spiner did not do much formal analysis. Nevertheless, it was a starting point. Legal Options Schey understood that Drive did not have to negotiate with Burton; the firm could simply take legal action. To be prudent, however, Schey needed to educate himself on the legal environment in Georgia, as laws and practices differed state by state in respect to the two most common legal actions taken by lenders following commercial real estate defaultsforeclosure and the appointment of a receiver. Drive had the legal right to foreclose on the property and take ownership, and Schey understood that in Georgia, this would allow Drive to take ownership in less than two months.5 But he was not sure that Drive would want to do this, as the property was built on a former gas station. The tanks were still in the ground, and while Schey had a Phase II environmental report (Exhibit 5), environmental risks were particularly uncertain. After speaking with Drive's in3 The underlying underwritten value; each note within a structured note sale pool is assigned a value of assumed return (by the equity purchaser) and the aggregate targets are used to determine the bid price to the FDIC. 4 This particular equity purchaser assigned three tiers to the assets purchased as thresholds for duration of anticipated hold times (Tier 1 = 1-2 years; Tier 2 = 3-4 years; Tier 3 = 5-7 years). 5 The foreclosure process in Georgia is completed in 37 days on average, as reported by RealtyTrac, \"Foreclosure Laws and Procedures By State,\" http://www.realtytrac.com/foreclosure-laws/foreclosure-laws-comparison.asp (accessed September 10, 2012). 6 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 6/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS house counsel, Patrick Dorn, it was clear that appointment of receivership was a viable option, executable within a matter of days following filing (Exhibit 6). In Georgia, however, judges were given the right to appoint the receiver of their choice. Although the lender's recommendation would be taken into consideration, there was no guarantee as to who would be appointed. Through his past experiences, Schey knew that this was a wild card situation. A local judge could enlist a competent property manager to act as receiver who would ultimately work on behalf and in conjunction with Drive. That said, Schey had worked on other cases where judges appointed \"friends of the court\" to preside over receivership. These individuals, working for the court, could just as easily be incompetent, combative, and ultimately have a negative impact on the property's performance. However, without the appointment of a receiver, Schey would never know for sure whether the property's cash flows were as Burton reported. The original note did not contain a lockbox provision, so Burton was collecting the rent personally. One potential issue with receivership, however, was that if the property was sold through a receivership and the sales proceeds were not enough to cover the principal owed, Drive would lose the right to seek a deficiency judgment against Burton. 6 Given that the loan was issued with recourse, 7 there might be additional value to Drive hidden among Burton's other assets, and Schey did not want to rule out that option either (Table 3). Table 3: Personal Financial Statement of Michael Burton, May 2010 Assets Liabilities Cash Marketable securities Retirement accounts Nonmarketable securities Real estate $3,301 $0 Credit Cards Personal Lines of Credit $295,439 $0 Other $8,409 $0 $0 See below Real Estate Holdings of Burton Properties, LLC a Mortgage Balance ($) 525,260 Current Net Operating Income ($) 5,117 Current Monthly Debt Service ($) 4,410 Date Acquired 5/14/2003 Current Value ($) 496,000 B C 8/29/2003 2/20/2008 573,000 1,453,000 528,857 1,339,920 6,098 13,298 4,440 9,735 D E 4/14/2005 9/1/2005 1,089,000 161,000 1,364,968 191,041 10,003 2,224 11,062 1,787 F G 9/2/2008 5/27/2009 100,000 326,000 87,597 322,878 909 2,687 745 2,357 H 4/8/2010 938,000 807,000 7,153 5,800 I 1/6/2010 162,000 156,000 1,419 1,500 a. Estimated by Michael Burton. Property A 6 A deficiency judgment occurs when a court determines that a borrower still owes money to a lender after a foreclosure sale fails to produce sufficient funds to pay off the existing mortgage balance. 7 Recourse means that the borrower is personally liable, above and beyond the value of the real estate, for the failure to pay his or her mortgage debt in full. KELLOGG SCHOOL OF MANAGEMENT 7 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 7/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Offer Looking up from his files, Schey was surprised to see twenty-seven unread e-mails in his mailbox. Deleting the ads for overseas pharmaceuticals and carefully filing the current updates from his fantasy baseball league to read later, Schey spotted a message from Stewart, which had apparently been sent shortly after his voicemail. He read it carefully (Exhibit 7). It came with a number of routine disclosures as attachmentsmany of which he already hadbut one caught Schey's eye immediately: item (iii), the alternative financing commitment letter from First Community Savings Bank (Exhibit 8). He knew he had been hired to bring resolution to these distressed deals and that the obvious way to do this was to have the loan balance paid off in cash. The commitment letter was a boilerplate form, but what Schey noticed immediately was the amount: \"the Lesser of $1,000,000 or 75% Loan to Value.\" It was clear what was being asked. There was no other direct mention of a discounted payoff, but it seemed clear that Burton was communicating, through his counsel, his intention to request a discount from the principal balance and accrued interest to the maximum $1,000,000 payoff from First CSB. That was some distance from the target given to him by Drive, but because he had not yet explored what was reasonable, Schey could not dismiss the offer out of hand. Schey thought, too, about the possibility of a workout. The FDIC had not pursued this course before, but maybe that would be the best way forward. The dimensions of flexibility were endless, but Schey put together a preliminary proposal as a starting point for any negotiation (Exhibit 9). At the end of the day, perhaps Drive would be better off keeping Burton as the owner, incentivizing him to make payments to Drive in exchange for a lower interest rate, maturity extension, or other relaxations of the existing loan terms. Who knew? Commercial property prices might turn around and Drive could get close to full value for its note in a couple of years. Of course, a modification that would cause the note to be reclassified as performing would trigger a 35 percent short-term capital gains tax based on the difference between the modified book value and the $465,000 that Spiner/Drive paid for it at auction. Drive could extend the maturity date up to half the duration of the original maturity without tax implications, but this would only be true if no other terms of the loan were modified. Thus, the avoidance of capital gains tax seemed improbable given that Burton was already failing to meet his current debt service obligations. Conclusion As Schey came to the end of his long day, he began typing out an e-mail for a conference call the following week between Drive (represented by Schey and Dorn) and Burton Properties (represented by Burton and Stewart). Schey knew he had a couple of days to fully analyze all of the operating and financial information he had at his disposal. This being his first deal at Drive, he wanted to get the most value he could. Ironically, Northwinds Community Crossing actually showed a lot of promise because it was generating cash flow. The majority of Schey's other loans was collateralized by vacant land or busted development deals. 8 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 8/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS Exhibit 1: Sources of Commercial Mortgage Credit Source: Federal Reserve Flow of Funds. Exhibit 2: National Commercial Property Rents and Vacancy KELLOGG SCHOOL OF MANAGEMENT 9 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 9/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Exhibit 2 (continued) Source: CoStar. 10 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 10/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS Exhibit 3: Delinquency Rates for Commercial Mortgage Loans in CMBS 9 Delinquency rate (percent) 8 7 6 5 4 3 2 1 0 Source: Trepp. Exhibit 4: Excerpt of a Letter from Burton to Drive Property Solutions, May 31, 2010 In June of 2009, we reached out to the FDIC as receiver for Colonial National Bank (letter attached for reference) to inform them of the then-current position of the property and made a request to approve an interest-only period for 12 months. If the request would have been granted, it would have made it possible to continue timely payments as they were being made at the time. Due to the sale of the asset, we received no response from the FDIC as receiver for Colonial National Bank. As you will note in the property data provided, all of the tenants are paying a portion of what they are obligated to pay per the lease agreement. Due to the over-abundance of vacant retail space available in the area, a decline in overall sales, and the collapse of the economy, we reluctantly agree to accept a portion of the obligatory monthly rent. If we were not to accept a portion, they would simply vacate and in that case, there would be nothing being collected. Due to our efforts even in this tough market, we have been able to maintain 100 percent occupancy. The sole reason for this is due to the relationships and trust we have developed with the tenants and the community with our very active, hands-on approach and interaction with each tenant, which requires substantial time and effort. KELLOGG SCHOOL OF MANAGEMENT 11 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 11/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Exhibit 5: Environmental Concerns (excerpted from FDIC case filing) It must be noted that prior to conversion to a strip center, the property was a four-pump gas station, demolished in 2006, however, ceasing delivery of gasoline a couple of years prior. A Phase II limited surface investigation was completed by Sierra Piedmont on December 9, 2005, for the subject property. Based upon the findings of their search, Sierra Piedmont did not recommend further assessment at the subject site, stating: MTBE (0.077 mg/kg) was detected in soil sample B-2 (29-31'). Currently, the State of Georgia does not regulate MTBE. Therefore, this constituent does not need to be reported to Georgia Environmental Protection Division. Since MTBE is soluble and found in gasoline, this constituent typically defines the leading edge of a gasoline plume. However, based on the previous data collected by Sierra Piedmont and the data associated with this report, there is no compelling evidence to suggest that a catastrophic release to soil or groundwater has occurred. Please note that data from both assessments were collected proximal to the existing tank pit. Further assessment will be necessary in the event of tank closure. The borrower provided the originating bank with a copy of a State of Georgia Notification Data for Underground Storage Tank document dated June 28, 2007. This document indicated that the three underground storage tanks (USTs) on the subject property were protected under the G.U.S.T. Trust Fund. Although this fund has a $10,000 deductible that the owner of the property would be obligated to pay, the G.U.S.T. Trust Fund offers financial protection of up to $1 million due to the former owner (Gas Station 66) making payments to their supplier (Fuel Marketing, Athens, GA), who in turn made Environmental Assurance Fees to the State of Georgia. The storage tanks were installed at the site in February 1991. However, the location has not been receiving gasoline since 2001. Exhibit 6: The Receivership Option Receivership is the process of appointment by a court of a receiver to take custody of the property, business, rents, and profits of a party to a lawsuit pending a final decision on disbursement or an agreement that a receiver control the financial receipts of a person who is deeply in debt (insolvent) for the benefit of creditors. Thus, the term \"the business is in receivership.\" Receivership is an extraordinary remedy, the purpose of which is to preserve property during the time needed to prosecute a lawsuit, if a danger is present that such property will be dissipated or removed from the jurisdiction of the court if a receiver is not appointed. Receivership takes place through a court order and is utilized only in exceptional circumstances and with or without the consent of the owner of the property. Georgia Receiverships Applicable when the property requires protection, income needs to be collected, and the party in possession is diverting assets or income with the insolvency of the party not being sufficient, alone, as grounds. In this case, due to rental receipts and remittance to the lender below both lease agreements and debt service requirements coupled with the borrower's inability to keep property taxes current, the argument for receivership is clear. It must be noted that the state of Georgia gives the local judge discretion to appoint the receiver he or she sees fit rather than the recommended appointment as sought by petitioning parties. 12 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 12/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS Exhibit 7: E-Mail from Jonathan Stewart to Sam Schey, May 10, 2010 Sam, My client, Mr. Burton, received your messages. Per your request, attached please find the following documents and information relating to the loan and the property: (i) Evidence of property insurance; (ii) Copies of tenant leases; (iii) Alternative financing commitment letter from First Community Savings Bank; (iv) History of the property and recent developments in the market; (v) Statement of assets and liabilities of Burton Properties, LLC. After you have completed your review of the attached documents and information, please let me know whether there is any additional information that you need and whether you would like to set up a call to discuss our rationale for the loan modification requests set forth in our proposal. We look forward to your response and are hopeful that you will agree that our proposal is a reasonable and practical approach for addressing the issues and concerns regarding this loan and property. Thank you for your time and consideration, J. Stewart KELLOGG SCHOOL OF MANAGEMENT 13 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 13/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Exhibit 8: Loan Commitment Letter from First Community Savings Bank Burton Properties, LLC 1175 Magnolia Drive Norcross, GA 30093 Re: Northwinds Community Crossing Dear Mr. Burton, Your application for the first mortgage 03947891Z on the referenced property described further in this letter has been approved by First Community Savings Bank. Amount: the Lesser of $1,000,000 or 75% Loan to Value Collateral: Northwinds Community Crossing Interest Rate: 5.75% Term: 3 years Title Insurance: Title Insurance is to be supplied at the borrower's expense insuring the first lien position by a title insurance company acceptable to Lender. Insurance: The mortgagor will provide all necessary casualty, liability, and flood (if required) insurance in amounts sufficient enough to protect the mortgagee's interest. Survey: The borrower is to provide a current survey showing all easement of record. Financial Data: Each year the borrower and guarantor will provide current financial statements by April 15 for the preceding year end. Prepayment: Loans prepaid at any time prior to the end of the term will incur a penalty equal to 3% (three percent) of the outstanding balance. Expenses: The borrower is to pay all costs to close the transaction, including the title policy, documentary stamps, intangible taxes, recording fees, lender's counsel, and any other charges necessary to perfect our first lien position. Other: All loan documents are to be prepared by First CSB's counsel in a form and content acceptable to the lender and will contain all standard loan covenants appropriate to this type of transaction. No secondary financing will be permitted. 14 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 14/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS Exhibit 8 (continued) The loan will be due and payable in the event of transfer of ownership through sale of the property or transfer of beneficial ownership in the corporation. The borrower will provide all necessary representation and warranties as required by First CSB counsel. Lender will require a Phase 1 environmental inspection confirming that none of the collateral for the loan is in violation of the federal, state, or local environmental laws, rules, or regulations. In addition, the loan documents will require that the borrower and guarantor will indemnify, defend, and hold harmless the lender of any loss as a result of any past, present, or future use of the property that are in violation of any environmental laws, rules, or regulations and will not permit the property to be used in violation of any such laws, rules, and regulations. There has been no petition of bankruptcy or reorganization filed by borrower or guarantor. Lender will hold escrow funds for taxes and insurance. Value as indicated in this commitment is subject to lender's receipt of a current real estate appraisal by an approved commercial real estate appraiser. The borrower will pay the appraiser directly. If the above terms and conditions are acceptable please sign and return a copy of this letter no later than May 24, 2010. This loan must close in forty-five days from the date issued or it will become null and void. Sincerely, LENDER Accepted by: Denise Gates April 19, 2010 KELLOGG SCHOOL OF MANAGEMENT 15 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 15/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse WORKING AT WORKOUTS KEL697 Exhibit 9: Loan Modification Proposal This Loan Modification Proposal contains an outline of the primary terms of a proposed loan modification. This is not a binding agreement on the part of the Lender, Servicer, Borrower, or Guarantor and remains subject to the negotiation and execution of definitive documentation. This Loan Modification Proposal is for discussion purposes only and sets forth terms that are nonbinding in all respects and may or may not become part of a definitive agreement. This Loan Modification Proposal is not based on an existing agreement between the relevant parties and is not intended to impose any obligation whatsoever on any party. This Loan Modification Proposal is not to be construed as a commitment, offer, agreement-in-principle, or other agreement or understanding of any kind by any party to any term or condition set forth herein or as a waiver by any party of any of its rights or remedies under any agreement, at law, or in equity. Subject to the foregoing and the other terms and provisions of this Loan Modification Proposal, set forth below for your consideration are the general terms regarding a possible modification of the Burton Properties, LLC (\"Borrower\") and Michael Burton (\"Guarantor\") would consider in order to attempt to resolve the outstanding defaults under the loan (the \"Loan\") currently held by 2009-10 Spiner Capital/Drive Property Solutions/FDIC, LLC (\"Lender\") and serviced by Drive Property Solutions (\"Servicer\"): Past Due Principal and Interest, InterestOnly Period, and Monthly Payment Amount: Past due principal and interest would be added to the outstanding principal balance of the Loan. The monthly payments would be interest only for a period of six months and thereafter a new monthly payment amount would be set based on such increased principal balance and a twenty-year amortization schedule at an assumed interest rate of 6%. The interest-only period is being requested in order to provide Borrower with a short period to use a portion of the cash flow from the property to help pay a portion of the delinquent real estate taxes. This interest rate is to be fixed for the first year of the agreement. Delinquent Property Taxes: Borrower to make monthly payments to the tax commissioner in the amount of $6,000 per month until no tax delinquency exists, provided, however, in the event that Borrower receives any notification of a pending tax sale with respect to the Property, Borrower shall promptly pay all such delinquent property taxes. Borrower shall provide Lender with copies of all tax payments and all tax notices received. Modification of Maturity Date: The maturity date of the Loan would be extended to May 25, 2013, in order to provide Borrower with sufficient time to stabilize the property for a refinancing or sale to permit a repayment of the loan without any debt forgiveness. Discounted Payoff: Borrower will use good faith efforts to refinance the Loan prior to the maturity date of May 25, 2013, and in the event that Borrower is able to obtain such financing on or before May 25, 2013, then Lender will accept $1,250,000 as payment in full of the Loan. Modification of Interest Rate: After the initial year of the agreement, the interest rate would adjust monthly based on the original terms (WSF Prime + 2%), modified to lower the \"floor\" from 6% to 4%. 16 KELLOGG SCHOOL OF M ANAGEMENT This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 16/17 8/2/2016 Pearson Collections For the exclusive use of R. Jaruse KEL697 WORKING AT WORKOUTS Exhibit 9 (continued) Guaranty Release/Deed-in-Lieu of Foreclosure: In the event of a default under the loan documents (after giving effect to applicable notice, grace, and/or cure periods) following the execution of the modification agreement, (i) Borrower would either provide Lender with a deed in lieu of foreclosure or permit Lender to pursue an uncontested foreclosure (at Lender's election) and (ii) Borrower and Guarantor would reasonably cooperate in good faith in connection with the transition of ownership of the Property to Lender and in connection with Lender's ownership and operation, and in exchange Lender shall release Guarantor for any and all liability under the loan documents other than with respect to any hazardous substances, fraud, or misapplication or misappropriation of funds. Delivery of Financial Statements: Borrower and Guarantor shall furnish to Lender within thirty (30) days following the end of each calendar year, (i) an annual operating statement and rent roll for the Property, and (ii) a statement of assets and liabilities of the Guarantor. Cure of Defaults; Notice and Cure Rights: Upon execution of the modification agreement, (i) the prior defaults regarding past due monthly payment amounts and delinquent property taxes and any other defaults that Lender has actual knowledge of shall be deemed cured and/or waived and (ii) the Borrower shall be entitled to a five-day notice and cure period for monetary defaults (except no notice shall be required with respect to monthly required payments so long as Borrower timely receives a monthly invoice) and a sixty-day notice and cure period with respect to nonmonetary defaults. Any general default regarding a material adverse change in the financial condition of the Borrower, Guarantor, or the Property or regarding Borrower, Guarantor, or the collateral being impaired shall be deleted from the loan documents. Waiver, Release, and Covenant Not to Sue: As consideration for Lender agreeing to the above-described terms, the Borrower and Guarantor would agree to waive and release Lender from any and all claims with respect to the Loan and the loan documents through the date of the modification agreement, and would covenant and agree not to sue Lender with respect to any such claims. KELLOGG SCHOOL OF MANAGEMENT 17 This document is authorized for use only by Rob Jaruse in Strategic Financial Decision Making taught by Alexa Zahares, NORTHEASTERN UNIV from 01/1970 to 01/2017. https://collections.pearsoned.com/student/#print/0ac602b65431198481543a8ed34802a9/0/6 17/17