New York, or Kansas City? Miami, or Denver? With the mantra “location, location, location” always relevant to considerations of real estate investment, will climate change cause existing real estate market darlings to fall out of favor? Are concerns about the effects of climate change likely to drive investment away from US coastal hot spots and into the interior? A recent article in Forbes indicates that climate change will force a reckoning in the real estate market that will ripple across both residential and commercial real estate portfolios affecting owners, investors and lenders alike. Rather than seeking out oceanfront property, in future people will want to own a slice of heaven in a nice landlocked community and the more landlocked (and higher) the better! In the January 27 article “These Are The Cities Most People Will Move To From Sea-Level Rise,” the following cities are cited as beneficiaries from migration away from US coastal areas: Atlanta, Houston, Dallas, Denver, Las Vegas, and Austin. Whether these cities actually benefit from climate change migration remains to be seen, and some of these cities may themselves experience climate-related issues affecting their desirability (for example, higher ambient temperatures in the southern and desert regions of the US, and coastal storm threats, could drastically affect the livability of many of the cities cited in the article). Nonetheless, it is worth focusing on the basic premise of the article–climate change will significantly alter the thinking about where it is prudent to buy and invest in real estate. At this moment, it may be almost unthinkable that great US cities such as Miami and New York (which are on the list of the top 20 cities projected to experience the most significant losses due to climate change) may eventually go the way of Atlantis, but for the investor it is not premature to continuously consider these issues and evaluate one’s portfolio accordingly.
With much attention currently on geographic locations around the world where the effects of climate change are thought to be keenly felt, including the fires in Australia, rising seas in coastal areas and receding glaciers in the Arctic zone, the potential effects of climate change on other aspects of human culture, such as economic decision-making, has not always generated the same headlines. That is, until a bombshell article published in the DealBook section of The New York Times on January 14 noted that the world’s largest asset manager would implement policies to evaluate investments based on issues of sustainability and climate change. As explained in the article, in the annual letter sent by Laurence D. Fink, founder and chief executive of BlackRock, which has nearly $7 trillion in investments, to the CEOs of the largest companies in the world, BlackRock announced that it intends to exit investments to the extent they “present a high sustainability-related risk.” Cited as potential targets for divestiture are fossil fuel businesses and companies whose management is not sufficiently focused on sustainability. Mr. Fink insists that fiduciary concerns are driving these policies, not politics, suggesting that, in BlackRock’s view, shareholders should evaluate a company’s stewardship of the planet when considering the company’s stewardship of its own business.
BlackRock’s announcement was pivotal in that it was issued by a major institutional player in the capital markets and evidences a policy not just of funding “green projects,” a socially-conscious investment strategy that has been employed by other financiers, but of specifically targeting for divestiture companies engaging in business practices that may have deleterious effects on the environment.
Notably, the NYT article on BlackRock was not the only interesting news on the economic threats posted by climate change. On January 16, The Wall Street Journal weighed in on this topic in “For the Economy, Climate Risks Are No Longer Theoretical.” Writing for WSJ, author Greg Ip leads off with an observation on how the Australian bushfires will negatively affect the Australian economy, he then notes that “[c]limate has muscled to the top of business worries” and financial losses related to climate change may not be subject to successful hedging or recoupment through adaptation or insurance.
It remains to be seen whether BlackRock’s position is the start of a trend toward more focus by banks and other financial institutions on climate-related issues in their lending and finance activities, or whether BlackRock remains a lonely voice on this issue in the capital markets.
Banking has been an impediment for the cannabis industry because the Bank Secrecy Act of 1970 (BSA) and related regulations―which seek to prevent money laundering and other financial crimes―place onerous requirements on banks when a transaction is suspected to involve illegal activity. 12 C.F.R. Section 21.11. Notwithstanding billions of state-legal cannabis dollars exchanging hands, the commercial banking industry, which is largely federally regulated, is virtually nonexistent in the cannabis space. In 2014, the Treasury’s Financial Crimes Enforcement Network (FinCEN) provided guidance intended to enhance the banking of cannabis-related monies by establishing a category of suspicious activity reporting for “marijuana related businesses.” But, according to FinCEN, as of June 30, 2019, just 553 commercial banks and 162 credit unions had filed an SAR for a “marijuana-related business.”
In two recent posts I discussed (i) the structure of unitranche facilities and their growing acceptance in the market and (ii) the uncertainty inherent in these facilities because they have not been tested by a troubled economic environment. Below I address certain of the substantive differences between common terms contained in agreements among lenders (or AALs) found in unitranche transactions and more traditional intercreditor agreements between first lien and second lien lenders. Note that because the unitranche market continues to develop, the standardization found in intercreditor agreements does not yet exist for AALs and many terms remain negotiable. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part III
In an earlier post, I generally discussed the structure of unitranche facilities and their growth in popularity among borrowers since the credit crisis. Of course, this explosive growth has occurred in a relatively benign economic environment. As a result, the inherent limitations of the structure have not been tested by a downturn or, in turn, by bankruptcy courts. Lenders exploring the market must do so with some caution and a fulsome understanding of the rights of, and limitations on, “first out” lenders in a distressed scenario.
By their nature, unitranche debt does not easily allow senior lenders to silence junior lenders in times of distress based on collateral valuation alone because all the borrower’s obligations are secured by a single lien. Instead, protections must be carefully drafted into the AAL. These protections will include, for e.g., waivers of the ability of “last out” lenders to vote in favor of a contradictory plan of reorganization, restrictions on their rights to object to asset sales, and limitations on the rights of such lenders to provide post-petition financing. Similar provisions contained in first lien/second lien intercreditor agreements have been deemed enforceable “subordination provisions” in the context of a bankruptcy. The same should generally hold true for AALs. If an intercreditor dispute arises in the context of a borrower’s bankruptcy, lenders should be mindful that a bankruptcy court might decline to accept jurisdiction (particularly if the borrower is not a party to the AAL), leaving an unrelated state or federal court to address the matter. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part II
A variety of factors have fed the rapid growth in the market for unitranche loans during the last few years. These structures — a hybrid of a traditional single lien and a first lien/second lien facility – began in the lower middle-market and are now commonly found in loan transactions exceeding $100 million.
In this first in a series of posts addressing this quickly developing market, I discuss below the basic structure of unitranche facilities. In later posts I will address certain of the intercreditor issues that necessarily arise when negotiating unitranche loans and the complexities that may be presented by the unitranche structure in a market downturn. Continue reading Unitranche Facilities – Continued Growth in an Uncertain Market: Part I
The U.S. Department of Justice (“DOJ”) financial fraud enforcement program’s actions in the wake of the 2007–2008 financial crisis have led to some of the largest settlements in the history of the DOJ. To date, 10 financial institutions have reached settlements with the DOJ resolving allegations of fraudulent packaging and sale of residential mortgage-backed securities (“RMBS”) in the run-up to the crisis. The government has recovered a total of nearly $62 billion in fines and penalties from these cases. While a few institutions have yet to resolve their RMBS cases with the DOJ, the RMBS cases have largely run their course. A decade out from the crisis, it is worth taking a look back at the conduct that led to these cases, the reasons the government was able to extract such large penalties and how financial institutions can prepare for such enforcement actions in the future.
By J. Colin Knisely
On February 15, 2018, the U.S. House of Representatives passed the Americans with Disabilities (ADA) Education and Reform Act . The bill passed by a vote of 225 to 192, with 12 Democrats voting in favor of the bill. Most of the Democrats who joined with Republicans to support the bill were from California, where state law allows plaintiffs to recover actual damages and a statutory minimum of $4,000 for each time the plaintiff visited a business and encountered an access barrier, in addition to the attorney’s fees available under the ADA.
Proponents of the bill argue that the amendment to Title III of the ADA will curb the number of frivolous, “drive-by” lawsuits against businesses, which have increased dramatically in the past few years. H.R. 620 would create a “notice and cure” requirement before any legal action could be taken against a business for an alleged failure to comply with the standards set by Title III. Under H.R. 620, a claimant must first send a business owner or operator a written notice “specific enough to allow such owner or operator to identify the specific barrier.” The written notice must further specify “in detail the circumstances under which an individual was actually denied access to a public accommodation” and “whether a request for assistance in removing an architectural barrier was made.”
A claimant can only file a lawsuit if the business does not respond to the written notice within 60 days with “a written description outlining improvements that will be made to remove the barrier.” If the business responds, but “fails to make substantial progress” in implementing the improvements, a lawsuit can be filed.
Critics of the H.R. 620 have argued that it would effectively exempt businesses from compliance with Title III until the business receives notice of an alleged compliance issue, and that it would shift the burden of protecting access onto the person with the disability, whom critics have argued would have to become experts on the legal code in order to properly comply with the notice requirements of H.R. 620.
H.R. 620 has now moved to the Senate, where the fate of the bill is uncertain. However, there is currently no companion bill in the Senate, and Republicans in the Senate would still need to gain the support of several Democrats to meet the Senate’s 60 vote threshold.
In a January 4, 2018, memorandum regarding marijuana enforcement, U.S. Attorney General Jefferson B. Sessions rescinded, effective immediately, the previous guidance issued by the Department of Justice on marijuana, including the memorandum often referred to as the Cole Memo. To the extent a bank’s compliance program relating to marijuana-related businesses (MRBs) relied on the guidance in the Cole Memo, the bank should immediately re-evaluate what changes in that program, if any, may be appropriate.
To read the full text of this Alert, please visit the Duane Morris website.
The Federal Trade Commission and the Federal Communications Commission are among U.S. regulators now starting to flex their muscles when it comes to enforcing cybersecurity standards, says Burton. What enforcement trends might we expect to see in 2017?
To view the video, please visit the Bank Info Security website.