Propmodo Daily

By Franco Faraudo · May 8, 2024

Greetings!

Fortress Investment Group is looking to call in its $550 million in loans to an entity associated with Cohen Brothers Realty. Instead of foreclosing, they aim to take equity in the company. In today’s email, we explore how the outcome of this case could influence foreclosure practices and intensify the national debate on loan restructuring, potentially establishing new precedents for lenders and asset managers.

Building affordable housing is already a major challenge, burdened by high costs, community resistance, and complex regulations. Making these developments energy-efficient can seem even more difficult. But, as we explore in a new article, a growing number of projects demonstrate that it's possible to achieve both affordability and sustainability.

This week in Propmodo Technology, we're exploring how tech is driving the rise of flexible office spaces. Plug-and-play solutions like modular phone booths and meeting rooms offer adaptability to changing work needs. Large office owners are embracing tech-enabled flex spaces to support hybrid work models. And we'll investigate why an on-demand 'Class Pass' model for office access hasn't gained widespread popularity yet.

Now, let's dig in!

A Look at the Lawsuit That Could Change the Foreclosure Process

Foreclosing on a commercial property is a complex and time-consuming process. It often involves months, if not years, of court proceedings and substantial legal fees. Even if the lender wins the foreclosure case and takes possession of the property, they must then sell it at auction (likely at a discount) to recover their losses.

Fortress Investment Group is taking a different approach by attempting to call in its $550 million in loans for a property portfolio owned by an entity linked to Cohen Brothers Realty. Instead of foreclosing on each property separately, Fortress is employing a method known as the Uniform Commercial Code (UCC). This process allows a lender to take equity in the company owning the property rather than obtaining proceeds from the sale of each individual asset.

As with any lawsuit, numerous details will influence the judge's decision. The loan agreement specifically grants Fortress the right to recourse on the assets of Cohen Realty Enterprises LLC and its owner, Charles Cohen. The agreement states, “Guarantor hereby irrevocably, absolutely and unconditionally covenants and agrees that it is liable for the Guaranteed Obligations as a primary obligor, in the amount of the Maximum Guaranteed Amount.” The document also details the equity value each property represents within the $180.7 million loan in question.

The defendant argues that several reasons exist as to why the loan should not be enforceable under the UCC. The primary complaint is that Fortress had agreed, via email, to modify the loan terms. According to these new terms, the loan would be extended to 2027, allowing Cohen to defer 3.5 percent of the 5.5 percent interest charges, which would then be added to the principal and become due upon maturity. Mr. Cohen's Affirmation of Opposition includes examples of the email responses from Fortress regarding the proposed new terms, notably stating, "Correct/agreed."

Cohen alleges that Fortress acted unfairly by demanding the full payment of $19 million with only 48 hours’ notice, claiming they "pulled the rug out from under us." He argues that this behavior represents bad faith on Fortress's part, especially considering their previous conduct. Cohen highlights that their loan dealings had always followed a consistent process: reaching an agreement on business terms via email—which were binding on the parties—and formalizing these terms in signed agreements later. The affirmation states this practice was standard, including on the specific date of December 14, 2024.

But the defense argued that an emailed statement is not sufficient to enforce this type of contract. Not only does New York law state this: “Under New York law, informal agreements (including email exchanges) may not amend contract where the contract requires a signed writing.” Fortress also included specific language in the contract: “No amendment or waiver of any provision of [the Loan Agreement] . . . shall be effective unless the same shall be in writing and signed.”

This is a complex case with uncertain outcomes. While Fortress appears not to be acting in good faith, enforceability typically requires a signed contract, which places some responsibility on Cohen as well. Should Fortress lose, they would still have the option to foreclose on the properties. However, such a loss could further tarnish their reputation, especially given their history of investing in third-party lawsuits.

If Fortress wins, it could redefine the approach to foreclosures. Other lenders might begin incorporating similar clauses into their contracts, and asset managers would become increasingly cautious regarding recourse loans. The outcome of this case could significantly affect the already challenging discussions on loan restructuring occurring nationwide, potentially making these conversations even more contentious.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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