By now, anyone who works in the real estate industry is likely to have heard of Basel III and the new requirements for HVCRE Loans.  But you may be asking: what is Basel III; what constitutes an HVCRE Loan; and what is the impact to a borrower in real estate deals?  The alert below answers these questions.

What is Basel III?

The Basel Committee on Banking Supervision (the “Committee”) is an international committee focused on the importance of adequate capitalization in a stable international banking system.  To improve regulatory oversight and risk management in the banking sector following the 2008 financial crisis, the Committee adopted a new capital accord commonly referred to as “Basel III”. Congress mandated the adoption of Basel III in the United States when it passed The Dodd–Frank Wall Street Reform and Consumer Protection Act.  The final rules implementing Basel III took effect on January 1, 2015.

HVCRE Loans

Recent attention on Basel III has focused on the increased risk weighting of certain High Volatility Commercial Real Estate Loans (or “HVCRE Loans”), and the corresponding increase in reserve requirements for banking organizations making such HVCRE Loans.  A typical commercial real estate loan has a risk weighting of 100% and a capital requirement of 8%.  This means that a bank must reserve at least $8 million in capital to make a $100 million loan.  An HVCRE Loan is assigned a risk rating of 150%.  This means that a bank must reserve at least $12 million in capital to make a $100 million HVCRE Loan (i.e. $4 million more in reserves).

An HVCRE Loan is any loan from a banking organization that finances the acquisition, development or construction of real property, which is not considered to be “permanent financing,” and specifically excludes: (1) loans on 1-4 unit residential properties; (2) community development loans; (3) agricultural loans and (4) commercial real estate loans which satisfy the following requirements:

1. The loan-to-value ratio is less than: (a) 65% for raw land; (b) 75% for land development projects; (c) 80% for commercial, multi-family, or other non-residential construction projects; or (d) 85% for already improved property;
2. The borrower has contributed capital in the form of cash or unencumbered readily marketable assets of at least 15% of the project’s “as-completed” value; and
3. The borrower’s contributed capital and all of the project’s “internally generated capital” is contractually required to remain in the project until the project is sold, or until the loan is either paid off in full or converted to permanent financing.

The HVCRE regulations currently only apply to banking organizations, although there is some speculation that this could change to also include loans from insurance companies. Mortgage REITs and private equity funds that originate commercial real estate loans are not currently subject to HVCRE regulations.

“Permanent financing” is not defined in the regulations, but based on an FAQ published in April 2015 by the relevant federal banking agencies: (1) a loan does not constitute “permanent financing” if it will have future advances and the underwriting is based on the “as-completed” value of the project and (2) “permanent financing” requires, at a minimum, that the loan satisfy the lender’s “normal lending terms” and “underwriting criteria” for permanent loans.

Borrower Impact

Increased Pricing: If a loan is classified as an HVCRE Loan, the lender will face a lower return on its capital as a result of the higher capital reserve requirement.  This will likely lead to increased pricing on the loan, including a higher interest rate, for the borrower.  If possible, lenders will want to ensure that a loan is not classified as an HVCRE Loan.  Borrowers should expect to see loan provisions addressing that the exemptions to being classified as an HVCRE Loan have been satisfied.

Required Capital: In the HVCRE Loan analysis, the loan-to-value requirement is a relatively straightforward calculation that is standard for all commercial real estate loans.  The requirement that a borrower will be required to have contributed capital in the form of cash or unencumbered readily marketable assets of 15% of the project’s “as completed” value is more complicated.  Since such capital must be contributed prior to the disbursement of any loan proceeds, this requirement may create obstacles to disbursement of loan proceeds at closing.

Borrowers should first understand what may be included as “capital” in the form of cash or unencumbered readily marketable assets.  “Capital” includes cash paid to purchase land and out-of-pocket development expenses.  It does not include: (1) the value of any contributed land (including any increase in land value that may result from improved market conditions or a project’s entitlements) or (2) any borrowed money or other collateral pledged in support of the loan, such as a second mortgage or an unsecured loan.  It is unclear whether proceeds of a mezzanine loan or debt of a borrower’s parent entities may be included as “capital”, but a conservative lender would likely exclude such proceeds. This may cause certain joint venture structures to look more attractive.  Furthermore, the capital contribution requirements are based on the “as-completed” value of a project rather than a project’s cost, which is a change from conventional underwriting practices, and may increase the required capital contribution for any given project.

Capital Must Remain in the Project: Borrowers must also be aware of issues related to the requirement that a borrower’s contributed capital and internally generated capital remain in the project until the project is sold, or the loan is paid in full or converted to permanent financing.  This requirement prohibits a borrower from making distributions of any contributed equity and traps net operating income in the project, in each case, during the life of the loan. It is unclear whether income generated by the project can be applied to cover a project’s expenses. Borrowers should therefore expect to see increases in required reserves to cover a project’s carrying costs.

Cost Provisions: Borrowers may be tempted to let the lender focus on the details of ensuring a loan satisfies the requirements necessary to avoid classification as an HVCRE Loan; however, it is in a borrower’s best interests to focus on this issue as well.  If a loan is determined after closing to constitute an HVCRE Loan and the lender faces higher reserve requirements and capital costs as a result, the lender may attempt to pass these costs onto the borrower through the general cost and indemnification provisions that are standard in most loan documents. Borrowers should also be on the lookout for any new or special provisions specifically related to such costs.

The attorneys at Coblentz Patch Duffy & Bass are well-versed in the nuances of the new Basel III regulatory requirements.  Should you have any questions or require additional information, or are interested in counseling on a specific project, please contact Kyle Recker.

One consequence of the United Kingdom’s vote to exit the European Union is the questions it raises regarding European trademark protection.   The UK’s “Brexit” potentially will disrupt both the trademark registration process in the EU and registrants’ trademark rights in the UK.

For the immediate future, there is no change.  EU trademark registrations are protected in the UK by statute as if they were UK registrations.  As a result, owners of EU trademark registrations will continue to enjoy protection in the UK, either by a statutory order, or potentially by way of division from the EU trademark registrations, which might or might not require some action by the trademark owners.  If anything, EU trademark owners may need to file in the UK and claim seniority from the corresponding EU registrations, although this would be sometime in the future.

It is unclear at this stage whether EU applications filed after June 23, 2016 and before the “Brexit” is complete, or pending as of that date, will extend any protections to the UK.  However, going forward, trademark owners with (or planning to have) operations in the UK would be well advised to file separate UK and EU applications to register new marks.

For further information and assistance, contact Thomas Harvey at tharvey@coblentzlaw.com.

Last week the Department of Labor published a Final Rule updating the federal overtime regulations.  Most significantly, the new rule increases the minimum salary required to qualify for the Executive, Administrative, and Professional exemptions to $913 per week (or about $47,476 annually).  The new rule also creates a mechanism for automatically updating the minimum salary requirement every three years starting January 1, 2020.  These changes become effective on December 1, 2016.

This new rule revises federal requirements concerning these exemptions.  However, states may impose different and additional wage and hour requirements.  Thus, employers must be mindful of and compliant with both state and federal requirements.

California Employers

California has already increased its minimum salary requirement for the Executive, Administrative, and Professional exemptions to $41,600 per year, effective January 1, 2016.  Because the new federal standard is higher, employers who have current salaried exempt California employees whose salaries exceed the California standard ($41,600) but are less than the new federal standard ($47,476) will need to evaluate their options and make appropriate changes to comply with the new federal rule.  For example, employers could raise employee salaries to meet the new salary requirement and try to maintain their exempt status.  Alternatively, employers could reclassify those employees as non-exempt.

Employers should understand that any option could have significant implications for the business and their employees.  An individualized audit of the employer’s current policies and practices will help ensure that employees are properly classified and that any changes are consistent with California and federal law.

We are happy to advise California employers through these changes. To further discuss how these new regulations may affect your business, contact Charmaine Yu at cyu@coblentzlaw.com or Clifford Yin at cyin@coblentzlaw.com.

On May 16, 2016, the United States Supreme Court issued its decision in Spokeo v. Robins, likely making it more difficult for plaintiffs to bring individual or class action lawsuits based on the bare violation of a statutory right.  However, because the Supreme Court merely clarified the standing requirement, and “took no position as to whether . . . Robins adequately alleged an injury in fact,”ⁱ the implications of the Court’s decision remains to be seen.

At first blush, this appears to be a victory for Spokeo, who had argued that Robins only had standing if he suffered an actual, real-world, “palpable” injury.  The Court explained that a plaintiff does not “automatically satisf[y] the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.”ⁱⁱ However, the Court specified that a “concrete” injury, “is not necessarily synonymous with ‘tangible.'”ⁱⁱⁱ An injury can be “concrete” even if intangible and “difficult to prove or measure.”^iv

As a result, what will constitute concrete injury will be highly dependent on the statutory right allegedly violated.  Where a plaintiff seeks to vindicate a “private,” personal, or individual right, the threshold will likely remain low.^v In contrast, where a plaintiff seeks to enforce a “public” right, the standard may become higher, with a plaintiff having standing only if he can “allege that he has suffered a ‘concrete’ injury particular to himself.”^vi The new battleground will be whether the alleged violation involves a “public” or private” right.

Under the guidance articulated by the Supreme Court, the Ninth Circuit will likely find that Robins’ allegation that Spokeo provided false information about him involves a “private” right, and that his alleged injuries are sufficiently concrete to confer standing.^vii However, Robins’ other FCRA allegations appear to involve “public” rights, and it is unlikely the Ninth Circuit will find that Robins has alleged “concrete” injuries arising from these violations.

For more information, contact Richard Patch at rpatch@coblentzlaw.com or Skye Langs at slangs@coblentzlaw.com.

i.  Spokeo v. Robins, No. 13-1339, slip op. at 11 (2016).
ii.  Id. at 9-10.
iii.  Id. at 8-9.
iv.  Id. at 10.
v.  Id. at 2, 5 (Thomas, J., concurring).
vi.  Id. at 4, 6 (Thomas, J., concurring).
vii.  Id. at 7 (Thomas, J., concurring).

On May 11, 2016, President Barack Obama signed into law the Defend Trade Secrets Act, a culmination of a lengthy bipartisan effort to provide full federal protection to trade secrets.

The new federal law is an effort to harmonize the current patchwork of state laws protecting trade secrets and create a single nationwide framework for litigating trade secrets disputes. Legal commentators consider the DTSA to be the most significant expansion of federal intellectual property rights since the 1946 passage of the Lanham Act, which provides federal protection to trademarks.

Under the new law, companies for the first time have the right to file a federal cause of action for trade secret misappropriation. Prior to its passage, civil protection of trade secrets was a creature of state law only. Currently, federal statutes already provide for civil protection of other forms of intellectual property, including copyrights, trademarks, and patents. While most states have adopted some trade secret statute based upon the model trade secrets law, the Uniform Trade Secrets Act, not all have done so, and the statutory provisions they enacted have varied.

Proponents of the new statute hope that it will allow for the development of more predictable case law, and shift more litigation to federal courts that they believe are better equipped to handle interstate and international trade secrets disputes. Notably, however, the DTSA does not preempt state laws already addressing trade secrets. Rather, it will coexist with state laws and not modify or influence them.

What does the passage of the statute mean for companies?  First and most importantly, it provides for broader access to the federal court system. Federal courts now have subject matter jurisdiction over trade secret disputes, enabling companies to pursue misappropriation claims there. The law also provides for new and potentially valuable remedies to trade secret owners. For example, its most controversial remedy provides for ex parte seizures of misappropriated trade secrets in extraordinary circumstances, such as if the trade secret owner believes the defendant is about to take the trade secrets out of the country. A plaintiff satisfying its stringent requirements may use law enforcement to seize stolen information without providing advance notice to the defendant. There is no comparable provision in the Uniform Trade Secrets Act or any state law.

Finally, an aspect of the DTSA that is immediately relevant to companies is its whistleblower provision. The DTSA creates civil and criminal immunity for whistleblowers that disclose trade secrets under certain circumstances. Companies must provide notice of this immunity to employees and contractors in their confidentiality agreements. Those that fail to do so will not be able to utilize all remedies that the DTSA provides, including its provisions for attorneys’ fees and exemplary damages. Companies hoping to benefit fully from the DTSA’s remedies need to amend their confidentiality agreements to comply with this provision.

For more information, contact Thomas Harvey at tharvey@coblentzlaw.com.

Authored by Scott Hall; originally published in the Daily Journal, April 22, 2016

The Age of Drones is here, but the legal and regulatory framework necessary to fully realize the anticipated benefits of drones continues to lag behind advances in technology. The potential applications for drones, including aerial photography, precision agriculture, emergency response and package delivery – to name just a few – are well known. Less clear are the laws governing drone use, as well as the basic question of who possesses, or should possess, the authority to make laws aimed at drones. While the majority of states have passed or are considering drone-related laws, currently proposed federal legislation, such as the FAA Reauthorization Bill (S.2658), passed by the Senate on April 19, would prohibit states and local governments from enacting or enforcing any law or regulation “relating to the  design, manufacture, testing, licensing, registration, certification, operation, or maintenance” of drones.

The presumption of all drone-focused legislation, if passed, would significantly restrict the ability of states and local governments to deal with problems in their localities arising from the increasingly popular and widespread use of drones. Those in favor of broad federal preemption argue that strict uniformity is necessary so that drone manufacturers and operators are not confronted with a patchwork of differing state and local laws. But while uniformity is important, the sluggishness with which federal laws and regulations have been, and continue to be, developed may be hindering the advancement of the fledgling drone industry at a critical time for its growth.

. . .

To continue reading the article, click here.

Authored by Skye Langs and Richard Patch. Originally published in Law360, November 2, 2015.

“On Monday, the U.S. Supreme Court heard arguments in Spokeo Inc. v. Robins, a case that has the potential to fundamentally alter the landscape of class actions based on violations of statutory rights. At issue in Spokeo is whether a plaintiff has Article III standing to sue for a violation of his or her statutory rights, absent proof of any “concrete harm” resulting from the violation. If the petitioner is victorious, plaintiffs will no longer be able to sue for bare violations of a statute unless they can demonstrate that they suffered some real-world harm.

. . .

Ultimately, the Supreme Court’s decision in Spokeo could make it much more difficult for plaintiffs to bring large-scale class actions based on bare violations of the FCRA as well as other similar privacy statutes, such as the Telephone Consumer Protection Act, the Electronic Fund Transfer Act and the Video Privacy Protection Act. Under the status quo, class certification for claims based on statutory violations is a relatively low hurdle because no individualized proof of harm is required. Once a class is certified, defendants are under tremendous pressure to settle in the face of potential exposure in the billions of dollars. A ruling in favor of Spokeo would equalize this imbalance, raise the bar for class certification by requiring common proof of actual, real-world harm, and reduce the risk of large-scale liability to corporate defendants.”

Full article can be found at Law360 (subscription required).

Authored by Scott Hall; originally published in the Daily Journal, October 15, 2015

Last week, Gov. Jerry Brown signed into law Assembly Bill 856, which amends Civil Code Section 1708.8 to define a “physical invasion of privacy” as including knowingly entering “into the airspace above the land” of another person without permission in order to capture images, sounds, or other physical impressions of private activity. The law targets the increasingly aggressive efforts of paparazzi and other “peeping toms” in using drones to capture images of private conduct.

AB 856 passed unanimously and has been widely applauded, not only by celebrities, but by many others who value privacy and harbor reservations about the rapidly expanding uses of drones.  The new law, however, was only one of five drone-specific bills to reach the governor’s desk in recent weeks. The four other bills were vetoed by Brown, despite strong bipartisan support.

Less than a week earlier, the governor considered Senate Bills 168, 170 and 271. All three, like AB 856, passed with unanimous votes in the Legislature, but unlike AB 856, were met with a veto. According to Brown, he vetoed those bills because they sought to create “new crimes” that added complexity to California’s voluminous criminal code “without commensurate benefit,” given that much of the activity sought to be prohibited was already covered by other criminal provisions. His rejection of the bills comes as a disappointment to those who hoped the governor would embrace the opportunity to address some of the new and unique legal issues presented by the growing ranks of drones in California’s skies.

. . .

To continue reading the article, click here.

Authored by Timothy Crudo, Rees Morgan and David Anderson; originally published in the Daily Journal, July 15, 2015

White collar pundits have been atwitter since the 2nd U.S. Circuit Court of Appeals’ insider trading decision last December in U.S. v. Newman, 733 F.3d 438 (2d Cir. 2014). There the 2nd Circuit held that, to convict a tippee who traded on inside information, the government must prove that he knew that the insider disclosed the information “in exchange for a personal benefit.”

While that holding was no surprise, the court seemed to drop a bomb with its explanation of what constitutes a personal benefit. For decades, “personal benefit” had been understood to include a gratuitous gift of a tip from one friend to another. Now under Newman, that benefit must be “objective, consequential, and represent[] at least a potential gain of a pecuniary or similarly valuable nature.” In other words, the tipper must receive (or expect to receive) “something more than the ephemeral benefit of the [tippee’s] friendship.” The good vibe of gifting a buddy may no longer be enough.

The 9th U.S. Circuit Court of Appeals’ decision last week in U.S. v. Salman, 2015 DJDAR 7811 (July 6, 2015), is the ninth reported opinion, and first by an appellate court, to analyze Newman. A remarkable one-third of those – including Salman – were written by U.S. District Judge Jed Rakoff of the Southern District of New York. Tracing the evolution of Judge Rakoff’s view of Newman sheds light on both Newman and Salman and whether there is a split between the two.

It’s fair to say that Judge Rakoff is no fan of Newman’s suggestion that the tipper’s personal benefit must be a pecuniary quid pro quo. In April, he seemed to concede that Newman had so narrowed the definition of “personal benefit,” although he questioned whether that holding could be squared with Dirks v. SEC, 463 U.S. 646 (1983), where the Supreme Court, in “arguably unclear” language, suggested that an insider’s “gift of confidential information,” without any quid pro quo, could suffice. SEC v. Payton, 14-4644 (S.D.N.Y. April 6, 205).  Begrudgingly applying Newman’s “more onerous standard,” he concluded that the parties “history of personal favors,” including sharing expenses and help the tippee gave the tipper with a prior legal problem, was sufficient to find a pecuniary benefit to the tipper.

To continue reading the article, click here.

Are you ready? California’s mandated sick leave for all employees pursuant to the Healthy Workplaces, Healthy Families Act takes effect July 1, 2015.

An employer without a paid sick leave or PTO policy must adopt a sick leave policy immediately to ensure full compliance. Employers with paid sick leave policies and/or PTO policies must carefully review them to ensure full compliance with the requirements of the new statute.

Requirements:

• Full-time, part-time, temporary and seasonal employees who work in California for thirty or more days in a year are eligible.
• Accrued sick leave is available after 90 days of employment upon the employee’s oral or written request.
• Sick leave will accrue at the rate of 1 hour of benefit for each 30 hours worked up to a maximum accrual of 48 hours or block vesting of at least 24 hours each year.
• All relevant records must be maintained for a period of three years and be available for review by the Labor Commissioner and your employees.
• Display mandated poster and ensure that employees receive notice of the amount of available paid leave benefit each payday.
• Your wage theft prevention act notification must include information regarding the availability of paid sick leave.
• The definition of family is very broad.
• A separating employee’s unused accrued sick leave need not be cashed out. It must, however, be restored to that employee if he/she returns to the employer within one year of separation.

For more information, contact Charmaine Yu at cyu@coblentzlaw.com.