Purchasing Distressed Real Estate Debt: Performing Due Diligence, Documenting and Closing the Deal, Liquidating the Debt

Description

Distressed debt is once again becoming a frequent topic of discussion among real estate professionals given the current economic environment. The market landscape presents great opportunities for investors who aim to purchase these troubled loans at a significant discount, with the goal of a favorable outcome. Also, rather than amend a loan in default, or extend or refinance a matured loan, a lender is more likely to sell a distressed loan at a discount to par. While these market conditions present great opportunities for lenders and investors, debt acquisitions also carry significant legal and financial risks.

As a successor to the lender, investors can pursue remedies such as debt restructuring, loan-to-own strategies, reselling, or claim an interest in a debtor's bankruptcy proceedings. To ensure a successful transaction, it is critical that investors perform comprehensive due diligence relating to the loan and underlying collateral. Due diligence review should include an examination of title, zoning, building codes, and environmental concerns, as well as identify expenses and impediments to exercise any loan remedies such as receiverships or ongoing lawsuits.

When documenting and closing the deal, it is particularly important for buyers and sellers to obtain and review all relevant underlying documents including assignments, original loan documents and the loan file, the lender's title policy and assignment endorsement, and estoppels and consents. When drafting the loan purchase and sale agreement of the transactional parties, special attention should be given to the representations, warranties, and related remedies to ensure the client's interests, whether buyer or seller, are adequately protected.

After the closing, the investor's ability to realize its desired return will depend on the prompt repositioning or disposition of assets, requiring an analysis of the non-performing loan to determine if foreclosure is the best option or if other strategies are worth pursuing such as a loan workout, receivership, loan modification, or a deed-in-lieu of foreclosure. When deciding on the best approach, investors should bear in mind the income and property tax considerations, title coverage issues, mezzanine loan foreclosure issues, and any other issues that may present risks or expose the investor to liability.

Listen as our authoritative panel explores the key issues and considerations involved with underwriting, acquiring, working out, enforcing remedies, and liquidating distressed real estate debt.