Acquisition of Distressed Real Estate Debt: Due Diligence, Key Contract Provisions, Mortgage and Mezzanine Issues

Description

COVID-19 has increased nonperforming commercial real estate loans. The current real estate loan market presents investors with an opportunity to acquire distressed debt at a discount and for holders to offload defaulted loans from their balance sheets. Still, buyers and sellers need to clearly understand the due diligence and documentation issues to consider in a loan sale.

Due diligence of the loan and underlying collateral are critical to a successful transaction. As a successor to the lender, the investor will be able to pursue remedies such as foreclosure and claims against the guarantor. The investor must first examine the title, zoning, building code, environmental and other property-level issues, and identify expenses and impediments (receiverships, ongoing lawsuits) to exercising any loan remedies.

Mortgage transfer documents should include the loan purchase and sale agreement (LPA), any attachments, recordable assignments of recorded documents, and the original loan documents. Representations and warranties are a key part of the LPA. The buyer and the seller will typically indemnify one another for losses for actions or events caused by the indemnifying party during its ownership of the loan.

Mezzanine loans present special concerns. In addition to the LPA and its attachments, the purchaser must obtain an assignment of the pledge of the ownership interest in the borrower and the associated UCC as well as the intercreditor agreement. Counsel must have a thorough understanding of the entity structure and any consents required from the mortgage lender to transfer the mezzanine loan.

Listen as our authoritative panel discusses the nuances of buying and selling distressed real estate debt.