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

Recording of a 90-minute premium CLE video webinar with Q&A

Conducted on Wednesday, February 17, 2021

Recorded event now available

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Course Materials

This CLE course will examine the due diligence and transactional issues involved in acquiring distressed mortgage and mezzanine debt. The panel will outline strategies to identify and mitigate risks and liabilities for both the buyer and seller.

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.

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Outline

  1. Purchasing and selling distressed as opposed to performing debt
  2. Due diligence
    1. Review of existing loan documents: locating originals
    2. Property-level issues: title, survey, environmental, property condition
    3. Borrowing entity
    4. The financial condition of borrower and guarantor
    5. Outstanding claims, litigation, bankruptcy
  3. Documentation
    1. Loan purchase agreement
    2. Mortgage
    3. Mezzanine

Benefits

The panel will review these and other notable matters:

  • What types of due diligence must be conducted on the underlying property before proceeding with a loan purchase?
  • What are the key provisions of an LPA, and how might the LPA for a mortgage loan vary from a mezzanine loan?
  • How do the entity structure and financial condition of the borrower and guarantor figure into a loan purchase?
  • How should ongoing litigation, or a pending receivership, be addressed in the LPA?

Faculty

Dickey, Allen
Allen J. Dickey
Partner
Faegre Drinker Biddle & Reath

Mr. Dickey is a real estate and finance attorney who advises real estate funds, opportunity funds, real estate...  |  Read More

Harayda, Christopher
C.J. Harayda
Partner
Faegre Drinker Biddle & Reath

Mr. Harayda represents clients in bankruptcy and insolvency-related proceedings, transactions and litigation. He...  |  Read More

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