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

Description

The current real estate loan market allows investors to acquire distressed debt at a discount and for holders to offload defaulted loans from their balance sheets. Still, buyers and sellers must 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 can pursue remedies such as foreclosure and claims against the guarantor. The investor must examine the title, zoning, building code, environmental, and other property-level issues and identify expenses and impediments (receiverships, ongoing lawsuits) to exercise 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 crucial 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 unique 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 thoroughly understand 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.