Distressed Real Estate Acquisition and Financing: Due Diligence, PSA Provisions, Lender Participation

Description

Commercial property can be considered distressed for a variety of reasons. It might fail to generate sufficient cash flow to pay for operations and debt service. It might have become obsolete for its original purpose, experienced environmental contamination, or been subject to lawsuits, liens, building or zoning violations, or deteriorating relationships among existing owners. These issues could result in loan default or bankruptcy for the borrower.

Opportunistic investors must navigate the issues and determine the value of the property, and either negotiate a reworked loan with the existing lender or obtain new financing to purchase the property and retire the existing debt. Conventional mortgage financing might be unavailable, so new funding might be in the form of a joint venture or financing from a hard money or bridge lender to obtain permanent financing once the property is stabilized.

Due diligence of the collateral is critical to a successful transaction. The purchaser must examine the title, zoning, building code, environmental and other property-level issues, and identify expenses and impediments (receiverships, ongoing lawsuits) to taking control of the property. The purchase and sale agreement (if any) should include enhanced reps and warranties addressing such matters.

If the borrower is already in bankruptcy or receivership, the purchase may occur as part of a 363 sale or a court-approved sale by the receiver. Financing should be committed upfront, and the lender may need to participate in the transaction as an effective partner of the buyer. The parties must confirm that the property can be freely transferred and that existing claims against the property will be discharged.

Listen as our authoritative panel discusses the nuances of purchasing and financing distressed commercial real estate.