I’m currently advising a bank client regarding the purchase of a loan secured by distressed retail commercial real estate. There are numerous reasons lenders decide to buy and sale loans. Often, sellers are facing liquidity demands, regulatory pressure, lack of experience working out a specific type of distressed asset, or simple portfolio realignment. Buyers often have excess capital to lend or invest, possess the experience to work out a distressed loan, or simply want to try and get control of the note to attempt to foreclose on the underlying commercial real estate. Recently, it seems like most sales that I see are regulatory related, as banks are pressured to move underperforming or disfavored industry-specific loans (i.e. homebuilder, retail, leisure) out of their portfolios, sometimes at significant discounts. Many loan sales occur after the FDIC has seized a lending institution and placed it into receivership. Loan sales can include pools of multiple loans or individual loans, but most loan purchases follow a similar pattern and include the following general checklist items:
- Non-Disclosure and Confidentiality Agreement (NDA). Typically, the selling party will require an NDA to be executed by the buyer prior to disclosing any documents or other confidential information about the loan. This agreement protects both parties and provides for general agreement on safeguarding borrower- and guarantor-specific information. In most cases, documents are disbursed via an online data room filled with loan documents and diligence materials (title, survey, environmental, financial statements, appraisals, etc.).
- Letter of Intent. By the time a commercial real estate attorney gets involved, presumably the Letter of Intent has been signed memorializing the general business terms (purchase price, earnest money, due diligence period, closing date, etc.) of the deal.
- Loan Sale Agreement. Typically, parties will enter into a loan sale agreement providing time for the buyer to conduct due diligence, prepare for closing. Loan Sale Agreements usually include basic representations from the seller as well as acknowledgements from the buyer regarding the potential distressed nature of the loan. If the sale is “as is” or deeply discounted, there may not be an extensive due diligence period, and the parties may move directly to close (sometimes actually signing the loan sale agreement as part of closing, if at all). This is often the case in FDIC-related loan sale transactions.
- Due Diligence. The due diligence checklist for a loan sale is similar to any initial loan checklist for indebtedness secured by commercial real estate. The purchaser should perform a title examination, update the assigning lender’s survey (or obtain a no-change survey affidavit), update environmental due diligence, perform a lien search on the relevant parties, review all existing loan documents, review the seller’s correspondence file with the borrower, and generally identify any deficiencies with the loan documentation, security interest, or underlying collateral. I always try and obtain borrower’s and tenant estoppels if possible to verify my expectations regarding the loan status and rent roll. Usually, loan agreements and lease documents will require borrowers and tenants to deliver estoppels upon reasonable request. I always advise my buyer clients to update all available diligence information. Based on the size and nature of the transaction, clients will determine the time and expense they want to devote to due diligence. At a minimum, loan purchasers should (and can cheaply in most states) obtain an ALTA assignment endorsement that insures the assignment document properly vests the security title in the loan purchaser.
- Closing. There are three key documents that are typically part of a commercial real estate loan sale closing: (i) allonge endorsement to note; (ii) assignment of security documents (this is usually in recordable form); and (iii) general (omnibus) assignment of loan documents. Other deal-specific assignment documents (like assignments of declarant’s rights or entitlement rights) may be included depending on the specific facts and circumstances of the transaction. Another document that is typically executed at closing is a “hello letter.” The hello letter notifies the borrower of the transfer and directs the borrower to make future payments to the new owner of the note.