Getting a Bad Commercial Mortgage Loan: A Diligence Checklist | Celent JD Supra

When buying a commercial real estate loan in “bad luck” it is important to understand the nature of the default and the motivations of the transaction and of each party involved in the transaction. Diligence is the key.

Start by mining the source. How did you find out about loan availability? Brokers? Public records such as foreclosure complaints? Sign a non-disclosure agreement and visit the data room to get as much information as possible.

Once you’ve reviewed what you’ve acquired, review and analyze all of the latest loan and property information available.

To get started, get a copy of:

  • mortgage documentsincluding all warranties and all modifications.
  • Notice of default and litigation materials (if a foreclosure has started).
  • Any Prior Negotiation or Tolerance Agreement Information provided to borrowers and to mortgage lenders under their agreements.
  • financial statement For Borrower and Guarantor (note Sponsor and Principal).
  • budget, rent roll, information Reserves, capital investment, etc.
  • Copies of all tenancy agreements, rent schedules and related information Regarding tenant performance and lease up status.
  • Management contract When service contract,probably union contract.
  • Obtain a copy of any ongoing construction (including ongoing tenant improvements). Construction contract contract, architect contract, payment invoice, lien waiver, construction inspection resultsSuch
  • If you have a mezzanine loan, i.e. a “debt pile”, Copy of Intercreditor Agreement (ICA) Between mortgage lender and mezzanine lender and mezzanine loan documents.
  • If the interest to be purchased is a mortgage loan bond or participating right, joint lessor agreement or participation agreement.
  • Are there preferred shares in the deal? If so, Copy of joint venture agreement (to determine the protections afforded to holders of preferred equity interests).
  • get and review All third party reports Obtained at the start of the loan, including environmental, engineering, and zoning reports.
  • order new title report— A new lien may have been recorded!

then start Review and consider loan documents. in this regard:

  • Carefully review all loan documents and ancillary agreements.
  • Understand the nature and importance of default. Is the default a technical default? Is the borrower or guarantor in a position to remedy the default? Confirm the default and notify requirements.
  • Are there any flaws in the integrity of the loan documents/transfers/signatures/guarantees? Were the loan documents properly filed/recorded? Were they all signed and notarized?
  • Are they or can they be amended by pre-negotiation or moratorium agreements with the borrower?
  • Are there any caps (or limits) on the guarantees I can get at closing?
  • Are there any restrictions on the transfer of receivables?
  • If applicable, review pre-negotiation agreements and review what the seller’s lender has discussed with the borrower.
  • Check your grace agreement if applicable.
    • Typically, a moratorium agreement obliges the lender to defer enforcement of remedies in exchange for an amendment to the underlying loan documentation or other benefit to the lender.
    • For example, in consideration of agreeing to forego remedies (and granting covenants and other remedies), the lender may acquire fees, initiate cash management, and reduce interest on loans. You can withdraw, obtain additional collateral or additional security. You can also correct any “flaws” in the loan documents at this time.

At the same time, carefully consider your assets and collateral. Ask me a question.

  • Analyze environmental, engineering, and zoning reports. Are property taxes current?
  • Diligent rent and rent rolls, leases and other income.
  • If there is ongoing construction, obtain and review all construction-related materials (requests, liens and lien waivers, reports provided by construction consultants, etc.).
  • If the loan is a construction loan, review the construction contract and “provide” a letter with/from the general contractor or construction manager, architect, and material subcontractor.
  • Examine properties if possible.
  • Get the updated titles report and see the titles (and all the basic exceptions to titles) and surveys. Is there a mechanic lien on the title? Judgment or other lien?
  • Loans are cross-collateralised, so do you have multiple properties in your portfolio?
  • Is the cash “managed” by the lender? Are there reserves maintained under the loan?
  • If the accommodation is a hotel, review the Management Agreement and Franchise Agreement, along with the Comfort Letter or SNDA with the hotel manager or franchisor.
  • Is there a real estate related lien and has it changed since the loan was instituted?

who are you doing business with? We value our borrowers, guarantors and sponsors.

  • Verify borrower/principal/guarantor financial information.
  • Review existing financial covenants. Consider warranty caps.
  • How much equity is left in the project?
  • Do the borrower’s organizational documents provide for independent directors to vote on bankruptcy matters?

who are you doing business with? Diligently the loan seller.

  • The contract of sale may contain surviving representations. Can the loan seller fulfill them?
  • There may be environmental issues/debts that remain with the loan seller and affect the analysis of the seller’s financial situation.

who are you doing business with? Do you have mezzanine loans and mezzanine lenders?

  • If you have mezzanine loans, what protections have been given to mezzanine lenders under the ICA? Role of ICA between Mortgage and Mezzanine Lenders When Mezzanine and Construction Loans – Considerations and ICA Regulations.)
  • Do Loft Lenders Have Healing Rights? Purchasing Options?
  • What if the mortgage lender is considering alternative deeds? Are there certain protections for mezzanine lenders in this case?
  • What approval rights does a mezzanine lender have over modifications to mortgage documents?
  • What notice must be sent to mezzanine lenders in connection with obtaining a mortgage?
  • When Who Are you a mezzanine renter? What is the ability (or appetite) to cure or intervene and obtain a mortgage?

Again, diligence is key when it comes to obtaining a distressed commercial mortgage.

This is the first in a series of posts exploring key considerations for acquiring troubled real estate debt. In the next article, we will look specifically at bad debt mezzanine loans.

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