2008-12-26, 10:23

Beware of Loan Purchase Transactions

By: Multifamily Real Estate Industry Team
I continue to look on a daily basis for the transactional light at the end of this very long and dark tunnel that is virtually devoid of any real estate deals. I have recently seen some sparks and flickers involving transactions focused on the purchase of debt instead of the underlying collateralized real estate. A client recently called me to discuss how to structure a deal involving the purchase of a loan to obtain control of a fractured condominium project. Another contact at a large global brokerage firm advised me that his firm is increasingly involved in a number of transactions involving the sale of loan paper. And, only a few days ago, The New York Times ran an article underscoring that loans on distressed properties present not just a burden, but also an opportunity. http://www.nytimes.com/2008/12/24/business/24loan.html?ref=business

The proposition for all of these deals is that the purchaser of a loan and the associated documentation can position itself to take ownership of the underlying property serving as collateral for the loan through a foreclosure process, should the borrower under the loan default. Cash hungry lenders are increasingly considering the sale of loans to both get the non-performing debt assets off of their books and to increase their liquidity positions.

It remains to be seen whether these loan purchase transactions actually amount to a meaningful shift in the commercial real estate market, as reported by The New York Times, or simply just some sparks and flickers in an otherwise dead deal market. In any event, I caution anyone who is contemplating a loan purchase to be mindful of the significant risks involved in these transactions, not the least of which is an intervening bankruptcy filing by the borrower that can be extremely costly to resolve and can stall the transaction for months. An analysis of these issues is reflected in an article that my partner, Jeff Tarkenton, and I recently published in The Real Estate Finance Journal. http://www.wcsr.com/resources/pdfs/real040408.pdf

In today’s dark economic times, loan purchase transactions may present an meaningful opportunity to gain control of valuable real estate assets at distressed prices. However, there is no doubt that if you are not careful about properly understanding and managing the risks associated with a loan paper transaction, you may end up owning just a bunch of legal documents and nothing more. And, who needs to own more legal documents?

(This entry posted by Pamela V. Rothenberg, a member of Womble's Real Estate Development group)

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