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The Nuts and Bolts of Loan Purchases and Sales (Part 1: Purchaser Due Diligence) – JD Supra

  • Attorney Daniel Albert

Stroock & Stroock & Lavan LLP
In today’s ever changing economic landscape, many commercial real estate lenders and borrowers are feeling COVID-19’s impact, and strategic investors are realizing there are burgeoning opportunities to acquire both performing and distressed debt instruments.  When purchasing a single or a small portfolio of commercial real estate loans (as distinguished from a large portfolio which has distinct considerations), the prospective purchaser must perform extensive due diligence on many aspects of the loan, including the loan documents, the borrower and its organizational structure, the sponsors, the guarantors and the underlying real estate and related personal property collateral for the loan.  The period in which a prospective purchaser has to evaluate diligence matters is often short, with most if not all materials for evaluation coming from the selling lender (with little or no contact permitted with the borrower).  The ability of a prospective purchaser, and its counsel, to efficiently evaluate such diligence information and to know what questions to ask and what information to look for is critical for the successful negotiation of the loan purchase for many reasons, including the identification of gaps in the diligence materials that need to be covered by seller representations, warranties and indemnities.  As will be addressed further in a subsequent installment of this series, the breadth of the representations and warranties a seller may be willing to provide will also be dependent on whether the seller originated the loan and whether the loan is a distressed asset in, or in danger of, default.
If you are a prospective purchaser of a real estate loan, the following is a high-level overview of certain important diligence tasks and analyses that should be considered and evaluated, and about which a loan seller should expect you to inquire.
The Loan Documents:
The Borrower:
The Guarantor:
The Property:
This outline of key diligence matters is intended to give the prospective loan purchaser a framework for thinking about the myriad of issues and risks that must be investigated before proceeding with an acquisition, but each individual loan can have numerous additional nuanced issues that require thoughtful analysis by experienced legal counsel.
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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