Legal Knowledge for Today's Real Estate Marketplace

---

THE BOLD WILL BE WINNERS

In the early '90's, we represented the buyer in one of the first large sales of mortgages that the RTC acquired as the result the FDIC takeover of failed banks. Because of the size of the transaction and the prominence of the buyer, the transaction received a lot of attention from the real estate community. The general commentary was that the buyer had overpaid and was likely to suffer heavy losses from the transaction. The prognosticators were, of course, wrong. They failed to recognize that there are many ways to realize on debt, including discounted payoffs, foreclosures and sales, and other workouts; that if the debt is purchased for 50 cents on the dollar and through these techniques, the buyer receives an average of 65 cents on the dollar over a relatively short period, then the IRR will be off the boards.

Similarly, we recently represented another purchaser in the purchase of a large portfolio of loans from the FDIC. Just as before, the critics said that the purchaser overpaid for the portfolio and would doubtless suffer large losses from the transaction. Our early experience suggests that the critics are just as wrong in this case as they were in the 90's. The lesson is that the bold will be the winners in debt purchases, provided, of course, that the purchaser does its homework before bidding.

So, what are some of the homework items required to make an intelligent bid?  Among the things to consider are:

• Is there hidden value? (say a guaranty, letter of credit or other credit enhancement).

• Are there problems with the loan documents or the property?

• Has someone visited the property?

• Are there reserves, continuing funding obligations or potential lender liability by reason of previous failures to fund or other matters?

• Are there any other lenders?

• Do you have servicing capability?

• What are the exit strategies? (consider tax issues, usury restrictions, potential litigation and transaction costs)

One problem, of course, is that there may not be a lot of information available and you may therefore have to make an educated guess on a number of issues.
   
After you acquire the debt, then execution is the key. However, it is vital to avoid legal traps in the execution. You must keep on your lender hat and in that connection do nothing with the borrower until it has signed a prenegotiation letter. In preserving the value of the property, you must proceed with caution (while a receiver, injunction and attachments should be considered, you should consult a litigator before taking action against borrowers or guarantors--there may be anti-deficiency/one action rule concerns or guaranty enforceability issues). Recognize that, unless properly done, loan modifications might jeopardize lien priority or risk a usury violation. The  procedures and risks associated with mortgage and mezzanine loan foreclosures must be understood. Inadvertent recognition of taxable gain must be avoided. Whether the borrower's threat of bankruptcy is a real concern must be evaluated. Most important, time is money and prompt resolution is therefore essential. Lawyers, principals title agents, brokers, etc. must work together and efficiently and you must have good form documents (and negotiate to the forms).

While all of this sounds challenging (and it is), the benefits can be enormous.  

Leo Pircher, one of the founding partners of Pircher Nichols & Meeks, contributed to this column.

---