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Purchasing Commercial Real Estate Mortgage Notes « CGC Commercial
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Purchasing Commercial Real Estate Mortgage Notes

by Chris Garcia, 2:23 PM on November 12th, 2011, No Comments

Much has been talked about when it comes to distressed commercial real estate over the last few years.   More and more property has come to the market as a result of mortgage default.  In the last 12 months it seems even more property has gone back to the Lender.  As a Buyer you might be thinking, how can I take advantage of this?  There are 2 ways:

1. Wait till the bank forecloses on the property and puts it on the market.

2. Purchase the mortgage note before it goes into foreclosure.

Under the 2nd scenario, the Buyer purchases the distressed note from the Lender BEFORE the foreclosure process starts.  The discount is usually steep, anywhere from 40-70% off the market value. Reasons for this include:

  • Lender can get the real estate off their books immediately
  • Lender no longer has to go through the foreclosure process
  • Lender does not incur legal costs which can be heavy
  • Lender does not have to incur hold costs while the property is foreclosed and title is cleared
  • Lender does not have the uncertainty of knowing when the property will trade

Those are some of the reasons why the Lender is prepared to take a lower price on the property.  From the Buyer point of view, there are risks associated with the purchase, here are some things to think about before buying the note:

  • Most of these transactions are completed in cash and close in less than 30 days from the sale price agreement
  • Many Lenders will not negotiate the documents such as a Purchase Agreement
  • Legal costs associated with reviewing loan documents, foreclosure process, and the redemption period can be expensive. Speaking with Moss and Barnett they estimated costs can be anywhere from $25-100,000
  • Due Diligence can be limited, when purchasing real estate the due diligence period can range from 30-90 days while in this scenario that amount of time is much less and limited in the scope.  One example is environmental, likely you will be limited to the existing documents versus having the time to do your own investigations.

There have been some high profile transactions that have occurred this year, possibly the biggest being the 99,342 Square Foot (SF) Buffets Inc Headquarters in Eagan.  Here is Sam Black’s article from February of 2012 http://www.bizjournals.com/twincities/blog/real_estate/2011/02/former-buffets-hq-auction-set-to-begin.html.  The property had an assessed value of $9.5M.

Currently, there are a handful of notes for sale in the Twin Cities including:

  • 60,000 SF Office/Warehouse in Brooklyn Park
  • 231,000 SF Office/Warehouse in Edina
  • 54.000 SF Office building in Minnetonka
  • 55,000 SF Office/Warehouse in Edina

Having a team in place to complete this complicated transaction is important, some people to have on board include:

  • Attorney- absolutely necessary to have them review loan documents and assessing the risk before you start bidding
  • Broker- need to have an understanding of what the market value is and what you can purchase for to understand the upside in the transaction

Those two partnerships should get you on the right track.  Buying the commercial note can be risky but also provides the greatest upside potential.  In the economy we are in, there are some great deals available and this should be carefully considered.

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