TOP TEN ISSUES WHEN BUYING
DISTRESSED COMMERCIAL
REAL ESTATE
David W. Kelley
Leonard, Street and Deinard
Professional Association
Minneapolis
Client Expectations
 Manage your client’s expectations.
 Buyer’s lawyer should explain the process to
client and discuss likely scenarios.
Recognizing Distressed Property
How do you know a property is “distressed”?
 Asking price below apparent market value.
 Property is serious disrepair.
 Property taxes delinquent.
 Tenants are complaining about property or
owner.
 Mechanic’s liens filed.
 Seller has judgments or tax liens filed against
it.
Determining Status of Seller’s
Mortgage Loan
 How to know seller is in default.
 What do you want to know?
 Two threshold questions:


Will sale price pay entire mortgage debt?
Will sale close before foreclosure concluded?
 Proceeding with seller.
Special Purchase Agreement Provisions When
Purchasing from Owner (Not Lender)
 What if buyer wants to terminate or
renegotiate agreement?
 What transaction costs will be incurred by
buyer and when?
 What if seller does not or cannot perform?
Due Diligence
Items deserving special attention:
 Physical condition of property.
 Tenant concerns.
Buying from Seller’s Lender – Buying
What?
 Lender’s interest – what stage is foreclosure
in?
 Buyer’s options.
 Due diligence.
Negotiating with Lenders
 How to contact lenders?
 Lender’s outlook on distressed property –
buyer’s BFF?
 How does lender determine its price?
Title Insurance
 If buyer from seller, title policy can insure that
seller’s mortgage, mechanic’s liens and other
liens have been satisfied.
 Title companies can insure any interest held
by lender.
Fraudulent Transfers
Key questions to determine fraudulent
transfer risk:



Is purchase price less than fair market value?
If so, is seller insolvent before or after the sale,
or left with unreasonable small capital? If yes,
sale is likely fraudulent as to seller’s other
creditors and could be voided.
Does seller have other creditors who are likely
to attack sale, or is seller likely to file
bankruptcy?
Seller’s Bankruptcy
Key bankruptcy principles to keep in mind:
 Seller/debtor may reject “executory” contracts. 11
U.S.C. § 365.
 Filing operates as automatic stay of commencement
or continuation of collection efforts. 11 U.S.C. § 362.
 Foreclosing lender’s options in bankruptcy.
 Unperfected or improperly perfected mortgage may
be avoided by trustee or debtor in possession. 11
U.S.C. § 544(a).
 Mortgage may be voidable preference or fraudulent
conveyance. See 11 U.S.C. §§ 548(a) and 547(b).
Questions & Answers
 If you would like a copy of the PowerPoint
Presentation or any reference materials, please visit
the Lecture Series section of the NCS website at
www.firstam.com/ncs.
 An audio / video replay of this presentation will also
be posted to our website at www.firstam.com/ncs.
 CLE credits are not available in all 50 states – to find
out if credits for this webinar are available in your
state, please contact your local NCS account
representative.
The views and opinions expressed within this presentation are those of David
Kelley (and/or the law firm of Leonard, Street and Deinard) and not necessarily
those of First American Title Insurance Company / National Commercial Services.