It’s beyond the scope of this blog to predict where the commercial real estate market is heading, but there are those who have predicted a downturn. If that turns out to be right, there may be more loans than usual going into default. If you are considering buying a commercial note that is in default because you ultimately want to foreclose to buy the property securing the loan, consider the following as part of your due diligence:
- Are the loan documents enforceable? The loan documents should be reviewed for compliance with Florida law. Presumably this was done by the lender and borrower when the loan was originated, but don’t assume anything.
- Does the current lender have the original promissory note and any allonges? In Florida, a lender generally needs the original note and any allonges to turn over to the court at a certain point in a foreclosure. A lender without the original note may still enforce it, but there are legal requirements that must be met.
- What’s on the title report? A note purchaser should consider ordering a title search on the property to check for other mortgages, liens, and surprises.
- What did the current lender and borrower discuss? If the loan is already in default, the current lender and borrower may have discussed the default and related issues, like forbearance or modification of the loan terms. It is important to understand what representations the current lender made to the borrower and vice versa.
- Are there any known defenses of the borrower? Ask the current lender whether the borrower has already suggested how it might defend a foreclosure or lawsuit to enforce a loan guaranty. For example, has the borrower asserted that the lender did not fully fund the loan? Or has the borrower claimed that it was promised a loan modification?
These are common issues, but every loan can have its own quirks.