Distressed Commercial Loan buy – Due Diligence List

Distressed Commercial Loan buy – Due Diligence List




Introduction:

With today’s distressed loan market and the FDIC selling distressed commercial loans it is important that possible investors/buyers have a due diligence list specific to distressed loans. There is an opportunity for investors to buy commercial loans individually or as a part of a larger portfolio at a meaningful discount from the confront value. However, the buyer/investor must beware and carefully perform due diligence to ensure this distressed investment will ultimately provide a financial return.

Due diligence is the verification course of action of information and its associated documentation to ensure a reasonable individual “that they get what they are paying for”. If your company has a team of professionals who have experience in distressed loan transactions and a detailed checklist to follow that is probably an exception to the rule, most companies due these kind of transaction rarely. consequently, it is recommended that due diligence be a coordinated effort with members of the company and an outside firm who has experience with the distressed loan portfolio acquisition and the due diligence course of action.

The following is a recommended due diligence listing of the meaningful elements to be considered and reviewed as part of a distressed commercial loan buy:

Commercial Loan

  • Loan Documents
    • Loan Agreement
    • Guarantees
    • Spousal Consent
    • observe
    • Security Agreement
    • Forbearance Agreement
    • Control Agreement (with third party financial institution)
    • Inter-creditor Agreements
    • Subordination Agreements
    • Interest Rate Swap Agreements
    • Landlord Subordination
    • Licensing Agreements
    • Bank payoff letter
    • Closing certificate (borrower represents no material change, lien position and how funds will be applied)
    • Opinion letter from borrower’s attorney if transaction is complicate
    • Default Letter(s) if applicable
  • Corporate Resolutions
  • Articles of Incorporation
  • Evidence of Good Standing
  • Evidence of Insurance (lender should be loss payee)
    • General Liability
    • character
    • Workman’s Compensation
  • UCC Search
  • Patent/Licenses/Trademark Searches
  • Tax lien Search
  • Judgment Search
  • Litigation Search
  • Lexis – Nexis Search
  • Reuters / Google Search
  • UCC terminations from prior lender
  • Credit check/background search on guarantors
  • Personal character tax search
    • Usually assessed at county level, but could be assessed by city, township or state (never federal).
    • Contact the County Board of Equalization and/or County Treasurer’s Office.
    • Tax clearance certificate.
    • Tax lien primes senior lender and follows equipment.
    • Assessed value is based on cost of equipment less some depreciation factor.
  • 4506 IRS form
  • Evidence of ownership of collateral (invoice/bill of sale)
  • Website – URL ownership move
  • D&B on borrower(s) and on meaningful customers of borrower
  • Contact outside appraiser for valuations- Fair Market Value (FMV), Orderly Liquidation Value (OLV),
  • Check equipment vendor website for information and compare to appraiser

Real Estate

  • Appraisal
  • Assessed value
    • County Assessors Office
  • Mortgage/Deed of Trust documents
  • Down-date title insurance
  • Title Exceptions
  • Updated survey
  • EPA studies – Phase I, II
  • Flood Insurance
  • BPO – Broker Opinion of current value
  • O&E (not a Title Search, Title Insurance or other form of Title Guarantee)

    • Tax Assessments
    • Deeds
    • Mortgages
    • Judgments
    • position of RE Taxes
    • Legal Description
  • Real Estate Tax search (total and unpaid)
    • County Assessors Office
  • Leases to tenants on owned character or sub-lessees
  • Easements
  • Assignment of Rent and Leases

Conclusion:

When an investor considers bidding on distressed commercial loans and has the opportunity to perform due diligence, it is strongly recommended that they follow a disciplined approach and use the due diligence list outlined about as part of their course of action.




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