Distressed Commercial Loan buy – Due Diligence List
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:
- Loan Documents
- Loan Agreement
- Spousal Consent
- 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
- 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
- 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
- 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
- Assignment of Rent and Leases
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.