Introduction:
With the current depressed loan market and the FDIC selling distressed commercial loans, it is important that potential investors/buyers have a special due diligence list for distressed loans. There is an opportunity for investors to purchase commercial loans individually or as part of a larger portfolio at a significant discount from their face value. However, the buyer/investor should exercise caution and careful due diligence to ensure these distressed investments will ultimately result in financial returns.
Due diligence is the process of verifying information and related documentation to ensure reasonable individuals “that they get what they pay for”. If your company has a team of professionals who have experience in problem loan transactions and a detailed checklist to follow, that may be the exception to the rule, most companies rarely do this type of transaction. Therefore, it is recommended that due diligence be a coordinated effort with member companies and outside companies who have experience with non-performing loan portfolio acquisition and due diligence processes.
The following is a recommended due diligence list of key elements to consider and review as part of purchasing a troubled commercial loan:
Commercial Loan
- Loan Documents
- Loan Agreement
- Guarantee
- Spouse Approval
- Notes
- Security Agreement
- Covenant of Patience
- Control Agreements (with third party financial institutions)
- Agreement between creditors
- Subordination Agreement
- Interest Rate Swap Agreement
- Landlord Subordination
- License Agreement
- Bank payment letter
- Certificate of closure (borrower shows no material changes, pawn positions and how funds will be applied)
- Opinion letter from the borrower’s attorney if the transaction is complicated
- Default letter(s) if applicable
- Corporate Resolution
- Articles of Association
- Proof of Good Position
- Proof of Insurance (the lender must be the beneficiary of the loss payment)
- General Responsibilities
- Property
- Worker Compensation
- UCC Search
- Patent/License/Trademark Search
- Tax lien search
- Judgment Quest
- Litigation Search
- Lexis – Nexis Search
- Reuters / Google Search
- UCC termination from previous lender
- Credit check/background search on guarantor
- Personal property tax search
- Usually assessed at the county level, but may be assessed by city, township or state (never federal).
- Contact the District Equalization Council and/or the District Treasurer’s Office.
- Tax clearance certificate.
- Tax liens provide primary loans to senior lenders and follow equipment.
- The assessed value is based on the cost of the equipment minus several depreciation factors.
- 4506 IRS form
- Proof of collateral ownership (sales invoice/billing)
- Website – URL ownership transfer
- D&B to the borrower and to the main customer of the borrower
- Contact an outside appraiser for valuations- Fair Market Value (FMV), Orderly Liquidation Value (OLV),
- Check equipment vendor websites for information and compare with raters
Housing area
- Evaluation
- Rated value
- County Appraisal Office
- Mortgage Document/Deed of Trust
- Down-date title insurance
- Title Exception
- Updated survey
- EPA Studies – Phase I, II
- Flood Insurance
- BPO – Broker opinion of current value
- O&E (not Title Search, Title Insurance, or any other form of Title Guarantee)
- Tax Assessment
- deed
- Mortgage
- evaluation
- RE . Tax Status
- Legal Description
- Real Estate Tax Search (total and unpaid)
- County Appraisal Office
- Rent to tenants in owned or sub-tenant properties
- convenience
- Lease and Lease Assignment
Conclusion:
When an investor is considering bidding on a troubled commercial loan and has the opportunity to conduct due diligence, it is highly recommended that they follow a disciplined approach and use the due diligence checklist outlined as part of their process.
