In the first two installments of our three-part series of articles addressing the various issues that arise in connection with real estate secured note purchase transactions, we first discussed the general framework and issues related to all note purchase transactions and then looked more specifically at issues unique to the purchase of commercial mortgage backed securities (“CMBS”) notes. This article explores the options available following the acquisition of the note, and identifies some potential pitfalls that note purchasers should be prepared to address.
So, you’ve purchased a note secured by real property – what to do now? A purchaser acquires the note for any number of reasons, but it will (nearly) always lead to dealings with the borrower. Upon the completion of the note purchase, the purchaser typically sends the borrower a “hello” letter, putting the borrower on notice that the purchaser has purchased the note and providing the borrower with the contact information for payment and notice purposes pursuant to the loan documents. The purchaser will likely have determined how it intends to proceed with (or against) the borrower.
If the borrower declines to cure defaults and offers no agreeable methodology for settling claims, the primary option available to a note purchaser is to institute foreclosure proceedings to acquire title to the real property. A noteholder should be prepared for the borrower’s efforts to thwart lender’s attempts to secure its rights under the note such as seeking a restraining order or filing bankruptcy. Prior to undertaking foreclosure proceedings or other actions against the borrower, the noteholder should assure that it has analyzed all third party relationships and other property related matters (indeed, these activities are best undertaken prior to the purchase of the note as detailed in our prior newsletter articles). The completion of a foreclosure sale can, under certain circumstances, have unintended and potentially disastrous results. For example, certain leases may be terminated by a foreclosure unless preemptive actions are taken, thereby potentially impacting the value of the asset. If the noteholder has taken the proper precautions, it can exercise all of the remedies available by complying with all requirements imposed by the loan documents and applicable laws related to the foreclosure of real property, such as notices to borrower, filing of the foreclosure action, and undertaking the actual sale, for instance.
Immediately after the completion of a foreclosure sale, the noteholder will stand as the owner of the property and should immediately take all activities to secure the property and its valuable elements. For example, the noteholder (as the new “landlord” under any leases related to the property) should contact all tenants informing them of its acquisition of the property, directing that rent payments and notices to landlord be sent to the noteholder. In this regard, it is important to review the provisions of the leases prior to taking any actions to determine any specific language which needs to be included in the letter to assure that the leases are either retained or terminated pursuant to the specific case facts and desires of the landlord.
It should be noted that dealing amicably with the borrower is often possible, and the particular circumstances of a relationship with the borrower may eventually lead to a settlement of a payment of the note at a discounted amount or a “friendly foreclosure” which will save all parties time, money and aggravation. An option available to all lenders is to determine if any workout can be achieved with the borrower. Given some of the pitfalls and delays which can be involved with the other options available to the purchaser, these types of borrower-friendly transactions can often be the best case scenario, as they can be more expeditious and economical than the more contentious alternatives.
We are hopeful that our three part series has been helpful in addressing the opportunities which can be realized in the acquisition of promissory notes which are secured by real property. The interested reader should understand that these articles have been general in scope given the depth of substance and the varying fact situations potentially involved in these transactions. We encourage any reader which has specific interest and inquiries to contact the authors at their convenience.
By: Jeffrey J. Porter and Jeff Mosteller