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Christine Ziomek
chris@caryl.com
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July 1, 2010

Industry Veterans Detail Pitfalls And Strategies Of Buying Distressed Cre In Today’s Market

Seminar Focused on Timing, Underwriting, Valuation, Exit Strategies and Legal Challenges

NEW YORK, N.Y., July 1, 2010 – Property investors and owners eager to learn “What You Need to Know (But Nobody Will Tell You) About Buying Distressed Commercial Real Estate” filled the room at this recent NYC seminar. Held at the law office of Herrick Feinstein LLC, the program featured three industry veterans who shared crucial advice. David Tesler, Esq., CEO, Real Diligence, LLC; Bruce Stern, Principal, Red River Asset Management LLC; and Gary Eisenberg, Esq., Herrick, Feinstein LLC; offered strategies for successful investing in today’s volatile market and detailed ways to avoid costly errors.

The Three Biggest Mistakes
In his opening presentation, Bruce Stern of Red River Asset Management detailed the three biggest mistakes investors make when buying distressed commercial real estate.

  • Buying too early – Rushing to pick up troubled assets before conducting thorough and comprehensive due diligence all too often leads investors to pay “stupid prices” and lose money; cash-rich funds have been especially guilty of making this error.
  • Underwriting the past – Rather than looking at the “New Normal,” investors too often accept underwriting that is based on past expectations. But, in today’s economy, the past is no longer a predictor for the future.
  • Not having multiple exit strategies – To avoid catastrophic failure, investors should know how they can get their money back in any scenario, whether they decide to keep, sell or refinance the asset(s).

Digging Deeper with Due Diligence
As David Tesler of Real Diligence LLC noted in his presentation, thorough financial due diligence is important for all real estate transactions but it is absolutely essential when acquiring distressed assets. Whether purchased through short sale or by buying notes or bank-owned (REO) properties, every distressed asset is unique and requires a multi-step process of examination, including:

  • Valuing the note
  • Valuing the real estate
  • Loan due diligence
  • Seller due diligence
  • Property due diligence
  • Standard due diligence

Tesler laid out the advantages and drawbacks of short sales, notes and REOs, concluding that short sales generally offered investors the most access to relevant documentation, with greater control over the borrower and advantages in pricing and timing.

How to Avoid Trapping Yourself
Gary Eisenberg of Herrick, Feinstein discussed the legal pitfalls that threaten distressed property purchases, especially when buying notes. He noted that standard precautions – don’t ignore warning signs; review all documents and communications; do proper searches, etc. – are always important but that investors should take extra steps today to avoid lender liability claims brought by a borrower in connection with a loan workout or default. Steps include:

  • Don’t make any sudden moves that might jeopardize the borrower’s project.
  • Similarly, err on the side of providing a construction loan, albeit with rigorous documentation in place, so the borrower cannot later claim a waiver.
  • Be careful of the tone of default letters: avoid “saber rattling” or tough talk that might alienate a jury.
  • Replace outside counsel that closed the loan with outside counsel that is expert in workout and lender liability.
  • Always be truthful to third parties such as potential replacement lenders. That said, avoid contact with them as much as possible and provide no assurances.
  • Above all, always operate in good faith – just be fair.

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PHOTO CAPTION: Property investors and owners eager to learn “What You Need to Know (But Nobody Will Tell You) About Buying Distressed Commercial Real Estate” filled the room at this recent NYC seminar. Held at the law office of Herrick Feinstein LLC, the program featured three industry veterans who shared crucial advice. 

(L-R) Bruce Stern, Principal, Red River Asset Management LLC; Gary Eisenberg, Esq., Herrick, Feinstein LLC; and David Tesler, Esq., CEO, Real Diligence, LLC offered strategies for successful investing in today’s volatile market and detailed ways to avoid costly errors. Photo credit: Bisnow.