As more borrowers default on commercial RE loans, more lendersare starting to sell either the defaulted notes or, afterforeclosing on the property securing the loan, the REO (real estateowned) properties. These deals are typically "as is" deals,subject only to certain negotiated representations and warrantiesfrom the lender/seller to the buyer. I thought it might beuseful to outline some of the typical representations andwarranties we're seeing in these deals; and also to set forth areminder about the due diligence that should be done by buyers sothey know what they are getting, and don't just become knifecatchers. In today's post, I've outlined typical reps andwarranties. I'll outline typical due diligence issuesin the next post.First, at the risk of stating the obvious, there'sa big difference between buying foreclosed REO andbuying a distressed note. If you'rebuying REO property, the borrower has already been foreclosed upon,and therefore you as buyer will not have to either foreclosethe loan or take the risk that the borrower will file forbankruptcy. If you are buying a note, however, you as buyerare taking those risks. This means that a buyer of a notemust take additional precautions and doadditional diligence in order to make sure that the distressednote is actually worth what the buyer is willing to pay for it.Oneway to determine the value of a distressed note, is toevaluate the market value of the underlying realestate collateral, then to take a discount from that in the amountestimated to reflect the likely cost to enforce theloan (possibly all the way through a borrowerbankruptcy), adjusted by the likelihood that the borrower (andguarantors, if any) will fight the foreclosure. This requiresboth a business and a legal analysis -- the latter to determine ifthere are any defects in the loan documents that would make theloan harder or easier to enforce.In purchases and sales ofdistressed REO, the terms of the deal are basically like otherpurchases and sales of real estate, with a few exceptions. The seller of REO, typically a lender which has foreclosed upon theproperty, will not usually make a lot of representations about theproperty because it is not as knowledgeable as the typical seller-- the lender's position is usually that it made a loan, andwill make representations about its ownership of the loan, but notabout the underlying real property. So most sellers of REOwill generally represent and warrant as follows:1. that thelender/seller has the authority to enter into the sale of theREO, and that the agreement to sell the REO is enforceable againstit;2. that no interests in the REO have been previouslyconveyed to others by the lender/seller;3. that there is nolitigation concerning the REO other than asdisclosed in writing in an exhibit to the purchase and saleagreement;4. that the information provided by thelender/seller is true, complete and correct to the extent it hasbeen created by the lender/seller (note that a lender/sellerwill usually provide copies of third party reports, suchas environmental reports, but expressly will not accept liabilityfor their accuracy -- buyers need to either engage the provider ofsuch original reports for downdates of them so that they can relyon such reports, or to have new reports done for them); and5. other representations typical in CRE purchase and salesagreements may be included.If a distressed note is being sold,rather than REO, additional representations of lender/seller mayinclude:6. that the lender/seller has provided to the buyercopies of all of the contents of its loan file, includingall loan documents, modifications and copies of allcorrespondence relating to the loan;7. that the lender/selleris selling the whole loan (or, if the sale is of part of a loan,what part);8. that the lender/seller owns the distressed loan, andhas not conveyed any interests in it to any third party (except asdisclosed in writing in the agreement).In both REO and distressednote sales, there may be more representations andwarranties running from the buyer to the lender/seller than in atypical CRE purchase agreement. In a sale of REOproperty, in addition to the standard representations that thepurchase contract is enforceable against the buyer and the buyer'ssignatory has the authority to execute the contract, thefollowing representations may be included:1. that buyer hasinvestigated and completed its due diligence on the property, andwill rely only on that diligence in electing to purchase theproperty;2. that the buyer expressly agrees itspurchase of the REO is "as is, where is";3. that thebuyer complies with the Patriot Act;4. that the buyer is notan insider or affiliate of the lender/seller.Sometimes indistressed note sales, a buyer will also represent that it is asophisticated investor, and can bear the risks of purchasing adistressed note. These lists of representations are notexhaustive, but should give you an idea of the sorts of reps you'lltypically see in these deals.Next post: Due diligence neededfor purchases of REO and distressed CRE notes.

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