Animal spirits are stirring again in the commercial real estate market after the sharp drop in prices. But many properties remain in limbo because financial and legal problems are making short sales, or even traditional sales, difficult, if not impossible. So how are some investors re-entering the market? By purchasing the loans on the properties.

Buying loans tied to the underlying properties enables equity investors to take control of the physical asset and then address the problems by restructuring the paper, making improvements, renegotiating leases, changing the tenant mix or anything else that will add value. Fundamental to this approach is a cost-benefit analysis that factors expenses and risks.

For those willing to consider loan purchases as the route to property ownership, there are many opportunities to buy assets that are 50% to 75% below their price just several years ago. Money center banks, insurance firms, finance companies and investment banks are selling a growing volume of non-performing loans to improve the health of their portfolios. For investors, the accelerating number of loan sales translates into an unprecedented opportunity to purchase distressed properties. Loans secured by multifamily, industrial, retail and office projects are all for sale.

In addition to selling loans tied to distressed properties, many institutions are selling performing loans to rebalance their portfolios. These higher quality properties are typically conservatively levered, but they, too, represent an opportunity to invest in the property by purchasing the loan.

Buyers are gravitating toward loan purchases not only because of the wide choice, but also because online marketplaces in particular make it easy to identify buying opportunities. Investors can survey the entire market quickly and efficiently, and gain an accurate read on loan and property prices. Because all of the loan and property documents are online, investors can review loan files, rent rolls, legal documents without traveling to the selling institution to inspect the physical documents.

As a condition of participating in an online marketplace, buyers must abide by the established rules. First, buyers must be registered and approved. Prospective buyers are typically institutional investors and are screened to ensure they have the financial resources to close a transaction. The buyer's ability to make good on the sale is always a key concern of the hundreds of financial institutions that routinely sell loans online.

Buyers must also agree up front to use standardized legal and transfer documents. Standardized documents expedite the closing process, reduce the expense of separately negotiated contracts, and ultimately lead to more choice. Standardized legal documents have worked exceedingly well over the past 10 years, and they are the reason transaction closings now take just seven to 10 days, compared to 60 days or more for a traditional loan sale.

To make an offer on a loan, investors place a sealed bid or bid electronically online, depending on the property and the seller's preference. Loans may be sold individually, or as one component of a larger pool. Typically, equity buyers will be bidding against opportunity funds, hedge funds and other institutional investors primarily interested in the loan.

One key consideration before placing a bid is understanding the current market pricing for commercial property loans and its effect on the underlying asset. At the end of December, the aggregate value of the more than 60,000 loans priced by DebtX in the CMBS universe was 75.9%, down from 77.7% at the end of November. For all of2009, loan prices declined by 5.4 percentage points. The price decline was due mostly to a weakening of the collateral.The good news for equity buyers is that more institutions are willing to sell to investors who want to purchase loans to own the property. With more choice than ever before, commercial real estate buyers have a unique opportunity to find properties that build their portfolio in a distressed market.

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