TAMPA, FL—These days, many institutional lenders have no interest in hanging on to problem commercial loans. In fact, special asset departments at many banks are shrinking or, in some cases, even disappearing completely.  Instead of servicing problem loans, these financial institutions are focused on selling these loans to capital companies and other investors, typically in large portfolios.

So what does this trend mean for the commercial real estate market, and what should capital companies and investors consider to protect themselves as they buy these loans?  To get some answers, GlobeSt.com talked to real estate attorney Ron Cohn of the Arnstein & Lehr firm's Tampa office. He specializes in helping lenders reduce their commercial real estate-related risk from a legal perspective, while working on a lender's behalf when a commercial loan goes into default.

GlobeSt.com: Is this trend of capital companies and investors acquiring problem loans good for the commercial real estate market?

Cohn: Overall, this trend is a positive for the marketplace. Indeed, it can even be a positive for the defaulted borrowers whose loans are sold, in that the investors buying commercial loans are often more flexible in working with delinquent borrowers than institutional lenders are able to be, even to the extent of sometimes providing financing for new projects, which expands borrowing options for developers and builders.

GlobeSt.com: With loan purchase activity heating up, what are you seeing as you work with capital companies and other buyers?

Cohn: As we have seen in cycles in the past, as the market heats up, people get in a hurry, worried they are going to miss out on opportunities. Once a decision is made to sell a commercial loan, the institutional lenders want to move them out of their portfolios as quickly as possible.  In the case of buying loans on commercial real estate properties, we advise the buyer to build in sufficient time for proper due diligence to the extent possible.

This may seem obvious, but we are seeing buyers who aren't doing this and end up with loans that may have thorny issues relating to priority of interests, value, collateral condition, environmental issues, and so on. These issues may not be readily apparent from a quick review of the seller's file.

In the current market, buyers may be given as little as four weeks to prepare a bid on a certain loan portfolio. Unless the buyer has adequate experienced and knowledgeable staffers who can spot and assess problem issues quickly, it may be the best move to pass on the opportunity and instead focus on another loan sale where you have more time to do your homework.

Proper and thorough due diligence is the key to a successful loan sale purchase because what may seem like a great deal at first blush might not be so great after you learn more about the property and the borrower. And it's certainly better to find that out up front rather than after you have already purchased the loan. While loan sales have always been an available avenue of resolution for an institutional lender, we have certainly seen a larger emphasis by the lenders on utilizing this strategy than in the past, to the point where I believe this will become the norm, if it hasn't become so already.