What is involved in investing in distressed commercial property?
Buying distressed real estate opportunities exist in bankruptcy. This can be done by owning the secure debt , becoming an owner who wants to maintain the distressed value property , or purchasing the distressed commercial property outright. Typically, there are good opportunities in commercial real estate in bankruptcy that start with a buy low and sell high strategy and make improvements to physically distressed properties that cannot be made by the previous owner. There are mis-managed distressed real estate opportunities and some owners may have run out of money to manage their property. As an Investor or buyer can also team up with owners of distressed commercial properties. Bottom line, when the bankruptcy exists, there is a secured creditor taking a security interest in a property and funds do not exist to pay the debt to the holders of the note.
Buying distressed properties in bankruptcy
Strategy : From a small commercial real estate property such as a single purpose entity, an investor can purchase the physically distressed or financially distressed property below market and restructure the debt. What is a single purpose entity? Within bankruptcy, it is an entity that is formed to own a single asset. There are special rules that apply to these entities. For the distressed property owner, there are a lot of responsibilities- maintain insurance, provide reporting, they can’t use rents without the lender or court approval, However, the landlord of the distressed property can use the rents to maintain the commercial real estate property, pay janitorial staff, landscaping etc. Property taxes can be paid with rental income as well, however there is a short 90 day period that a distressed commercial property owner is given to get out of bankruptcy. They must make some type of payment to their lender. Lenders are looking to preserve the collateral thru bankruptcy which is their primary initial strategy.
The distressed commercial property owner may be able to force new debt terms on the secured lender, often at a reduced interest rate and a reduced debt payment. Discussion around a new note can be made on the distressed real estate, however they are not made that often. Does an owner of distressed properties have an advantage in bankruptcy? It depends; sometimes the distressed property in bankruptcy can freeze the foreclosure. The most common reaction from the lender is we want the distressed commercial properties. Courts can rewrite the terms upon lenders which do not want worse terms from potential court cases. In the analysis there is a review what the distressed properties are worth versus what the current market is for the note for potential re-financing. Bankruptcy can provide a breathing spell for the distressed property owner.
Needless to say, this can become a complex transaction in which distressed properties are sold in bankruptcy. If distressed properties are not able to reorganize and have new funds available, then their options as financially distressed commercial property are foreclosure or bankruptcy to see if they can restructure the debt.