Understanding Dynamics of buying or selling Distressed Businesses or Real Estate Part 2

Distressed Businesses Real Estate

Read Part 1

Investors Concerns:

This article touches on a few issues that could arise when an investor is interested in acquiring business assets or a creditor’s position. Working with a seasoned attorney to perform various due diligence, both with respect to the actual business assets the investors is looking to acquire, and in studying the dynamics of the various stakeholders in order to best understand the bargaining positions of the various parties, could really benefit the investor(s). For example, in one situation where I represented some investors, as I worked through my due diligence, I reviewed an appraisal commissioned by the bank for the property. The property was initially appraised for $700,000 and the bank was not willing to discuss any compromise. After reading the small print regarding the legal description, I soon realized that a portion of the building lay on the neighboring property. The appraiser (who I imagine receives a great deal of business from the bank trying to sell off its note and mortgage secured by the building) rendered a 95 page appraisal with many fancy pictures. In the middle of the appraisal was the legal description arbitrarily re-written to do away with a material problem with the legal description. The tiny asterisk under the “new and improved” legal description made a disclaimer, stating the legal description was rewritten based on a conversation with the debtor, claiming “the problem had been worked out.” The debtor had not provided any details or written documentation supporting their position. The appraiser went onto to state in small print on page 44 of the 95 page report, “if this information is inaccurate, then the appraised price will dramatically be impacted.”

I then ordered title work which confirmed my suspicion that no such amended legal description existed and the legal description of record still contained the “over lap.” The bank was firm in their position with my client, the investors. Once I armed the investors with this information among several other material deficiencies, which essentially undermined how secured the bank’s position really was, the investors were able to negotiate with the lender much more aggressively.

Additional due diligence revealed that the second lienholder was only in second position for the first $150,000 owed to the lender, and the bank was not the first perfected lienholder beyond that. In a short period of time, we realized that the first lienholder was the heirs of the prior deceased partner, and they were anxious to dispose of their interest or be “cashed out” at substantially reduced price. We spoke with their accountants and attorneys and my client were able to acquire the interest of the first lienholder for 20% of the face value of the note and security documents, held by the heirs. Even though my clients paid $100,000 for a note with an outstanding balance of $500,000, they were protected to the extent of the $500,000, because they purchased the underlying note and security documents, essentially stepping into the shoes of the first lienholder.