Purchasing Distressed Assets

By Scott R. Lippert, Esq.
slippert@pashmanstein.com

Those of us who remember the 1987 stock market crash and its subsequent and long-lasting effect on an over-heated real estate market are starting to see some of the same signs of recovery that we began to see in the early 90’s.  One of those signs is the emergence of the entrepreneurial men and women who are willing to risk private capital to purchase distressed assets and turn them around.  In the commercial real estate arena, this frequently means purchasing the loans affecting over-leveraged properties at a substantial discount from the institutional lenders who would rather not engage in the workout/foreclosure/bankruptcy process that must occur in order to displace the defaulting ownership and acquire title.  It can be a difficult process, but a necessary one, creating an opportunity for substantial profits.

It goes without saying that there are risks accompanying those potential rewards, chief among them evaluating the purchase price.  To mitigate those risks, all of the due diligence that is standard to any acquisition must be performed, while having to work around an ownership that may be hostile to your presence.  In deciding how much to pay to acquire the loan, the careful purchaser will factor in the time and expense of ultimately obtaining title, whether by judicial process or by voluntary agreement of the debtor.

One of the ways to obtain title quickly is by having the debtor deliver a deed in lieu of foreclosure.  However, the New Jersey Division of Taxation has placed an obstacle in the way of completing such a transaction.

The Bulk Sales Act applies to transfers of interests in real estate and the Division requires the seller to place funds in escrow to secure payout of state taxes.  Of course, where a debtor is giving a deed in lieu of foreclosure, the likelihood is that the debtor will not be able to comply with this requirement.  After all, if the debtor had cash on hand, it probably would not be in default in the first place.  The same issue would apply if a lender agrees to permit a short sale.  The escrow requirement does not apply to a sheriff’s deed, so in these circumstances, completing a foreclosure may be the only way to obtain title.

The current marketplace affords many opportunities to acquire mortgage debt at substantial discounts.  This little nuance concerning bulk sales compliance is but one of many potential bumps in the road.  Careful execution of the transaction is essential.

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