Author(s): Nicole R. Nies
Published: 04/09/2010
Given the current commercial real estate market woes, commercial loan defaults are on the rise — forcing lenders and borrowers to evaluate their pre- and post-default options. For a variety of reasons, the "deed-in-lieu" transaction is becoming a popular alternative to foreclosure. In a deed-in-lieu of foreclosure transaction, the borrower voluntarily agrees to convey to the lender the collateral property that secures the loan. Advantages of the deed-in-lieu transaction often include time and cost savings, avoidance of the stigma of foreclosure, flexibility in negotiating the payment or waiver of deficiency balances, avoidance of bankruptcy by the borrower, and the ability to negotiate mutual releases.
There are also a myriad of concerns that must be considered, primarily by the lender, when evaluating whether a deed-in-lieu transaction is the best option. The following are answers to questions often asked by lenders in this evaluation process:
Is the deed-in-lieu process less expensive than the foreclosure process?
There is generally a financial benefit to the lender in taking ownership of the property on an expedited basis. The actual legal expenses incurred in connection with a deed-in-lieu transaction depend on the nature and extent of issues identified during the due diligence process.
How long will the deed-in-lieu process take?
Generally, the lender can perform the appropriate due diligence and negotiate the documentation within one to three months, sometimes less. It probably goes without saying that for commercial property (as opposed to residential), the due diligence process will likely be more involved and take longer. That said, with a deed-in-lieu transaction there is usually more cooperation on the borrower's part. The actual documentation is fairly straightforward and generally includes a settlement agreement, transfer deed, bill of sale and assignment, estoppel affidavit, and FIRPTA affidavit. The settlement agreement will likely be the most heavily negotiated document.
What does the due diligence process entail?
A deed-in-lieu transaction should be approached with the understanding that the transaction is more akin to a purchase and sale. Accordingly, the lender will need to undertake significant due diligence on the front end and be prepared to operate and sell the property upon consummation of the transaction. To that end, the lender will need to investigate the physical condition of the collateral property, as well as the legal title to the same. Due diligence will likely entail, among other things, an environmental review, title review, and review of existing leases and contracts affecting the collateral property. Additionally, it is important to note that there may be additional documentation needed to address some due diligence items. For example, existing leases will need to be assigned and the lender may desire to obtain estoppel certificates from existing tenants. The transaction may also require side negotiations with junior lienholders, whose liens would otherwise remain in place following consummation of the deed-in-lieu transaction. While it is not possible to address all aspects of the due diligence process here, the lender should be able to rely on its counsel to provide the appropriate guidance and assistance.
While a deed-in-lieu of foreclosure transaction may not be a feasible alternative in all cases due to existing junior lienholders, a potential bankruptcy, and/or other issues, it can provide both economic and non-economic benefits to lenders and borrowers when the circumstances are right.
Nicole Nies is an associate in the Denver office at RJ&L. She represents individual and corporate clients in all aspects of commercial transactions. She has considerable experience representing borrowers and lenders in real estate and other commercial loan transactions. Ms. Nies can be reached at 303-628-9516 or by email at nnies@rothgerber.com.