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Assuming Distressed Properties


Once a lender understands the risks involved in the properties it controls, it has several options for reducing its liability.


“The most important thing they can do is take their time before foreclosure, which includes understanding what the asset is before we ever take control of that property.”


Patricia Dennis, Zions Bancorp


A review of the property site and associated contracts can be a lender’s best protection against future liabilities, such as mold resulting from a prior fire or construction defects on a poorly prepared site. But even the best review may not reveal every risk, and a bank should consider different options for mitigating its liability. One way is to sell the property to a buyer who is savvy in construction or the type of asset. This protects the bank against claims that it sold a problematic property to an unsuspecting buyer. Another option is to buy additional insurance to protect against specific liabilities, such as construction defects or pollution. When a property has risks the bank does not want in its portfolio, it can try to sell the note outright, or, lacking a buyer, set up a special purpose entity.


Copyright © 2012 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise.


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