Question 1

What is the difference between buying a performing and a non-performing commercial real estate note?

Accepted Answer

A performing note is current on payments, you buy it to own a yield instrument secured by real estate. Discount to par on performing notes is modest (5-15%). A non-performing note is delinquent or in default, you buy it to control the workout and ultimately the asset. Discounts on non-performing notes are larger (20-50%+ depending on asset quality and market) and the return comes from workout execution, not coupon income. Most opportunistic buyers target non-performing notes; core and core-plus buyers occasionally purchase performing notes at modest discounts.

Question 2

How do I find commercial real estate note sales that are not publicly marketed?

Accepted Answer

Off-market note sales happen through four channels: direct relationships with bank loan workout officers, relationships with debt fund portfolio managers, restructuring advisor networks (the investment banks and boutiques that run note sale processes), and CMBS servicer contacts who run bilateral note trades before formal auction processes. OffMarketX sources through all four channels and delivers unmarketed note opportunities to qualified buyers.

Question 3

What legal structure is required to buy a commercial real estate note?

Accepted Answer

Note purchases are documented through a loan purchase agreement (LPA) and a loan transfer notice to the borrower. The buyer needs a legal entity (typically an LLC or limited partnership) to hold the note, legal counsel familiar with commercial real estate loan transfer documentation, and an understanding of the state-specific foreclosure or enforcement process that will be required if the workout does not result in voluntary payoff or sale. Most buyers use their acquisition counsel to manage the note transfer and subsequent workout process.

Question 4

What happens if the borrower pays off the loan after I buy the note at a discount?

Accepted Answer

You receive par, the full outstanding principal balance. The discount you paid becomes your profit. If you buy a $10M note at $7M (70 cents on the dollar) and the borrower refinances or sells the property and repays the full $10M face amount, you made $3M on your $7M investment. This is the cleanest note purchase outcome. The risk is that the borrower does not pay and you must foreclose, which adds legal cost and time but should still deliver a profit if your discount was appropriately sized.

Question 5

Are CMBS notes available for individual purchase?

Accepted Answer

Individual CMBS notes (representing a single loan within a trust) are sometimes sold by special servicers as part of their workout process. These transactions are more complex because the note transfer requires trust consent and servicer cooperation. Small pools of CMBS notes have traded between special servicers and debt fund buyers. The Freddie Mac and Fannie Mae note sale programs are the most institutionalized and transparent commercial real estate note sale mechanisms, though they are primarily multifamily focused.