Article
May 30, 2025
Note Purchase Liquidity: Unlocking Capital and Opportunity in 2025’s CRE Market
Note Purchase Liquidity: Unlocking Capital and Opportunity in 2025’s CRE Market
A tidal wave of commercial real estate debt is maturing in 2025, and not all borrowers can refinance or payoff their loans in time. Meanwhile, banks and other lenders holding these loans face their own pressures – rising defaults, regulatory scrutiny, and balance sheet constraints. Enter the strategy of note purchases: where an investor (often a private lender or fund) buys a loan note from the original lender, typically at a discount. This strategy provides liquidityto the original lender (hence “note purchase liquidity”) and creates an opportunity for the buyer to step into the lender’s shoes, potentially restructuring the debt or taking control of the property.
For brokers and capital markets professionals, understanding note sales is crucial in 2025. They offer a creative way to resolve distressed situations, fill capital gaps, and even originate new deals. This article will demystify the note purchase process, explain why it’s booming now, and how a note purchase lender like C2R Capital can facilitate these transactions to benefit all parties.
The 2025 Debt Wall and Distress Cycle
We’ve mentioned earlier: approximately $957 billion in CRE loans mature in 2025. Many of these were extended from prior years as lenders kicked the can (over $384B of loans were extended into 2025 instead of resolved in 2024). Now, time is running out for troubled loans.
Some context:
Rising Delinquencies: Certain property types (office, to name one) and loans with floating rates have seen higher delinquencies. By early 2025, CMBS delinquency rates had crossed 7%, and it’s “not just office anymore” – multifamily and hotels have upticks in defaults as well. Many properties purchased or refinanced at peak prices in 2019-2021 are now over-leveraged (loan balances higher than what current property values justify). When these loans mature, the borrower can’t easily refinance the full amount – they might be underwater or the new interest rates make the debt service coverage unworkable.
Bank Pressure: Banks, especially regional and smaller ones, are under the microscope with these troubled loans. Regulators are urging them to address non-performing loans, and in some cases, banks need to improve their balance sheets and capital ratios. Holding a bunch of defaulted or high-risk CRE loans ties up capital and invites criticism from regulators and investors. As one industry outlook noted, banks are facing “increased regulatory and internal pressures to dispense with bad loans, often at a discount”. In other words, banks are motivated to sell loans rather than prolong the pain or foreclose themselves. The famous example was the Signature Bank failure in 2023, after which regulators auctioned off its $33 billion CRE loan portfolio. This was a wake-up call and a starting gun for more loan sales.
Given this backdrop, 2025 is seeing a significant wave of note sale activity. Instead of classic foreclosure or “extend and pretend” again, lenders are saying: “Let’s cut our losses and sell the note to someone who’s willing to work it out.”
What Happens in a Note Purchase?
A note purchase means the ownership of the loan (the promissory note and mortgage) is transferred from the original lender to a new investor. The property owner’s obligations generally stay the same under the loan terms (they often have to be notified of the new lender). But from the borrower’s perspective, they suddenly have a new lender to deal with – which can actually be a good thing if that new lender is more willing to find a workable solution.
Key aspects:
Discounted Price: Typically, notes are sold at a discount to the loan’s unpaid balance (especially if the loan is non-performing or underperforming). For example, a $10 million loan might be sold for $8 million to the note buyer. The exact pricing depends on the collateral value, the loan terms (rate, maturity, etc.), and the perceived likelihood of getting repaid. The discount is essentially the new lender’s potential profit margin and a cushion for the risk they’re taking on.
Due Diligence: The note buyer will do similar due diligence as one would for a property acquisition: review the property financials, inspect if possible, analyze local market, evaluate the borrower’s situation, and review all loan documents (to know their rights and any limitations). Essentially, buying a loan is a way to buy into the propertywith one step removed – you’re buying the debt, not the real estate, but you have a claim on the real estate. As Chapman and Cutler’s guide suggests, you must “perform full diligence on the asset, the loan, and the borrower” before diving in.
Closing the Deal: Once a price is agreed, transferring a loan can be quicker than a real estate sale. It’s mostly paperwork – an assignment of loan documents – and doesn’t trigger things like property title transfers (so no deed taxes, etc., usually). This can make note purchases relatively swift transactions, which is part of why they provide liquidity fast to the seller. Some note sales happen via auction or bid process (especially larger pools from big banks), while others are one-off trades negotiated privately.
Post-Purchase Actions: After buying the note, the new lender has a few options. They step into the shoes of the original lender, meaning if the borrower was in default, the new lender can continue foreclosure proceedings. Or, often more constructively, they can approach the borrower for a loan workout. Because the note buyer likely bought at a discount, they have room to potentially restructure terms for the borrower and still achieve a good yield. For example, they might reduce the loan balance or extend the term, in exchange for the borrower re-capitalizing the project or adding collateral. The Chapman article phrase was the new lender can “‘reset’ the loan to reflect realities" – that is, adjust the debt to a sustainable level given the property’s current value and cash flow. If a friendly workout isn’t possible, the new lender can proceed to foreclose and take ownership of the property (or whatever the collateral is). Since they bought at a discount, they might be okay taking the property at that effective basis, which could be significantly below market value.
In summary, the note buyer either gets paid off/paid back under the original or modified loan (gaining interest and potentially fees along the way) or ends up owning the property at a favorable cost basis.
Why Note Sales Are a Win-Win (When Done Right)
Note purchases can actually create a win-win-win scenario for the original lender, the borrower, and the note buyer:
Original Lender (Seller): They get rid of a problematic loan and receive immediate cash (albeit at a discount). This improves their balance sheet and frees them to focus on healthier parts of their portfolio. It also removes the need for them to expend time and resources on foreclosure or long negotiations. For many banks in 2025, selling a non-performing loan at 80 cents on the dollar is preferable to potentially recovering 90 cents after 2 years of legal battles – especially when you factor in the uncertainty and the opportunity cost of tied-up capital. Selling notes can also help banks avoid taking the accounting loss directly from foreclosure; instead, they take the loss via sale which is often viewed more favorably by markets.
Borrower (Property Owner): At first glance, a loan being sold might be unsettling to a borrower. But if they’re in default or struggling, a new lender can be a blessing. The new lender likely bought the loan at a discount, which means they might be willing to forgive a portion of the debt or rework terms, since even a partial payoff could meet their return targets. For instance, a borrower owes $10M, can’t refinance, old bank is pushing to foreclose. A note buyer buys it at $8M. That note buyer could then offer the borrower a deal: “We’ll settle the loan if you pay us $9M now or over a short period.” The borrower effectively gets a $1M reduction and avoids foreclosure – a much better outcome for them, keeping potential equity intact. Alternatively, if the borrower truly can’t continue, the new lender might give more lenient terms or time to sell the property on their own, or agree to a friendly deed-in-lieu of foreclosure (handing over the property without fight), perhaps with some consideration. In any case, a private note buyer often has more flexibility to find a solution than a rigid bank did.
Note Buyer (Investor/Lender): They stand to profit by either being paid off at par (or a higher amount than they paid) or by taking over a property at a bargain basis. Note buyers with development or repositioning expertise might even hope to take over certain properties. But even without foreclosure, many note buyers are content earning a high interest rate during the workout period and then exiting at a profit. For example, if they bought a loan at $0.80 on the dollar and the borrower keeps paying interest on the full $1.00 (perhaps hoping to find refinancing later), the yield on that investment is high. If eventually the borrower pays off the $1.00 (through a refinance or asset sale), the note buyer gets a one-time gain on top (the difference between payoff and what they paid). This can yield IRRs well into the teens or higher, which is attractive in a period where other investments might be volatile. It is not without risk, but the discount and being secured by the property help buffer that risk.
Because of these aligned interests, note sale deals can often be struck that leave everyone better off than the stalemate of a defaulted loan with no easy refinance. Lenders avoid messy write-offs, borrowers avoid bankruptcy or fire-sale foreclosures, and investors get a crack at strong returns or ownership of good assets at a discount.
The Role of Private Credit Funds and Lenders in Note Purchases
Private credit funds (like C2R Capital) are on the front lines of the note purchase wave. Here’s how they function in this arena:
Capital Availability: Purchasing notes requires capital – often quickly. Banks may decide to package and sell a bunch of loans and want to close in a short timeframe. Private debt funds have raised substantial capital for exactly these scenarios. For example, Brookfield recently raised $16B for a distressed real estate fund aimed at scooping up discounted assets and loans. This reflects rising investor appetite for discounted property bets, fueled by the market correction and lender pressure. Smaller specialized funds also exist focusing on certain regions or property types’ debt.
Expertise in Workouts: A good note purchase lender isn’t just throwing money at a problem – they have special asset management teams who handle loan workouts and asset turnarounds. They often have playbooks from past real estate cycles. For instance, they know how to navigate a foreclosure process efficiently in Texas vs. Georgia (where laws differ), or they have relationships with receivers and restructuring advisors. This expertise allows them to maximize the value from a purchased note, where a bank might not have the same flexibility (banks don’t typically want to manage real estate or be in protracted negotiations).
Deal Structuring: Private lenders can also structure creative transactions around note sales. One example is seller financing of note sales – a bank might even finance part of the sale for the note buyer (since banks are so keen to remove the risk, they’ll loan a portion to the investor buying the loan). It sounds odd, but it happens. Also, sometimes a note buyer will simultaneously strike a deal with the borrower when purchasing the note (a pre-packaged workout): essentially, closing a note sale and a loan modification in one coordinated move. This requires aligning incentives and careful legal handling, which is something seasoned private lenders can do.
Bridge to Resolution: Note purchase lenders often serve as a bridge lender in a distressed situation. They might hold the loan for a year or two, during which they help stabilize the situation – maybe leasing up a vacant property after taking control – and then the property/loan is refinanced or sold in a better market. Think of it as a form of bridge loan, but acquired indirectly by buying the existing note. For example, a debt fund buys a defaulted construction loan on a partially completed project. They then advance additional funds to finish construction (effectively acting like a new lender, though through the existing loan framework), get the project complete, then either the borrower sells the asset or they foreclose and sell it – either way, the project is completed and value maximized, and the note buyer gets repaid, usually handsomely for the risk taken.
For brokers and deal-makers, having relationships with note buyers is key in 2025. You might encounter a client who can’t refinance – connecting them with a note buyer could allow the client to buy their own debt back at a discount (through an intermediary) or at least bring in a party to resolve the situation. Alternatively, investors are asking brokers, “what distressed opportunities are out there?” Often the best answer isn’t a property on the market, but a bank with loans it wants to offload – essentially off-market inventory via note sales.
A Simple Case Study of a Note Purchase Scenario
Scenario: A regional bank in Georgia has a loan on a 200,000 sq ft suburban office building. Loan balance $30 million, interest-only, coming due now. The property’s value fell and is now maybe $25 million, and it’s only 60% leased (market soft). The borrower can’t pay down $5M to refinance at $25M and can’t find a new loan more than $18M. The borrower is at impasse and considering handing keys back. The bank classifies this loan as non-performing.
Note Sale Execution: Rather than foreclose (and possibly end up owning a half-empty office), the bank quietly shops the note. A private investment group specializing in value-add office debt does their analysis. They think the property could be worth $30M+ in a few years if repurposed or re-leased with fresh capital, but it will take time and money. They bid 65% of loan value – $19.5 million – and the bank, after some negotiation and seeing no better options, agrees to sell at $20M (around 67% of the loan face value).
Outcome: The bank takes a $10M loss on paper, but they get $20M cash now and remove a headache from their books. The note buyer now holds a $30M claim on the property. They approach the borrower with options: “We can foreclose, but we’re willing to work with you. What if we write off $5M of the debt and you grant us a second lien on another property you own as additional security? We’ll extend the loan for 2 years to give you time to lease up, and you pay us interest at 6% (the same as before) in the meantime.” The borrower, seeing a path to possibly save the project, agrees. The loan is reset to $25M (matching current value), interest keeps getting paid (which on the note buyer’s cost basis of $20M equates to a yield of 9% instead of 6%), and the borrower works on the building.
If the borrower succeeds – say leases up to 80% – the building might become worth $35M. Then the borrower can refinance or sell, and pay the note buyer the $25M agreed. The note buyer gets $25M on a $20M investment (25% gain plus the interest earned), an excellent outcome. The borrower keeps their project and any value above $25M is theirs to keep. If the borrower fails, the note buyer forecloses in 2 years, perhaps spending a little on foreclosure and some brokerage. They end up owning the building, which even if still worth $25M, means they got it for $20M + costs – a solid discount. They could then invest in repurposing or wait for a better market to sell. Either way, they’ve structured a no-lose (or minimal lose) scenario for themselves by buying at a low basis, and given the borrower a fighting chance. The bank avoids a protracted process and gets liquidity.
This kind of scenario is playing out across many markets, especially for assets that need fresh capital or a fresh approach.
How to Engage in Note Purchase Deals
For those interested in pursuing note purchase opportunities (either selling a note, buying a note, or arranging one), here are practical pointers:
For Brokers/Advisors: Build contacts with special asset managers at banks and with active note buyers. Often, note sales aren’t publicly marketed widely; they happen through networks and phone calls. If you catch wind that a lender might sell a troubled loan, you could facilitate introductions. Ensure confidentiality as banks are sensitive. Know the rough pricing environment – for example, multifamily notes might sell at smaller discounts than office notes in this climate.
For Borrowers in Trouble: Don’t be afraid to suggest the idea of a note sale to your lender. Some borrowers even bring a potential note buyer to the table for the lender. It can come across as adversarial (“you won’t pay me, but you found someone to buy the loan cheap?”), so do it carefully – but framing it as “this investor can pay you now and then work with us” can sometimes break a stalemate. At the end of the day, banks want their money; if you help show them a way to get most of it, they might play ball.
Due Diligence is Crucial: If you’re considering buying a note or advising a buyer, do thorough due diligence. That includes legal review of the loan documents (are there any unusual clauses? Any borrower defenses or claims? Any intercreditor issues?), property valuation, title check (ensure the mortgage is properly recorded, etc.), and understanding of foreclosure law in that jurisdiction (judicial foreclosure vs. non-judicial affects timeline significantly). Many note buyers partner with law firms and servicing firms that specialize in loan acquisitions to manage this.
Speed and Cash: Note sellers prefer a quick close and a buyer who has cash (or very certain financing). This is typically not the realm of highly leveraged purchases; note buyers often use cash or low leverage themselves (sometimes even lines of credit or fund capital). If you are trying to finance a note purchase, it can be tricky – there are lenders who finance note acquisitions, but it’s niche. Having readily deployable capital or partners is key to be credible in this space.
Conclusion: Liquidity and Opportunity
The practice of purchasing notes is breathing liquidity into a stressed CRE market in 2025. It’s essentially the market’s way of clearing out bad debt and moving assets to “best owners” – those who can reposition or hold through the downturn. For those in the know, it presents a chance to turn others’ problems into profits.
From the borrower’s perspective, if your deal is stuck, a note sale might be the lifeline that brings in a more flexible lender who’s willing to restructure your loan. From an investor’s perspective, note buying is a path to acquire properties or high-yield loans at a discount, requiring expertise but offering potentially outsized returns as the market recovers. And for the overall market, this mechanism helps avoid the kind of frozen gridlock that can exacerbate a crisis.
C2R Capital actively engages in note purchase transactions as part of our investment and lending strategy. If you are a lender looking to offload a CRE loan, or a borrower exploring options with a difficult loan, or even an investor seeking to participate in distressed debt opportunities, connect with C2R Capital. We have the capital and expertise to evaluate and execute note purchases, providing swift solutions. Our approach is to create win-win outcomes: we bring liquidity to lenders, workouts for borrowers, and strong assets into our portfolio. In a market defined by a CRE funding gap, note purchases are a key tool – and C2R is positioned to be your partner in leveraging that tool effectively. Let’s discuss how a note purchase or similar creative financing move could unlock value in your situation. Together, we can turn debt challenges into opportunities for growth and stability in 2025 and beyond.
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