Special Servicing: 24 Kmart loans

The challenge:

Bidding blind to acquire special servicing rights of a pool of 24 loans secured by shuttered Kmart stores located nationwide. The underlying land was owned by two investor groups of remainder-men interests. Loan documentation was lacking on the loans, which involved leases rejected by Kmart in its 2002 bankruptcy.

The solution:

Understand the scan loan documentation, the inherent liabilities, and state title recovery laws to formulate foreclosure sale action plans.

The story:

While working at First Union in the summer of 2002, Managing Member Geoffrey Curme was tasked with bidding on a pool of 24 loans secured by Kmart stores located nationwide, all of which had been closed in connection with the Chapter 11 bankruptcy. 

Kmart rejected the leases in bankruptcy so there were no payments or funds to pay debt service. The loan was secured by the individual stores and the land was owned by a third party. After obtaining the loan pool, Curme immediately oversaw the property management and worked to get title to the land, located in eight states and owned by two groups of remainder men. The approach was to identify the best use for each location and sell the store locations subject to the land lease while obtaining the titles.

One store was particularly mismatched for the demographics of its location: a Kmart located in the affluent southern California community of Mission Viejo. Geoffrey determined residential redevelopment made sense and prequalified a dozen interested multifamily developers. The store and land appraised for $4 million; the property sold for $15 million.

Michelle Jones