As published in Scotsman Guide's Commercial Edition, May 2012.
It is no secret that many commercial real estate loans that were made at the height of the market are reaching maturity this year and in the next few years. These maturing loans are creating challenges and opportunities in the marketplace. Lenders are well aware of potential implications and are looking for the best options to improve their outcomes, and alert investors also will be in the market for bargains.
Commercial mortgage brokers must stay on top of the ever-changing lending landscape and be able to step up to help clients who are in need of financing or refinancing. And one area that can be of interest for all parties involved is how to make the best of receiverships and receivership sales.
Receivers are independent, court- appointed third parties that take part in the marketing and sale of assets. They work on managing the operations and preserving the value of an asset that is enduring a commercial-loan default and pending legal action. A receiver’s purpose is to protect the asset that serves as collateral for the loan.
Although nationwide figures show a decline in distressed commercial real estate in 2011, there seems to be a growing trend of sales through receiverships. This shift is likely to continue and perhaps expand as many loans issued in the mid- to late-2000s begin to mature. Because commercial loans are for terms typically ranging from five years to 10 years, the impact likely will be spread out over the coming years.
For example, commercial mortgage-backed securities (CMBS) debts valued at $22.5 billion matured this past year, according to Fitch Ratings. By some estimates, that number could reach $50 billion this year. In addition, 65 percent of the $1.7 trillion of CMBS maturing between 2012 and 2016 likely will not qualify for refinancing — although some loans may be extended to avoid default.
The increasing participation of receivers in the disposition process is fundamentally built on the ability to expedite the sale in addition to the capacity to properly maintain an asset. When workout solutions failed, historically lenders would simply foreclose on the security for a loan — the real property — and sell the assets. Unfortunately, the foreclosure process is neither swift nor simple. Consequently, the process allows the borrower to let the property deteriorate, which diminishes its value. In comparison, protecting and potentially improving an asset to maximize its value for a potential sale is a better route out of a problem property than a traditional foreclosure.
With a timely sale, the price potential often is improved as well as the perception of the business’ stability. That reduces the amount of time vendors, customers and employees need to fret about their future.
Another benefit to receivership is that the lender never enters the chain of title or has to own and/or operate the property. A receiver also will work to preserve leases, thus stabilizing the property’s value. Keep in mind that the receiver may not have the same obligation a lender has regarding debts that predate the receivership — essentially clearing the books for prospective buyers.
As with most areas of the real estate market today, there are a variety of rules and regulations surrounding distressed assets and receivers. It is advantageous to all parties involved to stay informed and aware of laws and issues in their respective locales. The receiver’s knowledge and its legal team come into play in understanding the laws from state to state.
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