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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   May 2012

Pick Up the Receiver

Receivership sales offer a viable alternative to property foreclosure

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.

"A receiver’s purpose is to protect the asset that serves as collateral for the loan."

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.

Benefit

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.

Regulations

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.

In some areas of the country where overbuilding still hangs over the market — places like Florida, Arizona and Nevada, to name a few — the situation should be watched carefully. As the pressure mounts on banks to clean up their books, receivers likely will play an increasingly significant role in the market, particularly in the space between default and foreclosure.

Regardless of the property assigned to a receiver — be it a hotel, retail center, apartment building, casino, gas station, convenience store or other going concerns — the issues are similar and involve complicated legal issues that only commercial mortgage brokers who have specialized knowledge can help sort out.

Generally, the receivership is sought in the state court where the property is located, although in certain circumstances the case is filed in federal courts that often are more efficient and cost-effective.

Different forms

Receiverships come in many forms, and each one plays a different role in the life of the property. The three most common receiverships are: the general-assets receiver, the rents-and-profits receiver and the limited receivership.

A general-assets receiver takes over an entire business, but the rents-and-profits receiver only assumes possession of assets that specifically secure the loan and any income the property generates. A limited receivership is most often called on in the case of a partially completed project to keep construction moving forward. It gives the lender — that provides funds to the receiver instead of the developer —  some reassurance that a third party is in control and paying attention to details like staying on budget and on schedule. It also keeps the contractors moving forward without interruption.

The court order naming the receiver spells out the scope and authority given to the appointed party, including whether the receiver can lease or sell the property. Among the other main points that should be covered in the order:

  • The receiver’s rights to borrow money as protective advances to cover operating losses or make improvements;
  • Permission for the receiver to borrow money through the issuance of a receiver certificate; 
  • Permission for the receiver to borrow money, which can be repaid when funds become available; and
  • Protections from liability for property conditions, construction defects, title issues, outstanding debts of the borrower and other matters. 

Role

More on receiverships

Although receiverships are becoming increasingly common, many commercial mortgage brokers are unfamiliar with the ins and out of these asset managers. For example, receiverships and bankruptcies often are confused. A receivership occurs when the lender seeks to protect its security by having an independent third party take possession. In contrast, bankruptcy courts and rules are primarily aimed at protecting the borrower, not the lender.

The two can overlap. For instance, business-owners might file for bankruptcy after a receiver has been appointed to regain possession of the property. If this occurs, lenders may seek to remove the assets from the bankruptcy court’s jurisdiction via a “relief from stay” motion, allowing foreclosure action to proceed.

For more information on receiverships and how they function in the commercial real estate industry, see Bill Hoffman’s article “Receiverships 101,” in the September 2010 edition of Scotsman Guide, at sctsm.in/4263.

When the receiver’s appointment is confirmed, the receiver takes on all aspects of the operations — from accounting and financial records to evaluating the property and its potential for future profits. In some cases, ceasing operation may be the best route, but the preferred option often is selling the property. The receivers’ expertise becomes critical as they aim to slow further losses and prevent physical and financial damage to the property that is pending a sale. Securing the necessary approvals, permits and licenses also is part of the receiver’s role.

• • •

Although the market continues to sort itself out in today’s relatively uncertain environment, the commercial real estate industry can be certain of a few things: The market is not out of the woods yet, especially in light of the coming tide of CMBS maturities. Opportunities do exist, however, and they can help soften the landing for many property owners. 

Commercial mortgage brokers must be knowledgeable about the role of receiverships in today’s distressed-property markets. They should understand the available options and know where to turn for solutions, so they can offer valuable guidance to their clients.


 


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