The Ins and Outs of Receiverships
Receiverships offer promising avenues for commercial real estate professionals to assist lenders with distressed assets.
Though never the ideal spot for any lender or servicer, commercial loan default is a reality in the commercial real estate market of 2022. Among the options available to those looking to protect distressed assets, seeking to have a receiver appointed is a remedy often pursued by creditors because it can minimize losses, maintain property value, and limit liability.
A receivership involves an agent who is appointed by a state or federal court to preserve, maintain, and sometimes sell the assets over which he/she has been appointed. Receivers do not work for lenders; they are neutral — although some states provide for more direct interaction and influence over receivers than others.
But receiverships do not only occur when a borrower defaults on a loan obligation. In the case of California, for instance, a Los Angeles court receiver can be appointed to a case for a multitude of reasons in addition to handling rents, issues, and profits associated with real estate, such as fraudulent transfer actions, windup of a dissolved corporation, breach of fiduciary duty, government enforcement actions, divorce, and the enforcement of judgments.
Receiverships are a preferred method of handling default and distressed assets. This growing popularity can mean opportunities for CRE professionals in a few different areas.
Once a receiver is appointed in a case, he or she will take possession of the specified assets and either take the steps necessary to preserve, liquidate, or hold the asset pending further court order. The duties of a court-appointed receiver are expressly set out in the court’s order, but they can be varied, including tasks such as forensic accounting, completing construction of a property, and selling assets subject to approval by the court.
Opportunities for CRE Professionals
Technically, anyone is qualified to be a receiver. But in practice, courts typically name an individual who is experienced and knowledgeable in the basics of receivership administration, while being familiar with the local rules of the appointing court. For commercial real estate-related receiverships, a potential receiver should be experienced in asset/property management, brokerage, legal issues, and development.
Considering the complexity of many commercial real estate assets, receiverships are a preferred method of handling default and distressed assets. This growing popularity can mean opportunities for CRE professionals in a few different areas.
BOVs. Receivers regularly look to qualified parties for broker opinions of value (BOVs), rather than the more expensive option of appraisal. BOVs can be used when deciding to select a listing broker and to sell an asset during the liquidation phase of the case. During this time, a receiver may also have a need for in-depth market reports to establish market lease rates, tenant improvement allowances, escalations, and other concessions. In some respects, a receiver may be simultaneously acting as an owner, property manager, developer, seller, and consultant. Because of these demands, knowledgeable, trustworthy CRE professionals can be powerful partners to receivers.
Understanding the Process
To be in position to assist a receiver, CRE professionals must have a working understanding of receiverships and the ability to understand the life cycle of a receiver sale, including the appeal period and duties to creditors.
While every case has its own unique characteristics, the basic chronology of appointing a receiver remains relatively steady.
- Underlying Litigation Filed. Receiverships will always be tied to some type of dispute, such as a breach of contract or a foreclosure action. An action must be filed before proceeding to seek the appointment of a receiver.
- Dispute Requires Receiver. Not every dispute requires a receiver. This phase is where a party may request the appointment of one, and the court will decide if a receiver is appropriate.
- One Party Seeks and Presents a Qualified Proposed Receiver. If the plaintiff or defendant decides they would like to seek the appointment of a receiver, they should ideally seek the most qualified candidate for the role. A receiver can be qualified in many ways, including their background, experience, and location.
- Receiver Executes Declaration in Support of Appointment Receiver. Once deciding on a qualified receiver, the party will begin preparing the necessary papers to begin the appointing process.
- Party Nominates Receiver. The party requesting the appointment of a receiver files a motion with the court, because a receiver is an agent of the court. During this step, the nominating party states the legal authority on which the appointment of the receiver is based. The motion to appoint a receiver may be filed on an emergency basis, by noticed motion (when the party seeking the appointment obtains a hearing date on a nonemergency basis), or by stipulation (if all parties agree to the appointment).
- Court Hearing. During this phase, the court will rule on whether to appoint the receiver. The court will typically do one of three things: appoint the receiver, determine an appointment of a receiver is not appropriate at that time, or deny the appointment.
- Court Order. The order appointing a receiver is signed by the judge in the case. The order determines the initial scope of the receiver’s duties and authority. The nominating party then alerts the receiver of the appointment and provides a copy of the signed, conformed order.
- Receiver Qualifies to Serve by Filing Oath and Bond. The newly appointed receiver is typically required to file an oath and bond (in an amount determined by the court) to qualify as the receiver in the case. The receiver cannot undertake any duties until this step is completed.
- Receiver Commences Duties. Duties are pursuant to the authority granted to the receiver by the court order.
Speaking the Language
Just like commercial real estate has its own set of phrases and terms that could leave an unfamiliar party completely at a loss when two professionals are deep in discussion of a property, receiverships have specific jargon and a set of terms that distinguish those in the know.
The following terms are far from an exhaustive list of the terms of the trade, but they are a start in learning to speak the language:
Bonds. A receiver is required to post a bond in an amount fixed by the court, or the court can waive the requirement to post a bond. Until the receiver has posted the required bond, the receiver is not qualified to act and is legally not entitled to commence his or her duties. The party requesting the receiver’s appointment may also be required to post a plaintiff’s bond if the receiver is appointed on an ex parte basis.
Confirmation. If a receiver is appointed on an ex parte basis, the court is generally required to schedule a hearing to confirm the receiver’s appointment within the statutory period from the date of the ex parte appointment. Until the receiver’s appointment is confirmed and made permanent, a prudent receiver should not take extraordinary action.
Contempt. If a party fails to comply with the terms of an injunction, after knowledge of the terms, the party is subject to being held in contempt of court. The court can impose penalties in the form of monetary sanctions and even incarceration.
Court of Equity. The appointment of receiver is an equitable remedy. For a court to appoint a receiver, the court must conclude after reviewing the evidence that the appointment of a receiver is fair and warranted under the circumstances.
Final Account and Report. A receiver is required to prepare and file with the court an accounting and report of his or her administration unless the parties agree to waive the preparation. The accounting must include all financial activity of the receivership estate and make available to the parties the supporting documents. The court must approve the receiver’s final accounting before the receiver is discharged.
Oath. In order to qualify to act, a receiver is required to prepare and file an oath which states that he or she will faithfully perform their duties according to the applicable state laws and the United States. In addition, the oath also must state that the receiver has not entered into any agreement with any party with respect to the operation of the receivership estate or the disposition of the asset.
Order. The court issues an order appointing a receiver based on an application by one of the parties to the pending litigation. The order sets forth the receiver’s powers, duties, and responsibilities, and the receiver is required to comply with the provisions of the court’s order. The receiver can seek instructions from the court, if necessary, and the court can issue additional orders. Similarly, a court order must be issued by the court to terminate the receivership.
Receiver’s Certificate. A receiver’s certificate is an obligation of the receivership estate that evidences a senior debt to most other encumbrances on the property over which the receiver has been appointed. The receiver’s certificate is a negotiable instrument similar to a promissory note. It is only effective after court approval and is typically requested in situations when a receiver requires additional funds to operate the property. It can subordinate deeds of trust/mortgage secured debt.
Remedy (Not the Same as Bankruptcy). The appointment of a receiver is a provisional remedy and not a cause of action that is included in a lawsuit. Also, a receiver can be appointed in both state and federal courts. Bankruptcy cases, for example, are only filed in the United States Bankruptcy Court and are governed by the United States Bankruptcy Code. A receivership is not a bankruptcy case.
Rent, Issues, and Profits. In most standard deeds of trust, there is a provision that the borrower (trustor) assigns to the lender all rents, issues, and profits (assignments of rent clause) that may be generated from the collateral. As long as the borrower makes their payments to the lender, the borrower is entitled to retain the rents, issues, and profits. However, if a default under the terms of the deed of trust occurs, the lender has the right to file a lawsuit and seek the appointment of a receiver to collect the rents, issues, and profits derived from their collateral. A rents, issues, and profits receivership is a real estate receivership.
Stipulation. A stipulation is an agreement among the parties to the litigation that becomes effective when approved by the court’s order. The use of stipulations in litigations will benefit all parties by saving costs and time.
With a working knowledge of receiverships, the next natural question is: ”So, how do I get business?” In this case, there are four steps to tapping into this area of CRE:
- Exhibiting knowledge of the process is a must. The glossary of terms included here can help, but a working knowledge of receiverships is best gained by talking to those involved and learning from more experienced professionals.
- Agree to special terms of listing agreements/fee structure.
- Attending trade organization events and exhibiting corporate knowledge can establish connections in this space. Networking never goes out of style.
- Professional designations and qualifications, such as CCIM, are a major step in separating yourself from the competition.
Receiverships are an interesting, if complex, niche within commercial real estate, but the potential for business is undeniable. With education and experience, commercial real estate professionals can tap into this market.
Editor’s note: This article was adapted from the
CCIM Institute course, “Real Estate Receiverships.”