Distressed assets

Selling Distressed Commercial Property Through Receivership

With commercial property loan defaults still a reality in today's sluggish economy, lenders are increasingly opting to sell distressed properties through a rents-and-profits receiver instead of pursuing other remedies, such as workouts, deeds in lieu, and foreclosures. By using a rents-and-profits receiver to take custody and control of the property and sell it with final court approval, lenders not only protect the property's value and income being generated, but they also save time and money and more effectively minimize potential losses and exposure to liability.

While equity receivers are generally appointed over an individual or an entity, rents-and-profits receivers are typically appointed by the court to take possession and control of one or more properties, maintain adequate insurance coverage, and handle any health and safety issues, as well as manage and maintain the property and pay all necessary operating expenses until the default is either cured or the foreclosure is completed.

Receivership Sales

Along with controlling and maintaining the property, a court-appointed receiver can also sell the property with final court approval and the consent of the lender, borrower, and any junior lien holders. Notwithstanding various interpretations of the law regarding the sale of real property by a rents-and-profits receiver, the courts are routinely approving these types of sales.

Opting for a receivership sale can save a considerable amount of time and expense, preserve the value of the property, and minimize or even fully eliminate potential future liability and losses for both the lender and borrower. In addition, trustee fees are reduced since a foreclosure sale is no longer needed. The cost savings can be significant depending on the property's value.

Borrowers and junior lien holders will generally agree to a receivership sale if there is little or no equity in the property to satisfy any junior lien holders. Also, if there are existing valid personal guaranties and the lender and borrower are able to reach a resolution regarding the guaranties, the borrower will typically not object to a sale of the property by the receiver. The power to sell the real property can be included as part of the appointing court order, subject to final approval by the court as well as notice to all parties involved –– buyer, lender/owner, and all known creditors.

In negotiating a sale through receivership, careful, open, and effective communication between the receiver and all parties is essential. Ideally, all parties should agree to the property's initial listing price and the listing brokerage company. Any objections should be dealt with as soon as possible, as controversies or disagreements between the parties involving the final sale price of the property that erupt later on in the process can completely derail the sale.

For example, if the appointing order permits the receiver to sell the property, a helpful negotiation strategy is for the receiver to send out a letter ahead of time to all parties that addresses issues that could potentially cause conflict. The letter can advise the parties, including any junior lien holders, of the receiver's intent to list the property, the specifics about the listing broker, and the listing price. The letter should state that if the receiver does not hear back within 10 days after receipt of the letter then the receiver shall proceed with the stated plan and terms. This simple approach will quickly flush out any objections from the parties, which can be addressed promptly, preventing any future arguments.

Challenges to Receivership Sales

In addition to the benefits of receivership sales, there are some common pitfalls to avoid and precautions to take. A significant issue that could arise is when a receiver fails to provide proper notice of the motion to approve/confirm the sale to all parties with potential claims against the property, including any lien holders, any known creditors, agencies, or government or municipal bodies, or anyone else who might have a potential claim, however obscure, for any amount of money. Oftentimes, inexperienced receivers only provide notice of the sale to those on the "Service List," -- only the parties to the action.

To properly complete a receivership sale, receivers must also carefully coordinate with the title company. It is absolutely imperative to secure a title company early on in the process that is willing to review the proposed order approving and authorizing the sale and issue a policy of title insurance based upon the recording of the receiver's deed. Without a cooperating title company, the receiver's ability to close the sale and provide a policy of title insurance to the buyer will be precluded. Further, a title company's involvement is crucial if there are disputed liens on the property because such disagreements can severely delay a sale or the distribution of the sale's net proceeds.

When faced with foreclosure on commercial property loan defaults, receivership sales offer lenders an alternative. By carefully selecting a reputable and experienced receiver, lenders can effectively protect themselves, their property, and their income, as well as ensure the best possible outcome for all parties involved.

James H. Donell, CCIM, CPM, is a state and federal court-appointed receiver and CEO of FedReceiver, Inc., in Los Angeles. Contact him at James.Donell@FedReceiver.com.

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