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Receivership: An Underutilized Option for Sales of Distressed Properties

Receivership sale as a viable option for the resolution of a commercial property loan default is not as well known as other methods, such as workouts, deeds in lieu and foreclosures. However, with today’s sluggish economy continuing to produce a flood of distressed properties, receivership is a remedy that deserves more attention.

There are two primary types of receiverships: equity receivers, and rents and profits receivers. Equity receivers are appointed over an individual or entity. They have an undisputed right to sell the properties that are under their supervision—with a court order allowing the sale.

Rents and profits receivers are generally appointed by a court over a property to maintain insurance coverage, manage health and safety issues, and handle payment of operating expenses. There are varied opinions as to whether a rents and profits receiver has the legal authority to sell a property.

Receivers who want to sell properties in their possession should include a few key elements in the process to avoid conflicts with entities that have an interest in or lien on the property and to stay comfortably within their legal rights. These activities should begin earlier in the process rather than later.

The first element—and one of the most important—is ensuring that the court order appointing the receiver or a subsequent order contains language authorizing the receiver to sell the property, subject to court approval. If the receiver starts with this order authorizing him/her to sell the property, on the condition that all parties stipulate to the sale, everything else in the process becomes much easier. Along those same lines, a receiver can avoid objections from one or more of the parties involved by negotiating the listing price for the property up front.

Another key element for a successful receivership sale is communication—early and often. Good communication helps to eliminate surprises for any of the interested parties in the transaction, which in turn minimizes the chance of anyone throwing a wrench in the works as the sales process progresses.

Receivers who want to sell a property in their possession should start with a letter to all parties with potential claims against the property, informing them of the intent to sell. An absolutely crucial point to remember—something that inexperienced receivers sometimes overlook—is to ensure that this letter is distributed to everyone who may have an interest in the property.

This includes not only the so-called “service list” (such as the lender and the property owner), but also the broader list of entities that may have a claim against the property. This list can be far-ranging, including subordinate lien-holders, the IRS and other local, state and federal agencies. For a receiver, it is worth some extra effort to identify even obscure parties that have some financial interest in the property. Putting in this work up front can prevent major problems later.

Good communication puts everyone involved at ease and helps them understand how the sale will affect their interest in the property. Typically, borrowers and junior lien holders will agree to the sale if there is little or no equity in the property after the lender’s first lien is satisfied. Where there are existing personal guaranties, the borrower will likely assent to the sale if the lender and borrower can reach an agreement regarding the guaranties.

Another absolutely essential element to a successful receivership sale is title insurance. Not all title companies will insure these types of sales, but many will. After locating a willing insurer, the receiver should ask the title company to review the proposed court order, followed by a request for a policy of title insurance based upon the recording of a receiver’s deed. As with the other elements of a successful receivership sale, this is a process that should be started as early as possible. Failure to secure this important coverage can leave a receiver flailing, as few buyers would be interested in a property without the protection of title insurance.

The receivership option provides innate advantages and can offer tremendous benefits for the lender, the owner and others: saving time and expense compared to other options, as well as preserving the value of the property, minimizing or eliminating potential future liability and losses for both the lender and the borrower, and other benefits.

For that reason, lenders who haven’t given the receivership sale option much thought in the past might well discover an excellent new pathway to successfully disposing of the distressed properties in their portfolios.

James H. Donell is a state and federal court-appointed receiver and CEO of FedReceiver, Inc., in Los Angeles, California. He can be reached at [email protected] or 310.207.8481.

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