Scotsman Guide - September 2010 Commercial Edition

By Bill Hoffman
President and CEO
Trigild

Receiverships 101
Learn why lenders turn to court-appointed third parties to manage assets
In today’s market, receivers play an increasingly pivotal role in all aspects of commercial real estate.
In fact, many commercial lenders are
showing a preference for receivership,
which can be crucial to repositioning
and marketing distressed assets and,
in some cases, selling the property be-
fore foreclosure.
A receivership is a proceeding in
which a court appoints an impartial
third party to take charge of a troubled
asset during a pending foreclosure ac-
tion. Lenders are increasingly turning
to receiverships when loan-workout so-
lutions fail or when a borrower simply
gives a property back.
If lenders leave a defaulting borrower
in place until foreclosure, the borrower
may allow the property to deteriorate,
diminishing its value. Because re-
ceivers often are involved in property
disposition — and the purpose of a
receivership is to protect assets while
maximizing returns — this approach
ultimately benefits prospective buy-
ers seeking opportunistic investments,
as well.
Any type of property can be placed
in receivership, from traditional real
estate holdings such as multifamily
housing, shopping centers or office
buildings, to properties with an enter-
prise component, such as hotels, gas
stations, restaurants and entertain-
ment venues. These properties may
involve a host of business and legal
issues — including liquor licenses,
franchise agreements, multiple bank
accounts and vendor agreements —
and require specific knowledge of the
business and its industry.
In all situations, receivers must se-
cure necessary approvals, permits and
licenses, in addition to ensuring docu-
ments are recoded properly. Other re-
sponsibilities may include selecting and
overseeing contractors and vendors.
Because many complicated issues
are involved in receivership, it is critical
that the appointed receiver have signif-
icant legal expertise.
As receivership becomes more es-
sential, commercial mortgage brokers
should be well aware of the process,
especially when helping buyers find fi-
nancing for their purchases of proper-
ties in receivership.
the property for a quick sale, or any
combination of these. If construction
is not complete, the receiver may work
with the lender to decide whether to
continue or suspend construction,
as appropriate.
A receiver also can help guard against
further losses to the property. This en-
tails striving for optimal returns while
preventing physical and financial dam-
age. To do so, the receiver maintains
oversight of all aspects of accounting,
including receipts and disbursements
and other financial records.
To make the receiver’s job possible,
the lender may, at its discretion, fund
operating losses to maintain or en-
hance the asset until reaching a sale or
other outcome.

Receiverships Vs. Bankruptcies

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 bank-
ruptcy 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 fore-
closure action to proceed.
To do so, the lender must successfully show why the debtor should not re-
gain possession of the property and why the bankruptcy court should leave
the receiver in possession. A common argument for removing a property
from the bankruptcy estate is the lack of any equity beyond the lender’s se-
curity and the absence of value to creditors.
Defining receivers’ roles
There are many forms of receiver-
ship. But most commercial lenders
and loan servicers deal with general-
assets receivers, which are appointed
to take over an entire business, or
rents-and-profits receivers, which take
possession of specific assets that se-
cure the loan and any income those
assets generate.
A limited receivership can be effec-
tive for continuing construction on a
partially completed job, with minimal
interruption, while also reassuring the
lender that a third-party fiduciary is
in control of the project. This is sim-
ply a modified version that allows the
receiver to take a more limited role as
long as certain requirements are met,
such as staying within budget and on
schedule and using funding only for
specified items.
Under these circumstances, the
lender no longer funds the developer
directly but provides the funds to the
receiver, who in turn reviews and ap-
proves all monetary requests and pays
all vendors and suppliers directly. This
allows the existing contractors, devel-
opers or both to continue their work
unhindered, while giving the lender
a third-party watchdog to safeguard
spending. The limited nature can re-
vert to a full receivership without
further hearing if, in the receiver’s judg-
ment, the agreement’s terms are not
being met.
Also, the asset’s location usually
determines the court jurisdiction in
which the action will occur. Receiver-
ship actions are typically filed in the
state court in the county in which the
collateral is found. State receiverships
are limited to state boundaries.
When the lender and borrower are
in different states or the business is
conducted in multiple states, receiv-
erships are conducted in the federal
district court. Typically, federal receiv-
erships offer greater flexibility and
cost-efficiency.

future warranty issues in a residential-
tract developments or condominium
conversions.
As an agent of the court, a receiver’s
liability is limited to the assets of the
receivership estate itself as long as the
receivership is properly conducted and
cannot be held personally liable.
In addition to limiting liabilities, re-
ceiverships also steer the eyes of ven-
dors, franchisors, suppliers and others
away from the lender’s pocketbook.
Unlike the business-owner, a receiver is
not required to pay pre-receiver debts
and as such, can provide a clean break
between borrowers and prospective
buyers. Although the borrower remains
the property’s legal owner, the receiver
has sole legal possession.
• • •
In addition to restoring order, a well-
managed receivership can help bring
value to assets, ultimately making
them more attractive to prospective
buyers and investors.
In the face of chaos, receivers can
bring an objective management per-
spective to the business. They can in-
still a higher level of professionalism
to project management, operations,
accounting and reporting, which may
have deteriorated in the period preced-
ing the loan default. These improve-
ments benefit the business and the
property well beyond the term of the
receivership. •
Maximizing value
When a property is headed toward
foreclosure, a court-appointed receiver
can step in to control operations, pro-
tect the value of all assets, monitor and
approve expenses, and determine the
best action. This could include ceas-
ing or continuing operations, preserv-
ing or liquidating collateral, preparing
Benefits
Receiverships are an increasingly vi-
able option for the time between de-
fault and foreclosure. Receivers often
can clear up issues of potential li-
abilities tied to health, safety and
environmental concerns, homeowners-
association regulations, existing liens,
franchise agreements, and possible

Bill Hoffman is president, CEO and founder
of Trigild, a distressed-property-manage-
ment, receivership and loan-recovery spe-
cialist headquartered in San Diego. Reach
him at (858) 720-6700 or bill.hoffman@
trigild.com.

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