Understanding the Role of a Receiver

By definition, a receiver is appointed by a court to take control of and manage a distressed asset, and is often given full authority to decide how best to operate the property until bankruptcy proceedings are complete. The main goal is to recoup as much of the value owed as possible by collecting rents, leasing vacant space, making capital improvements and possibly remarketing the property.

While falling into financial hardship is certainly not an enviable position for a borrower, having a property go into receivership can often be a win/win for both the borrower and lender. By utilizing a receiver, lenders and/or borrowers have the ability to maximize property values, thus minimizing both parties’ losses.

Camisha L. Simmons (Simmons Legal PLLC; Dallas) noted in a past ABI Journal article that “[t]‌he secured lender opts to pursue a receivership rather than a bankruptcy proceeding because a receivership, among other things, generally costs less and allows the secured lender more control during the workout process.”[1] Her article also explained that “[w]‌ith respect to defaulted real estate projects, a receivership is commenced prior to the debtor’s bankruptcy filing.”[2]

Once the courts have named a receiver, that company or individual will begin by securing the asset and ensuring that it meets all safety requirements. All operating assets, such as bank accounts and utilities, need to be accounted for and taken custody of as well.

If it is a rental property, the receiver will notify the tenants of the change in management and provide contact information. This person will also collect all rents that are due and continue to collect the rent until the process has been concluded. Evaluating the condition of the property and current rental rates, vacancies and build-outs is important because value-added alternatives use property income to slowly build out the project; the increase in revenue and net operating income would benefit both the lender and borrower on valuations. Third-party property management may need to be retained, unless a receiver-affiliated company can provide those services.

Next, the receiver will need to make a full review of the asset and its condition, as well as any items belonging to the borrower. Based on market conditions, the receiver may then recommend strategic capital improvements that can be made to increase value. For example, a single-family home could mean updating finishes and making any needed repairs to help it better compete with other homes in the area. In a multi-family development, it might mean the completion of a build-out using available funds, especially for projects that were left unfinished during the recession. Certain improvements may require court approval, depending on cost and scale.

As the improvements are being made, it is up to the receiver to determine the best way to boost the value of the asset. In the case of a multi-family property, this could be done in several ways, including selling the property as a whole to an investor or holding onto the property for a longer-term return on investment (ROI). This would account for an increased ROI, which would therefore increase value to the eventual provider.

Depending on the type of property, a receiver may recommend a rebranding or marketing campaign to help reposition the asset in the public’s eye. For rental and for-sale housing communities that endured negative publicity during the recession, a new name and/or positive media coverage about planned improvements can go a long way toward reshaping public perception and recovering lost value.

With court approval, the receiver may proceed with the marketing and sale of the property, if that has been deemed to be the best financial move. As with property management, a receiver may need to hire a third party to sell the property if it is unable to offer that service directly.

There is always the possibility of the owner of the defaulted real estate could file a bankruptcy petition for relief. In her article, Simmons also explained that in a typical situation, “[t]‌he receiver with knowledge of the bankruptcy must also ‘deliver to the trustee ... any property of the debtor held by or transferred to [the receiver].’”[3] However, her article is focused on the mechanism under § 543‌(d) of the Bankruptcy Code, stating that “the debtor’s bankruptcy filing does not necessarily mandate that the receiver turn over the keys to the property to the debtor. The secured lender or other party with standing may seek the continuance of the receivership if all creditors (and equityholders if the debtor is solvent) would be better served by keeping the receiver in place.”[4]

In any situation, if a receiver has the ability to understand real estate markets and loan strategies to execute on a plan, both the borrower and lender stand to gain. The borrower’s liability will be reduced or possibly eliminated altogether, while the lender will benefit from the protection of the asset and, ideally, an increase in value.