The Basics of the Receivership Process – Part III

By Alexandra S. Jackiw, CPM®, CAPS, C3P

A receivership provides an expedient legal framework for a lender to take action to protect a mortgaged property from waste and deterioration in value.  One of the most critical decisions that an asset manager will make when moving to gain control of a real estate asset that is in danger of default is the selection of the person that will serve as the receiver.  That individual will have broad rights and responsibilities to facilitate the continued operation of the subject property and, in the best case, to rebuild some or all of its value.

As discussed in Part I of this blog series, receiverships are governed by the Order Appointing Receiver. The order sets forth the custodial responsibility of the receiver over the receivership estate. The order is flexible, specific to the case, and broad enough to allow the receiver special or unusual powers that the receiver may require in a given situation. The judge who issues the order can define virtually any procedures, rules, mechanisms, etc. that the court deems appropriate under the circumstances.

However, even the wisest judge cannot foresee the myriad of issues that a receiver may confront as she works to stabilize operations on a property that has been placed in her care.  Any number of unique issues can arise that will require the receiver’s thoughtfulness, resourcefulness, and even creativity to resolve.  I’d like to share some of the singular situations that I have encountered during the course of my receivership work – now more than 120 different properties and still counting.

Emergency Receiver Order

There may be instances when a borrower’s actions are so egregious and detrimental to the viability of a property that a lender will go to court and make a compelling argument for the immediate appointment of a receiver, without the consent or involvement of the borrower.  While those instances are rare, the process of taking control of an asset can be uniquely challenging.  I showed up at a property in Tennessee several years ago with an emergency receiver order in hand only to find the office in disarray and no staff to be found.  As I walked the property with my takeover team I discovered the maintenance person loading equipment and computers into the back of his pick-up truck.  Also in his possession were rent checks and money orders – in some instances with the payee section of the check left blank.  Utilities had been shut off to several sections of the property and a number of residents were without electricity.  When embarking on this type of receivership assignment a strong takeover team is critical so that operational issues can be handled quickly.  Taking control of the asset immediately, developing a game plan, and establishing normal operations were critical to the eventual turnaround for this property.

Borrower Fraud

While most receiverships involve cooperation from all stakeholders to the process, occasionally the borrower will be a “bad actor” who has been stripping cash from the property and not keeping up with repairs.  I took over a portfolio of properties in Ohio not long ago where the residents were living in deplorable conditions and the borrower continued to collect hundreds of thousands of dollars in federal rental subsidy payments illegally.  The issues eventually came to the attention of city officials, the local U.S. Congressman, and, of course, the press.  Not only did it take time to navigate all of the regulatory hurdles with the Department of Housing and Urban Development, but I found myself testifying monthly before a city council committee on housing and public safety.  In addition to the financial considerations that needed to be resolved, HUD regulatory problems had to be addressed, and over 2,000 city code violations needed to be cleared.  In this assignment, stakeholders did not just include the lender and borrower, but city officials, politicians, Legal Aid, tenants’ rights organizations, and, of course, the ever-present news media.  The ability to communicate effectively with multiple people, often with conflicting motivations, was key to getting this portfolio to a place where it eventually sold – three years after first taking over the assignment.  I learned that taking the time to get some media training helped immensely with this particular receivership.

Security Concerns

Sometimes, the nature of the distress on an asset is not just financial but stems from a lack of enforcing rules and regulations at a property, causing it to quickly spiral out of control.  When there is criminal activity that goes unchecked in broad daylight a property can never recover financially until those concerns are addressed.  A property in Illinois presented some unique challenges in this regard that required some fairly stringent procedures to get control.  With the help of the police department and private security, a plan was devised to shut down all but one entrance to this 920 unit property, impose a strict curfew for all residents, and limit access to amenities.  Cars were also restricted from driving into the property if they did not have an authorized, property-issued decal displayed on their windshield.  Harsh?  Perhaps.  Effective?  Absolutely.

Insurable Losses Both Prior to and During a Receivership

If property damage has occurred on a property prior to the receivership, the receiver will be responsible for obtaining bids and making arrangements to complete the necessary repairs to protect the asset.  However, the receiver may not always have access to the insurance proceeds which may have been collected by the borrower but never turned over to the receiver.  A source of funds needs to be identified to complete the repairs.  More often than not the lender will have to advance the funds in the form of a loan to the property to protect the asset from further deterioration and to bring units back online.  I encountered a crew of carpenters working on a fire rehab at a receivership property in Kentucky that was doing shoddy work at best.  There was no contract in place for the work and, if there were specifications, they certainly weren’t following them.  Work had to be stopped, the claim researched, and eventually, a new bidding process was put in place to get the renovation project back on track correctly.

Unique Challenges Abound

There are so many other unforeseen situations that receivers encounter – vacant or sparsely occupied buildings, lawsuits, liens, bankruptcy filings by the borrower, unpaid real estate taxes that force a sheriff’s sale, cancellation of insurance, environmental issues, borrower petitioning to have the receiver removed – to name a few.  While circumstances arise in all aspects of property management, the myriad of ongoing issues that frequently confront a receiver make the work difficult and complex.  However, being able to point to an assignment that ended well and provided some measure of resolution for not just the lender and the borrower, but also the residents living on a property with numerous challenges, can be a rewarding aspect to a receiver’s work.

Winding Down a Receivership

Once the receiver has reached a point where the property she has been overseeing has stabilized, discussions begin with the lender about timing for the potential sale of the asset.  In some instances, the borrower may be in a position to redeem the asset, but more often than not, the asset is sold to satisfy the debt owed.  Frequently there aren’t enough proceeds from a sale to satisfy the debt plus any accrued interest, late fees, and penalties, but it’s usually the most prudent outcome, nevertheless.

The Order Appointing Receiver often gives the receiver authority to sell the asset while it is still in receivership, with the court’s permission and supervision.  In those instances, the receiver will engage a broker to market the property as widely as possible with the intention of obtaining the best price at the best terms for all parties.  During the sales process, the receiver does everything possible to facilitate the sale and ensure an optimal outcome.  Receivership sales generally occur when the lender prefers not to take possession of the real estate for any number of reasons.

Alternatively, the lender may choose to foreclose on the asset after a period of time.  If the foreclosure action is not successful and a buyer cannot be found for the property at a foreclosure auction, the lender will take possession of the asset as REO – real estate owned.  Eventually that REO asset will be sold by the lender, usually at a steep discount.

Whether the receiver completes the sale or the asset goes through foreclosure, each process leads to the orderly termination of the receivership.  The receiver’s sole remaining responsibility after facilitating the transaction is to complete a final report to the court documenting the disposition of the asset and accounting for all monies that were in the receiver’s possession.

Being a receiver involves hard work, dedication, creativity, and an ability to work through multiple complex situations regularly.  It is challenging work, but also exceptionally interesting and multi-faceted.  I often tell my friends and colleagues that I have learned more about managing real estate from my receiver work than from any other aspect of my long career in property management.  If you’re ever given the opportunity to work as a receiver, take the leap and give it your best effort.  When all is said and done, you will be able to look back and reflect on your efforts and, most importantly, know that you made a difference.