If you're behind on your loan payments, your lender may suggest the idea of a real estate receivership. With that in mind, you may be wondering what receivership is and what it entails for you as the borrower. We've created a guide on commercial real estate receivership below.
What is real estate receivership?
When a commercial borrower defaults on their loan payments, there is often an additional step before the lender takes foreclosure action. Most of the time, there is a clause in the commercial purchase agreement that allows for real estate receivership.
Receivership occurs when a judge grants a court order for a neutral third party, known as an appointed receiver, to take over the responsibility for the distressed asset. In most cases, the court-appointed receiver is in charge of taking over the day-to-day operations of property management. However, in some cases, it's also the receiver's responsibility to organize and oversee a receivership sale.
It's important to note that the receiver's duty is to do whatever is in the best interest of both the lender and the property owner. This individual or corporation will take direction from the court on how to proceed with receivership matters. However, as a general guide, they may be charged with the following tasks:
- Securing the property
- Collecting rents
- Managing leases
- Maintaining the property and making repairs
- Managing expenses
- Selling the property
The appointed receiver is often charged with updating the court on their progress. In exchange for their efforts, they often receive a fee.
What are the different types of receivership?
Now that you know more about what commercial real estate receivership is and how it works, the next step is to learn about the different types of receivership. In today's commercial real estate industry, there are two types of receivership that you need to know about.
Similar to a trustee in a bankruptcy proceeding, most court-appointed receivers are granted general receivership. This type of receivership allows the receiver complete control over the property owner's portfolio of assets. The receiver takes over the management and control of these properties and, if necessary, has the power to liquidate them.
Meanwhile, as the name suggests, the powers granted in a limited receivership are a bit more reserved. In this case, the receiver's appointment will only give them control over certain, limited assets in the property owner's portfolio while the rest of the assets remain under the control of the borrower.
Typically, the goal of a limited receivership is to help the borrower make better financial decisions regarding the property to avoid bankruptcy or foreclosure proceedings.
What are the pros and cons of a receivership?
The biggest benefit to receivership is that a receiver's appointment can often turn a distressed asset around. Most court-appointed receivers are experienced commercial real estate professionals, both in property management and receivership matters, so they often can get the property in better condition before putting it up for a receiver sale and therefore achieve a higher sale price.
Most of the time, receivership allows the creditor and borrower to avoid foreclosure proceedings entirely. This process is often quicker and cheaper than going through a foreclosure.
However, receivership also comes with some disadvantages. In particular, sometimes lenders and borrowers feel that receivership comes with a lack of control over their assets. The receiver's ultimate duty is to the court. While they do try to keep everyone's best interest in mind, they may follow strategies different from ones the borrower or lender may have prescribed.
In addition, while they may be able to turn the property around, receivers' services may cost more than any gain that they bring to the property.
The bottom line on commercial real estate receivership
At the end of the day, receivership is not often optional for the borrower. Typically, the lender will request that the court issue a court order to make it happen. If the judge does so, the borrower must adhere to any instructions given.
Still, receivership is often preferable to undergoing a foreclosure or bankruptcy. With that in mind, use this article to give you an idea of what to expect from the receivership process.