Commercial Real Estate Receivership 101

In an ideal world, commercial real estate investments would run themselves—the building is fully rented, the property management company keeps everything in order, and the investor’s only job is to look for additional properties that might make a good investment. Unfortunately, things don’t always run that smoothly—cases of partner or family disputes, portfolio liquidations, foreclosures, and other distressed real estate situations occur all the time, and the longer you’ve been in the real estate investment business, the greater the odds that you’ll eventually have to deal with one of the above situations.

In cases like these, the importance of quality receivership service cannot be understated. From managing the property, to collecting on accounts receivable, to completing unfinished work or required maintenance, the right receiver can make all the difference.

First, let’s define some terms. You may be wondering…

What is a receiver?

Legal records indicate that receivership practices may actually date back to 14th century England. When legal trouble arises between two parties each of whom has an interest in a property (e.g. lender vs. mortgage borrower, one investing partner vs. another), the court has the responsibility to ensure that the property is adequately managed during the period of litigation to ensure that the assets are preserved for the winning party. With the two parties focusing on the litigation, it’s not uncommon for the building to fall into neglect or for the party who has control of the property to attempt to strip it of valuable assets, which is exactly why the receivership option can be so valuable.

So, during litigation, one of the parties will usually request that the judge put the property “in receivership”, in which case control of the building will be turned over to a third-party neutral organization, the receiver. Crucially, the receiver doesn’t answer to either of the parties participating in the litigation, but to the judge. As an independent third party, the receiver is in a great position to look out for the best interest of the property.

The passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”) laid the groundwork for a resurgence of receivership services in the U.S., though the practice didn’t reach peak popularity until the real estate financial crisis of 2008.

So, what are the receiver’s duties?

The receiver can be appointed in a variety of capacities, depending on what the judge thinks the property needs. Almost always, the receiver evaluates the condition of the property upon takeover, then addresses any health and safety issues.

The receiver frequently also manages the day-to-day operation of the building, including collecting rents, managing maintenance and renovation projects, confirms that the building is adequately insured, and ensures that the building is sufficiently protected to prevent the liquidation of any building assets (this could be anything from technical equipment to raw materials such as piping) by either of the parties, or by someone else. As the receiver takes care of these duties, he is mandated to report back to the court and both parties about the financial and overall status of the property on a regular basis (usually monthly) throughout the litigation process.

The receiver often appoints a new property management company, and reevaluates how the property can be run better to improve the health of the assets. Often, with a quality receiver in place and a competent property management company, a distressed asset can get back to profitability while the litigation is still in progress.

In the particular case of foreclosures, the receiver also fulfills another crucial purpose: by taking control of the property, it saves the lender prior to foreclosure from having to be legally responsible for the property or liable for anything that may happen while the property continues to operate.

The intimate knowledge the receiver gains of the property can also be useful to the summary resolution of the litigation, be it through settlement or another agreement between the parties.

That same knowledge also makes the receiver a qualified seller of the property (in what is known as a receiver or partition referee sale), something that more lenders are turning to as a way to dispose of the property quickly. This is also a viable alternative for disputing partners or family members.

On the flip side, for investors, a receiver or referee sale can constitute a more lucrative purchase than a foreclosure, both because of the aforementioned improvements to the property made by the receiver, and because dealing with the receiver tends to be simpler than dealing with the lender of a property in foreclosure.

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At RMC Realty Advisors, over the last 15 years, our receivers and referees have completed over 200 receivership and referee assignments in the western United States. The fiduciary duty of our insured and bonded court appointed receivers is to protect, preserve, and enhance properties pursuant to instructions from State and Federal Courts.

Our Receivership Assignments Include:

  • Rents and profits receiverships for commercial and residential properties
  • Partition sales of real property resulting from partner or family disputes
  • Construction project completion
  • Business disputes and business dissolution
  • Estate and portfolio liquidations
  • Judgment enforcement

Our Superior and Federal Court Receivers:

  • Take control of real property and oversee day to day management and leasing
  • Identify and address health & safety issues
  • Collect accounts receivable and future rents as they become due
  • Verify and/or secure property and liability insurance
  • Incur expenses for the maintenance, repair, and care of the property
  • Implement management, leasing, construction, and disposition strategies, as approved by the courts
  • Prepare monthly accounting of income, expenses, and fees

If you’re a lender or a partial owner of a property that is entering into litigation, contact us today to start the discussion about the best way to protect your investment.