With an outsized number of commercial real estate loans set to mature in 2024 and many property owners struggling to meet their debt obligations due to rising interest rates, increased vacancy, and declining valuations, the timing of SIOR's educational session on receivership at the Spring 2024 Event at Amelia Island couldn't have come at a better time.
The session, “When the Receiver Becomes the Quarterback,” was moderated by Michael Feuerman, SIOR, an attorney and tenant rep broker for South Florida-based Berger Commercial Realty. The panel of experts included commercial real estate attorney David Blattner of Greenberg Traurig; Ann Hambly, founder & CEO of borrower advocate firm First Service Solutions; Tom Dwyer, vice president and director of receivership services for Transwestern; and Lloyd Berger, SIOR, founder & president of Berger Commercial Realty, who has served as a court-appointed receiver for more than 150 distressed properties throughout the state of Florida.
WHAT IS RECEIVERSHIP?
There is no standard set of receivership rules, and courts apply varying standards regarding receiverships. A dozen states have adopted the Uniform Commercial Real Estate Receivership Act (UCRERA), which provides a comprehensive set of rules and procedures governing the receivership process, and others have adopted similar guidelines, but it varies from state to state. Federal court receiverships are governed by another set of rules. What follows is a general overview:
During a foreclosure or other legal action, where commercial real estate or other property can be sold to satisfy a judgment, the property owner typically retains possession until there's a foreclosure sale or some other resolution of the lawsuit. However, if the owner's actions allow the property value to decline or the owner is improperly diverting funds, the lender can request that the property be placed in receivership. Receivership is a legal process in which the court appoints a neutral third party — the receiver — who is entrusted with the custodial responsibility over a property pending the outcome of litigation. The receiver takes immediate possession and assumes all operational aspects of the property, including collecting rents, maintaining and repairing the property, managing existing leases and entering into new leases, ensuring that contractors and service providers are paid, etc., until the lawsuit is resolved.
“The receiver is there to protect the property owner, the lender, and the property itself. They're not representing one side or the other,” said Feuerman. “The owner may not care because they put, say, 10% down, and they have a non-recourse loan, so they may be taking the money from tenants and paying off their car loans or paying themselves, but they're not putting the money into the property. But the lender certainly cares, so receivers are there to try to stabilize the property, preserve value, improve it, and make sure it's running properly.”
RECEIVERSHIPS ON THE RISE
Dwyer and Hambly said they are seeing a significant increase in receiverships due to office market vacancy issues, increasing interest rates, and the lack of refinancing options. Hambly believes the trend will likely continue. “We don't know what the next couple of years are going to look like as far as who comes back to the office and who doesn't, and that's why a lot of owners are saying – and I’m hearing this across the board – ‘If it's a non-recourse loan, I'm not going to put any more money into the property. I'm just going to hand it back.’ So I think we're going to see a lot of that,” said Hambly.
If you’re an agency broker, and your client is faced with the potential receivership, you can help guide them to a borrower’s advocate because they may not even know that the service exists.
BENEFITS OF RECEIVERSHIP
While property owners may take a negative view of being placed into receivership, there are actually a number of benefits for both the lender and borrower. “It might surprise you to know that as a borrower advocate, I'm constantly recommending borrowers to agree to proactively get a receiver in property through the courts,” says Hambly. The reason she recommends the strategy is that although non-recourse loans mean the borrower has the option to hand the property back to the lender, “there are lots of ways lenders can make the loan recourse,” including nonpayment of taxes or insurance, liens on the property, or clear signs of waste by the owner. If the owner has an empty building and cannot generate income from the property, they have no way to pay those expenses.
“So the only way the owner can avoid paying those expenses out of pocket is by having the lender pay the expenses for them,” said Hambly. “And most of the lenders we deal with — all the CMBS servicers — will only do that if there's a court-appointed receiver in the property, so the benefit to an owner having a receiver in the property is that that receiver will then cover the expenses as opposed to the owner.
Hambly and Dwyer also emphasized the advantages of having a CMBS loan with a servicer in place versus a bank loan, as CMBS funds typically have more capital available for a property in distress. “The place where the money comes from (with CMBS loans) is the master servicer…and they have endless amounts of money to advance for tenant and property improvements — up to 90% of the value of the property,” said Hambly.
There are other benefits as well. To begin with, the court-appointed receiver acts impartially in the best interests of both the borrower and lender rather than favoring one side. Since the receiver's role is to protect and potentially increase the property's value by properly maintaining it, receivership prevents waste and preserves asset value, which in turn can reduce the borrower’s liability if the receiver is successful.
WHAT BROKERS SHOULD KNOW ABOUT RECEIVERSHIP
Dwyer told the gathering that “brokers and vendors don't want to go near a receivership property because of concerns about being paid.” Still, the panelists stressed that there were opportunities for brokers willing to engage with receivers, provided they proceed with caution. Feuerman advised that brokers doing business with receivers should first have their fee agreement with the receiver approved by the court to protect themselves and to have their authority to act on behalf of the receiver approved by the governing authority “because you don't want to spend time on these properties and then find out that the court won't approve the sale or your fee, for various reasons.”
The place where the money comes from (with CMBS loans) is the master servicer…and they have endless amounts of money to advance for tenant and property improvements – up to 90% of the value of the property.
For brokers seeking opportunities with receivers, Feuerman suggested they work to gain a better understanding of the receivership process. “If you’re an agency broker, and your client is faced with the potential receivership, you can help guide them to a borrower’s advocate because they may not even know that the service exists,” said Feuerman. Investment sales brokers need to be familiar with the process “because if there's going to be court oversight, they're not going to be dealing with the typical owners; they’re going to be dealing with the receiver if and when they’re going to sell the property, and they have to understand the rules and the process of getting court approval of their listing agreement and court approval of the sale.”
For tenant reps brokering a lease agreement for a client in a property that may be headed for receivership, Feuerman and Blattner advise, whenever possible, getting a subordination, non-disturbance, and attornment agreement (SNDA) so that the client’s lease cannot be disturbed if the property is sold in receivership. “Protecting yourself and protecting your client should be at the top of the list,” said Feuerman.
THE VALUE OF SIOR CONFERENCES
In a follow-up discussion after the conference, Feuerman emphasized that while receivership may not be the sexiest of topics, it’s precisely the type of content that provides SIORs with tools to excel. Feuerman is the chair of the SIOR Tenant Rep and Corporate Services Member Group Steering Committee and former chair of the Office Member Group Steering Committee and helps plan the conference content. “We try really hard to plan content that is relevant, timely, helpful, and educational for our members because that's what they're coming to these conferences for,” says Feuerman. “They want to learn and to grow, and they want new tools in their toolbox that will help them make money and do right by their clients.”
The Fall 2024 Event will be held in October in Los Angeles and will feature topics such as:.
- Retaining Tenant Rep Clients in Today's Ultra-Competitive Environment;
- Transform Your Investment Game: Harnessing AI for Smarter Transactions;
- ReUse & ReImagine: Finding Opportunities for Surplus Office Space;
- and much more!
To see the full schedule of events and to register to attend the legendary fall event with more than 1,000+ of the best brokers in the business, visit sior.com/hollywood.
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