Why a receiver is so important

Steve Spinell

Steve Spinell

Guest post by Steve Spinell
Principal of Kinzie Real Estate Group

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 goal: 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 using a receiver, lenders and/or borrowers have the ability to maximize property values, thus minimizing both parties’ losses, while also allowing for more control for a lender during the workout process.

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

If the property is a rental community, the receiver will notify the tenants of the change in management and provide contact information. The receiver will also collect all rents due and continue to collect the rent until the process is concluded. Evaluating the condition of the property and current rental rates, vacancies and buildout is important because value-add alternatives use property income to slowly buildout the project; the increase in revenue and NOI 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 make a full review of the asset and its condition, as well as any items belonging to the borrower. Then, based on the market conditions, the receiver may recommend strategic capital improvements that can be made to increase value. For a single-family home, for example, that could mean updating finishes and making any needed repairs to help it better compete with other homes in the area. In a multifamily development, it might mean the completion of a buildout using available funds, especially for projects 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 multifamily property, this could be done in several ways: selling the property as a whole to an investor or holding on to the property for a longer-term ROI. That would account for an increased ROI, therefore increasing 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 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 in reshaping public perception and recovering lost value.

With the court’s approval, the receiver may proceed with the marketing and sale of the property, if that has been deemed 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.

Sometimes, even when a receivership is in place, the owner of the defaulted real estate may still file a petition for relief through bankruptcy. That, however, does not necessarily mean the end of the receivership. Any parties with standing may continue the receivership if all creditors and equity holders would benefit from keeping the receiver in place.

In any situation, if a receiver’s has the ability to understand real estate markets and loan strategies to execute on a plan both the borrower and the 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.

Steve Spinell is principal of Kinzie Real Estate Group in Chicago. The company can be reached at 312-464-8800.

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