As published in the California Daily Journal on July 27, 2011:
By Gordon L. Gerson
Two plus years after the commercial meltdown we have dueling headlines – like dueling pianos – about the recovery in commercial real estate versus the increasing number of commercial defaults ahead, especially given the staggering number of commercial mortgage-backed security loans to mature in the years ahead.
What does this mean for the receivership industry? Conventional wisdom suggests a lot more ahead.
By now, most have attended Receivership 101 programs. We know the nuts and bolts. Two years of active receivership litigation has brought us to the understanding of a new reality: receiverships are the new hospice.
Lenders may never articulate it, borrowers may not like it, and some judges try to gravitate against the notion, but receiverships act like a hospice for borrowers and loans soon to be buried. Lender lawyers who, for receivership motions, submit briefs inked with indisputable facts and incontrovertible law, face borrowers’ pleas for mercy against what they argue may be death blows to their investments. However, no borrower of a commercial investment or commercial real estate loan is immortal. Borrowers who are 120 days from having half vacant properties go to foreclosure attempting to convince a judge that a request for a receiver should be denied, are simply trying to deny the lack of survivability of an investment.
There are telltale symptoms surrounding most cases ripe for receiverships.Yet deniability by borrowers – and sometimes courts – exists. Borrowers and their counsel try to create new meanings as to whether a particular commercial property may be given new life, and whether a defaulted loan can be revived or brought current, when the facts suggest otherwise. The following are some examples for when a receivership order should be granted:
Borrower has not made a mortgage payment in three months in the arrears. Property is more than 25 percent vacant; borrower does not have adequate capital to pay leasing commissions or tenant improvements for the vacancies. Borrower is more than 60 days behind on vendor payments. Utility shut off notices have been sent. Property taxes are delinquent. Tenant is not renewing leases and/or vacation. Health and safety issues arise because of borrower’s neglect. Environmental problems are unabated.
Yet in the face of all this, some borrowers will argue about the unfairness of the remedy and appeal to the court’s equitable power to deny a motion for a receivership even though the loan documents specifically provide that the lender shall have the right to an appointment of a receiver following a borrower default. And some judges – who either dislike the notion of receiverships or simply cherish their ability to do the equitable – deny that the receivership, like hospice, is for those borrower investments waiting to die. A distressed asset in its final days requires a receivership. By being in receivership, the receiver, as an independent agent of the court, will assure that rents are collected, the property is maintained, tenant issues are addressed, and health and safety issues or environmental problems, are being adequately addressed.
After an order for receivership is entered, most likely one of the following scenarios will take place:
A borrower will quickly file Chapter 11 bankruptcy. There are grounds, however, for a receiver to still maintain control of the property.
A borrower will give up the fight against death, and the lender will ultimately complete a foreclosure of the property.
The receiver will sell the property, sometimes with a short sale pay-off to the lender or the lender allowing an assumption of debt, with or without a loan modification, for a new borrower bringing new equity to the property.
Common to each scenario is the understanding that a borrower’s investment has gone bad, and an investment once loved has died. Soon to be dying are receiverships, a process where distressed assets and problem loans may be parked during the period that a lender exercises its rights (or “last rites”) allowed by law.
Gordon L. Gerson is managing principal of Gerson Law Firm APC, which has a national practice representing institutional and non-institutional lenders, and rated loan servicers, on all matters related to commercial real estate finance. He is a Fellow of the American College of Mortgage Attorneys.