Property Sales in Receivership: Alternative to Foreclosure on the Increase

CRE Finance World, Summer 2012

Property Sales in Receivership: Alternative to Foreclosure on the Increase Bill Hoffman President/CEO Trigild D up to 2008 have yet to be resolved. These loans mature if their view of the next few years remains gloomy. If the court willRoughly $22.5 billion in CMBS loans matured in 2011 and thatnumber could reach $50 billion in 2012. Certainly some of thesecan be extended or adjusted to avoid foreclosure, but we may seelenders and servicers decide to deal with the pain now — especiallyespite recent improvement in the commercial real estate(CRE) market, there are many indicators that suggesta new wave of defaults is looming. In fact, roughly $1.7trillion in CRE loans made in the “good” years leading over the next few years and are unlikely to be refinanced because grant the receiver authority to sell the property, a CMBS special the properties have no equity and the mortgage debt far exceeds servicer gains the benefit of any earlier sale at less expense and property values. In these cases, borrowers have continued to make greater return. timely payments in hopes of a turnaround in the economy soon enough to raise values and loosen commercial lending — or attract Indeed, a primary reason for the surge in receiver sales: the need additional equity partners. for speed. When a loan goes into default for non-payment, the lender or servicer may have to wait many months — even years — before After any protracted slump in commercial real estate, lenders and they can gain control of the property and sell it off their balance servicers tend to darken their view of the near future and can be sheet as owned real estate (REO, ORE, OREO). In a declining expected to be less patient in dealing with further bad news. We market, a drawn out sales process is especially problematic and can expect that workouts will continue to be difficult, and that translates into properties with little or no cash flow, and owners bankers will have less patience in liquidating secured assets (CRE) who are unwilling or unable to continue to go out of pocket for to recover what is today’s value rather than future hope money. no foreseeable benefit or equity return. That scenario means that properties may be considerably damaged in value, as marketing With this in mind, lenders are increasingly asking courts to appoint expenses, maintenance, labor costs, property and other taxes, an independent third party as receiver and agent of the court to franchise requirements for hotels, etc., become delinquent. In take possession and control of the secured asset (property) until addition to the physical damage, reputation in the market can a foreclosure or other solution can be accomplished. At least the also be marred. lender can then, if necessary, provide funds to the receiver to avoid further damage to the assets until the lender or servicer gains both The above scenarios and conditions in U.S. CRE are further possession and ownership. exacerbated by our general economy and the uncertainty of other global markets. Any optimistic remarks from the Federal Reserve Historically when workout solutions failed, lenders would then have been carefully tempered with many ifs. simply foreclose on the security for the loan and then sell the asset. However, during the foreclosure process the borrower may The ability to expedite the sale, as well as the capacity to properly allow the property to significantly deteriorate, diminishing the value maintain an asset and allow the lender to avoid the chain of title, of the asset. For this reason, an industry trend toward the use of are key factors in the increasing participation of receivers in the receivers has emerged. disposition process. Time is Not on a Lender’s Side Indeed, with a timely sale, the price potential is frequently improved As lenders move swiftly to unload properties that serve as collateral — as is the perception of stability, reducing the amount of time for loans gone bad, we have witnessed a dramatic increase in the vendors, customers and employees have to fret about their future. amount of CRE being sold by court-appointed receivers. Trigild Additionally, a receiver can protect and maintain any business alone, as a receiver, helped facilitate the sale of roughly $320 million enterprise value, as with hotels and restaurants, which in some in CRE during 2011. We have also seen the pace of loan sales case has more value that the real estate itself. increase of late, but most of these portfolios contain diverse property values and are selling at great discounts. CRE Finance World Summer 2012 58


CRE Finance World, Summer 2012
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