8 Reasons for CRE Receivers to be Appointed...Even if No Monetary Default Has Occurred

Posted by Charlie Dunlap on Oct 3, 2018 9:25:13 AM
Charlie Dunlap

Receiverships by RRA ConsultingEvents such as a downturn in the economy, a dispute among partners, or cash flow problems caused by new market competition, can affect the viability of an income property loan.  These real estate loans may need a “workout” by the lender so that the borrower doesn’t lose its property.  During the loan workout phase, it is critical that the borrower keep in full, open communication with the lender about their cash flow situation and plans to avoid a monetary default.  When a lender is dealing with a responsible, honest borrower, the lender is more likely to work with the borrower to help them get through a rough period. 

With that being said, even if no actual monetary default has occurred, there are a number of events that could precipitate the need for the appointment of an independent receiver.  Some examples of these events are:

1.  If there is litigation or internal disagreement between two stakeholders of the property

In any situation in which the property or the rights of parties need protection, a receivership is appropriate.  For example, if two owners of the collateral property sue each other, and the lender believes that the collateral assets are at risk of being depleted, there is usually no choice but to put the asset in a receiver’s hands.  At the resolution of litigation, the court can decide the proper disposition of the receivership assets.

Even if there is not ongoing litigation, a neutral, third-party receiver may be necessary in cases of internal disagreements between stakeholders.  Borrowers' internal stakeholder conflicts often cause delays, but generally the lender will not tolerate a borrower’s internal disputes to slow down the workout process.  The notice of intent to appoint a receiver is sometimes enough to encourage the borrower’s stakeholders to cooperate in the loan workout process.  If not, the appointment of a neutral, third-party receiver may be necessary. 

2.  If the borrower becomes uncooperative before or during the workout phase

A borrower acting in good faith will respond quickly to a lender’s request for information.  If during a loan workout attempt, the borrower becomes uncooperative or unresponsive, failing to reply in a timely manner or not at all, then it may be necessary that a receiver be put in place.

For example, “slow-walking” an answer to a lender’s request is often viewed as a delay tactic to give the borrower extra time to collect and stash away additional rental or business income. In order to avoid this potential situation, a lender will need a receiver to be put in control of all collateral as quickly as possible. 

3.  If the lender has a legitimate need for reliable financial information on the status of its collateral, and the borrower refuses to provide it

When the lender is not receiving reliable financial information that it is entitled to receive from the borrower, it will become necessary to obtain the correct information using a neutral, third-party source.

The lender may request that a “limited receiver” be appointed, who is capable of providing reliable financial information requested by the lender.  Such a “limited receiver” would have experience in the specific industry and understand the industry accounting and customs.  

4.  If the borrower/lender relationship becomes overly contentious and emotions have obstructed constructive communication

There are occasions when a borrower becomes overly emotional and sometimes combative.  At this point, the lender will find that very little constructive movement can be achieved by continuing to negotiate with the borrower. In order to remove emotion, it is oftentimes best to insert a neutral, third-party receiver.

The neutral, third-party relationship provided by a receiver, and overseen by a judge, removes most emotion from borrower-lender dealings and allows a judge to rule on any contentious issues. 

5.  If the borrower is not willing to allow the lender access to the property for legitimate appraisal, inspection, and/or environmental testing purposes

A lender does not have the right to enter a borrower's property without first obtaining permission from the borrower. In a situation where a difficult borrower is not willing to grant access, a decision by the lender to appoint a receiver to gain access to the collateral property will resolve the matter one way or another.  Access will be granted by either the borrower or by the appointed receiver.

6.  If the lender finds that the borrower’s word can no longer be trusted

If during a loan workout attempt, the lender believes that he can no longer trust the borrower to negotiate in good faith, or the borrower has been found to be untrustworthy based upon previous borrower misrepresentations, the appointment of a receiver will enable the lender to find out exactly what is going on with the collateral in question.

7.  If the lender believes there is evidence that the borrower has broken the terms of their loan

If it is clear to the lender that the terms of the loan agreement have been broken, the threat of a receiver being appointed may be enough to encourage a borrower to correct the situation.  If not, then the appointment of an independent, third-party receiver is the prudent next step to correct the situation.

8.  If the lender has reason to believe that funds are being misappropriated under the terms of the loan agreement

A receiver experienced in the specific industry will best understand the industry customs, “prudent person rules” and standard of care.  The receivership's purpose will not be to interfere with management direction but simply to verify facts. Such a receiver will provide a neutral, third-party analysis of not only the books and records, but also the appropriateness of each expenditure.

Again, it bears reiterating that frequently a receiver is thought of as a “last resort” once other solutions have failed.  This is a widespread misconception, as significant value can be preserved, costs avoided, and time saved if a receiver is appointed earlier in the process.  If any of the above red flags become apparent, consider the benefits that a receiver may confer before the situation spirals out of control. 

Should you have any questions related to receiverships, please email info@rracos.com

Topics: Receivership, Litigation

Charlie Dunlap
Written by Charlie Dunlap

Charlie Dunlap, a former partner of Trammell Crow, is the Founder and Chairman of RRA Companies. His more than 40 years of experience in the industry has involved the development, construction, rehabilitation, and management of assets valued at more than $2 billion. He has developed, built, or rehabilitated more than 10,000 housing units, managed over 11,000 apartment units, and managed or developed industrial, office, and retail properties in excess of half a million square feet. Mr. Dunlap has been named the Arizona Certified Property Manager of the Year and was presented with the Phi Epsilon Professional Award from Arizona State University.