How do court-appointed receiverships work for distressed commercial real estate loans?

Some owners might imagine that banks like to foreclose, but commercial loan defaults are a reality in today’s real estate market, and it’s never a good spot for a lender. You do need to know that creditors often ask a court to appoint a receiver to cut losses, keep property value up, limit liability.

Receivers are neutral agents appointed by a court to protect and maintain assets such as property. Receiverships live in state and federal courts. Receivers are not employees of the creditor. Receivers owe their loyalty to the court, not the lender.

Courts appoint receivers for a lot of reasons, and nonpayment is just one. In California, Los Angeles court receivers come in for various reasons besides default on real estate, such as fraudulent transfers, winding up a dissolved corporation, fiduciary breaches, government enforcement, divorce, and judgment enforcement.

Receiverships have gotten popular as a way to manage defaulted, distressed assets. A solid working knowledge of receiverships gives commercial real estate brokers room to grow business.

If a receiver is appointed, the receiver is tasked with protecting, selling, finishing construction on, or holding the named assets until the court decides differently. Courts decide what receivers will do, so their duties vary, according to a list of duties set out in the court’s order. The receiver may be asked to do forensic accounting. Receivers may also conduct a court-approved sale.

In theory, anyone can be a receiver if the court agrees. What happens is that courts often pick professionals trained in the receivership rules local to their court. Being a real estate receiver of a CRE asset involves brokerage, development, management, and legal skills.

That popularity, with courts getting behind installing a receiver to protect complex assets like commercial real estate, helps CRE pros in several spots. Brokers with good property management, leasing, or sales training can find work in this side of commercial real estate.

Many receivers ask for an opinion of value, rather than an appraisal, which they need to list and sell the property. Sometimes they’ll ask a qualified broker to submit a broker opinion of value to help pick the listing broker, or for a value opinion before liquidating an asset. CRE brokers who can tell you the market rates for things like lease rates, tenant improvement allowances, rent bumps, lease concessions, and other points also help receivers do their job. A receiver might become an owner, developer, seller, consultant, or manager. Being successful here means adding value and building trust.

Competing to be listed broker for a receivership needs knowledge of the receivership, what might happen during the process, the legal points, the appeal period, and duties owed to creditors. A CRE agent who knows and maps out each part saves the receiver time.

Every receivership is different, but courts often go with some common ways to get the job done. Knowing the most common way for these cases to play out gives you a better picture of what to do or where you are in the process.

Receiverships start off inside lawsuits. Every receivership spins out of a dispute like breach of contract or foreclosure. Courts won’t let anyone request a receiver before filing a case.

Not every case asks for one. One party will raise the question, and the judge decides whether a receiver is needed in the case or not.

Either the plaintiff or defendant can make that request if they think a receiver is required, and the side asking should think hard for the best person for the job. Experience, background, and proximity to the assets play a big part here.

Once a proposed receiver is picked, they typically sign a declaration supporting their appointment, and the party then drafts papers for the court to start the appointment.

Receivers are the court’s agents, so either side can file a motion nominating their preferred candidate if there is some legal reason justifying the request. There are three ways to bring a receivership motion. It can be brought as an emergency motion, as a noticed motion with a non-emergency hearing date, or by stipulation when every party consents.

At the hearing, the court typically finds either that a receiver should be appointed, a receiver is not yet needed but could be, or not needed at all.

After the hearing, the judge signs the order naming the receiver and what they can and must do. Once the court has signed the order, the nominating party must notify the receiver and send over the signed order.

New receiver’s first steps usually involve filing an oath, and posting a bond, in an amount the court decided when the order got signed. No duties can start until that’s done.

The order signed by the judge tells them what to do, which depends on the facts and needs of each case.

Their Own Vocabulary

With CRE jargon around, outsiders struggle to join the conversation. Just like CRE talk makes sense when you know it, so does the talk of receiverships, which have their own vocabulary. Knowing the terms is proof you’re an insider, or becoming one.

The terminology below is a starting point, though the word lists in the real estate world are much larger and more extensive than that.

The court, by order, sets a bond amount that the receiver must post, unless it waives the bond. Until that’s done, the receiver is not qualified to serve. If a receiver is named without notice to the other parties (ex parte), the party requesting a receiver may also need a plaintiff’s bond.

For ex parte receiver appointments, the court will set a confirmation hearing. A careful receiver often refrains from doing too much until the appointment is confirmed.

Ignoring an injunction that you know of is often called contempt of court. The penalties can include fines, but that’s not the real pain - it’s the jailing of the violator that the court can order.

Appointing a receiver is done within the court’s equitable powers. The court hears the evidence and equitably decides. Without proof it’s needed, it won’t get approved.

Before a receiver is discharged, he or she will file one last report (final account) unless the parties agree to waive it. The filing includes an accounting and report of all transactions in the receivership. All parties can see the papers filed by the receiver. The court must approve the final account before discharging the receiver.

If you want to serve as a receiver, you must be happy to swear, under oath, that you will perform your duties faithfully under state and United States law. No agreement can exist between you and a third party that you’ll handle things a certain way or dispose of the asset in a certain way for them. To serve, the oath must be duly filed with the court.

A signed order of appointment, entered in the pending litigation, both appoints a receiver and sets out the scope of his or her powers and duties as receiver. When in doubt, the receiver applies to the court for instructions and even for new orders. Appointed parties are tasked with going along, and only the court’s order ends the receiver’s job.

Once approved by the court, a receiver’s certificate is a debt of the receivership estate that comes before most other liens, negotiable like a promissory note. Each time the court creates one and approves its validity, the receiver can use that to raise operating money for the property they manage. A receiver’s certificate ranks above the mortgage or deed of trust that got the receiver appointed in some situations.

Be aware that a receivership is a provisional remedy and not a claim, not pled in any complaint. State and federal court cases both can have a receiver appointed. It’s not like a bankruptcy, which runs only in United States bankruptcy courts under the Bankruptcy Code.

Assignments of rents inside deeds of trust are normal. This means you get the income while the payments stay current, and the assignment gives lenders the right to seek a receiver to collect your income once you fall behind. The assignment of rents, issues, and profits means the lender can sue and request that the court appoint a receiver to collect them. This is a real estate receivership.

Signed consent is a formal way for everyone to agree on something. Called a stipulation, this agreement must be approved by the court. Stipulated agreements help all parties because it saves time and money. So how can you win receivership business? There are four steps to move into receivership work.

There is a standard playbook to receiverships. Knowing it shows people that you’re trustworthy. Talking with experienced receivers and attorneys teaches more than just a list of words, but the process of a receivership, why the jargon matters, and what doing a good job involves.

Receiver listings sometimes have more flexible price or commission arrangements than standard listings. Get used to it.

Trade events and industry gatherings are often the best spot to demonstrate that you know something useful about receiverships and CRE. Those gatherings may be boring at times, but they’re a net plus.

Getting recognized credentials such as the CCIM designation show that you’re a pro at commercial real estate and not a dabbler. Commercial real estate is a crowded field, and a top designation can be a huge differentiator.

The niche of receiverships has complex legal issues that are vital to understand before you try it. Following the steps outlined in this article will give you a head start, and help you develop this field as an additional revenue stream in your brokerage.