When Borrowers Default, Receivers Step In To Keep Things Running

The coronavirus pandemic has shone a light on a long-established yet little-discussed role in the world of real estate: receivers.

Shuttered retail centers, hotels seeing historically low occupancy rates, restaurants facing uncertain futures — as the commercial real estate world continues to face unprecedented upheaval, receiverships are going to be on the rise, and lenders need to make sure they are using the best receivers who can keep their assets secure. 

Receivers are individuals appointed by courts or lenders to take over the management of a property from borrowers who have defaulted on their loans. They can often mean the difference between keeping a property safe during foreclosure or walking in to discover frozen pipes and flooded basements. 

“Receivers are an invaluable tool to manage and preserve your asset while finalizing foreclosure,” said Robert D. Owens, president and CEO of Owens Realty Services, a privately held national commercial real estate investment and management company. “In times like these, they are more crucial than ever.”

Owens Realty Services offers a wide range of receivership services to help ensure that properties are safe and operational so lenders can feel confident that they are in good hands. Bisnow recently spoke with Owens to learn more about how the pandemic has impacted the CRE market, the rising importance of receivers and how Owens Realty Services can help. 

Bisnow: The pandemic and current economic environment have impacted almost every facet of real estate. What types of impacts have you noticed, specifically? 

Owens: The hospitality industry will have the most challenging road to recovery. Hotel occupancy fell catastrophically from a tourism boom to the lowest rates in the last 25 years. 

Many unpredictable variables will continue to challenge reopening and business continuity plans for significant hospitality groups, including hotels, travel centers, theme parks, sports venues, golf courses, cruise ships and restaurants. Their business will rely on the ability to regain the trust of travelers by instilling comfort and safety. If they’re not successful, hospitality investors financing development or acquisitions through commercial banks will continue to default on mortgages at an increased rate. 

Bisnow: Do you think there will be a rise in receivership appointments? 

Owens: Given the current economic and health crisis, there will be a definite rise in receivership appointments, particularly in hospitality and retail. 

As hospitality and retail companies continue to experience significant profit loss, they will be forced to close their doors, resulting in mortgage default. In recent years, commercial mortgage documents have awarded more power to the lender eliminating the need for court-appointed receiverships in the event of foreclosure. Lenders can take repossession of the facility, including appointing their own receivers. Mortgage brokers and lenders will rely on adaptive reuse to retain asset value.

Bisnow: What are some of the responsibilities of a receiver? 

Owens: Upon mortgage default, the lender's priority will be to secure the asset and protect their income flow into the future. The lender will immediately expect the receiver to change the locks, secure operating accounts, and retrieve all property-related documents from the borrower. The receiver must make regular financial reports to the courts as outlined in the receivership order.

The receiver will establish themselves as new management, establishing relationships with current tenants, service contractors and the local government agencies. They are responsible for managing current leases, executing new leases, collecting rent, negotiating property taxes and retaining service professionals.

Bisnow: Where do people typically find people to act as receivers?

Owens: This is where we can help. Owens offers comprehensive receivership services from rent collection to marketing and brokerage services. Our experienced team of facility managers develops unique operations plans for each building that are effective and efficient. We combine industry best practices with modern solutions to establish maximum life cycles for critical capital investments, a healthy and clean environment for all building tenants and visitors, as well as substantial cost savings.

On average, we save our clients 10% to 20% in facility operating expenses while at the same time improving management operations. Our team is bonded and insured to deliver accurate and timely financial reporting. With the knowledge and mobility to seamlessly transition sophisticated real estate investments, we are uniquely qualified to execute receivership services.

Bisnow: What are the benefits of transferring property management over to a receiver?  

Owens: Protection is the most significant benefit of transferring property management to a receiver. Protecting the asset value, including the physical-mechanical plant, will ensure the highest chance of recovering the lender's funds and procuring future sales. The physical building constitutes 80% of the total equity. 

In a mortgage default event, a borrower will likely stop paying bills, exposing the facility to gas and electricity shut-off and liens against the property. Frozen pipes or mold due to moisture accumulation have the potential to destroy the value of a building. Recent studies by the Office of Policy Development state that abandoned properties lose as much as 8% in property value and have a 15% higher rate of violent crime within 250 feet of the property.

Many insurance companies will not cover damage to an abandoned building. Building mechanical systems require continuous maintenance and monitoring to protect warranties and operational efficiencies. A receiver will conduct a formal facilities assessment and create an asset management plan to make necessary repairs, identify cost savings and implement operational efficiencies. 

Bisnow: What are some of the challenges associated with receivership? 

Owens: Receivership has come a long way in recent years. Historically, the lender could wait six to eight months before overrun courts could appoint a receiver, exposing the asset to greater risk. Loan agreements today typically offer more protection to the lender. The document allows lenders to contact tenants and assume operational responsibility immediately upon default. 

This feature was produced in collaboration between the Bisnow Branded Content Studio and Owens Realty Services. Bisnow news staff was not involved in the production of this content.