Lenders And Secured Creditors Have A New Partner: Receivers For CRE Defaults
There’s a storm brewing in commercial real estate debt markets as property valuations adjust around rising interest rates and their attendant cap rates.
These changes are likely to ripple through CRE and they have already impacted sales volumes. Valuations will likely be the next shoe to drop, which could lead to some difficult conversations between lenders and borrowers.
Lenders and borrowers may end up clashing on how to proceed when a property is at risk of foreclosure. Instead of going through complex litigation to determine who is responsible for the property, a receiver can help settle disputes. A receiver is a court-appointed person who has a fiduciary duty to all of the parties to preserve the value and protect the property from going through any disrepair, financial loss or mismanagement and to hopefully preclude foreclosure or bankruptcy.
“More borrowers are open to working with receivers to help them resolve complicated lending situations,” MRK Resolutions principal Mark King.
MRK Resolutions, a Miami-based CRE disintermediation firm, focuses on providing receivership services for lenders and banks that have defaulted or otherwise troubled loans.
“Recently, we assisted a borrower who had an $8M loan on a complex development parcel,” he said. “The lender was threatening legal action and the borrower was facing multiple challenges. We assisted him by clearing up title issues, creating a market and exiting the asset without foreclosure or bankruptcy, both of which were in consideration at the time.”
King said that MRK has years of experience working out these types of CRE problems.
“We bring an unbiased approach to each situation, which helps us bring more logical solutions to the problem,” King said. “Sometimes borrowers can have emotional ties that can cloud good decision-making.”
King said that unlike during the Great Financial Crisis in 2008, today, Florida bankers and lenders have a new tool at their disposal, the Uniform Commercial Real Estate Receivership Act. This act helps lenders gain court approval for the appointment of a receiver to manage problems for all of the parties to a troubled loan. Notably, a receiver will control the cash flows and preserve the asset value, while protecting the secured creditor from any exposure to the liabilities that may arise from going on the title of a troubled property.
UCRERA empowers court-appointed receivers to solve problems, secure cash flows and conduct a sale of the property without going through the long and expensive process of foreclosure.
"Before this law was put into effect, there was no statute available to standardize the legal process, which created a more contentious environment around getting court approvals for a receiver to be appointed," King said. "Today, judges have this statute to provide them with clear guidance as to the appropriateness of such appointments. This also has the effect of limiting a defaulted borrower’s protests against a court-appointed receiver being implemented."
Florida was the 10th state to enact this into law on July 1, 2020, right in the middle of the financial chaos of the pandemic. As noted by the Florida Bar, it took four years to get Florida to sign the UCRERA, but it came at a much-needed time with many CRE properties either defaulting or at risk of default because people could not pay their rent.
It initially received pushback from members of both sides of the Business Law Section of the Florida Bar. However, BLS members like Executive Council Chair Leyza Blanco began to realize the effectiveness and necessity of such a statute due to the effect Covid was having on the economy, particularly commercial real estate.
UCRERA gives a more uniform framework and legroom to help make the most out of property distress situations. Miami attorneys Kenneth Murena and Amanda Fernandez acted as co-chairs of the UCRERA Task Force, which helped them lead a new pathway for Florida courts.
King said one of the keys to being a good receiver is good mediation with all parties while maintaining a focus on controlling cash flows and preserving the value of real estate.
“A court-appointed receiver is an excellent risk-mitigation tool for lenders as it relates to the foreclosure and bankruptcy processes,” King said. “Both of those processes are slow, expensive and reactive, while the appointment of a receiver is proactive, less expensive and can provide a faster and more efficient resolution to the situation.”
King said MRK Resolutions works diligently to identify problems, create consensus around a solutions-based plan and execute accordingly.
King referenced the summer memo from the Federal Deposit Insurance Corp. providing bankers with some guidance and forewarning about troubled CRE loans, and remarked how it’s a clear sign for lenders to start looking into the benefits of receivers.
“Clearly, the FDIC is anticipating troubles ahead for banks with high concentrations of CRE and their messaging is clear: Get ahead of the problems or we may soon be visiting a conference room near you,” he said.
This article was produced in collaboration between Studio B and MRK Resolutions. Bisnow news staff was not involved in the production of this content.
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