Lenders, special servicers and financial institutions are now finding themselves in a very difficult position with new potential liability exposures. Although they may hold a form of security, most lenders (particularly financial institutions) are not in the business of being landlords, developers, contractors, operators or property managers.
The pending collapse of the commercial real estate market is going to further burden CMBS servicers. The biggest concern is that traditional foreclosure may trigger unforeseen problems including insurability, liability, claim exposure, tenant management (and retention) and construction management and construction defect issues.
While there is no cure-all solution, it has become apparent that the appointment of a Receiver is a viable avenue for preserving, managing, restoring, completing and, ultimately, disposing of certain real property assets. Further (and, if necessary) a Receiver can facilitate, through the court, the restructuring of existing debt-converting a non-performing loan into a new performing loan.
Non-judicial foreclosure guarantees that the lender will become fee title holder of the foreclosed distressed real property. All of the costs, liabilities and problems associated with that property will now become the burden of the lender. If the property is in the midst of construction, the burden and responsibility of completing construction or abandoning it, lies with the lender after a foreclosure.
After foreclosure, if the real property is a going concern, maintenance, tenant management and lease renegotiations (popular today) will be in the hands of the lender/servicer (or its designee). This creates multiple avenues of lawsuit exposure for servicers and lenders. While the laws are complex, it is unequivocal that lenders/servicers will be seen as target "deep pockets" in future litigation by plaintiffs' attorneys.
The Receiver's role as an officer of the Court protects the asset by providing Court oversight and approval of the Receiver's business decisions - providing the lender or financial institution with insulation from many of the claims and hardships they would have inherited had they followed the traditional route of foreclosure and ownership.
In instances where there are multi-unit structures, multiple tenants, incomplete construction, code violations or other unique problems with a particular parcel and its structure, the appointment of a Receiver provides "insulation" to the lender/servicer from certain claims and responsibilities. Those responsibilities are shifted to the Court, through its neutral, the Receiver.
A Receiver can operate, under the Court's supervision to resolve these unique problems and, ultimately, "clean-up" collateral for foreclosure or sell the property through a court approved sale process. Each asset must be evaluated on a case by case basis to determine what avenue, including the appointment of a Receiver, is best for that particular asset.
The appointment of a Receiver can facilitate the following: