Question: What should a receiver do when a property’s income can not cover expenses?
Answer: While certain obligations like taxes can sometimes be deferred until the property is sold (taxing authorities will sometimes grant a receiver better terms than a debtor), operating expenses need to be covered if the property is to remain open. If an income property cannot support itself, the receiver has two choices; either close the property or borrow funds to sustain it.
Closing is not the simple option it might seem. A closed property will still require money for insurance, security, upkeep and probably utility services. In most cases, closing also brings a loss of value and a lower ultimate recovery for the lender.
Question: What is the best way for a receiver to fund a property in such case?
Answer: If the lender decides to provide additional funds for the property, it normally has two choices; make an advance on the existing indebtedness or loan money to the receivership estate. The latter is usually recommended because additional advances may not be mentioned in the court documents and can cause confusion among junior lien holders.
The preferred way for the lender to provide funding for the property is by using a Receiver’s Certificate, which becomes a priority over all other final distributions, and noted as such by the court. Assuming that the lender does not expect full recovery on its original loan, the loan to the receivership est ate will be paid prior to others, including the lender’s original loan.
An additional benefit is that if or when income will allow, the receiver can repay that loan at any time, and not have to wait until the final discharge and distribution.
The issuance of a Receiver’s Certificate requires court approval because of its priority status. We customarily include such authority in the original Order Appointing Receiver. The court will allow it if the lender or receiver shows that it is vital to maintaining the property’s value. Judges who are unfamiliar with receivership actions may strike out that provision unless the receiver or lender’s counsel make a persuasive argument for the need.
The Certificate will be executed and delivered to the lender or its counsel, or sometimes held by the receiver when early repayment is anticipated. The interest rate merely needs to be "reasonable" which, in light of the circumstances, allows considerable latitude.
Question: If the lender chooses not to fund the property, what options does the receiver have?
Answer: While a receiver must act independently of the parties to the underlying case (usually a foreclosure action), and use his/her own business judgment, if the lender chooses not to make additional funds available, the receiver is forced to close the property. Debtors may mistake this as the lender "tellin g the receiver to close" and cl aim it as improper. Courts understand the distinction.
Trigild was appointed receiver over two condo conversion projects in Clay County, FL. The projects have a combined total of 454 units in various stages of completion.
Trigild closed several receiverships during November, including:
1. Condo conversion project in San Diego, CA
2. Hotel in Taos, NM
3. Hotel in McKinley County, NM
4. Hotel and restaurant in Abilene, KS
Trigild’s "Receivership vs. Bankruptcy" Traveling Seminar is coming to a city near you! Stay tuned for more information.