Question: We provided funding for a well-established developer to convert some 1970’s era apartments into state-of-the-art condominiums. With the current dismal state of the real estate market, the developer is now defaulting on the loan for this partially completed job. It makes economic sense to complete this endeavor, but we can’t imagine a new developer coming in with no track record on the project. What are our alternatives?
Answer: For many reasons, the developer who has, or will be, defaulting on the loan, may be the most qualified source for completing the project. For example, the existing developer knows the job, contractors involved, materials, sources utilized and the project’s work history, all crucial to its efficient completion. Bringing in another developer or contractor, even of equal or superior skill, can be time consuming and ultimately very costly.
So what is the solution?
In some circumstances and certainly with the advice of the lender’s legal counsel, the use of a "Limited Receivership" can be an effective way to continue construction with minimal interruption, while also providing reassurance to the lender that the project is under the control of a competent third-party fiduciary. A "Limited Receivership" is not a specific legal remedy, but simply a modified receivership that allows the receiver to take a more limited role as long as certain requirements are met, such as staying within budget on a schedule and using funding only for specified items. In short, under these circumstances, the lender no longer funds the developer directly, but provides the funds to the receiver, who in turn reviews and approves all the developer’s monetary requests and directly pays all vendors and suppliers. This allows the existing contractor and/or developer to continue their work unhindered, while providing the lender with a third party watchdog to safeguard spending.
The Order Appointing Receiver will differ from the typical scenario, in that the receiver’s authority is limited until certain specified actions or events occur – such as a default by the developer on one of the requirements included in the order. In such cases, the receiver can exercise greater control over the project. The change in level of authority and the triggering events should be outlined in the Order Appointing Receiver, so the transition is seamless and immediate. The most likely scenario is to switch from a limited to a normal receivership, where the receiver takes full possession of the property.
Ultimately, this limited receivership acts as somewhat of a forbearance, but with substantially more control built in. In a typical forbearance, the lender has limited control over subcontractors and vendors due to lender liability issues. The receiver can remain in place until completion of construction or even until the last unit is sold, depending on the lender’s preference, and the lender can still proceed with the foreclosure. Since the receiver’s aim is to do what is in the best interest of the property, the limited receivership can give the lender all of the benefits of a forbearance agreement – with the added comfort of more control and stability.
Jason Hull is the most recent addition to the Trigild team. As asset manager / business development director, Mr. Hull is responsible for maximizing value of Trigild-managed real estate assets and developing new business opportunities for Trigild. Mr. Hull has extensive experience in mixed use entitlement and development projects. He also served over six years as a Navy SEAL where he was decorated for valor in both Afghanistan and Iraq. He is a graduate of the U.S. Naval Academy and earned his MBA at Duke University.
Trigild opens the Holiday Inn Ontario Airport. This brand new hotel is situated on two acres less than a mile from the Ontario, California Airport and one block from the Ontario Convention Center. It features 180 beautifully appointed guest rooms, an outdoor pool and Jacuzzi, state-of-the-art fitness facilities, and over 5,000 square feet of meeting space.
Forbearance: n. 1. The act of refraining from enforcing a right, obligation, or debt. Strictly speaking, forbearance denotes an intentional negative act, while omission or neglect is an unintentional negative act. 2. The act of tolerating or abstaining. — forbear, vb.
Black’s Law Dictionary (8th ed. 2004), fiduciary
Third Party Fiduciary: Someone other than the principal parties who is required to act for the benefit of all parties on all matters within the scope of their relationship; someone other than the principal parties who owes to another the duties of good faith, trust, confidence, and candor.
Legal Remedy: A remedy historically available in a court of law, as distinguished from a remedy historically available only in equity. · After the merger of law and equity, this distinction remained relevant in some ways, such as in determining the right to jury trial and the choice between alternate remedies.