Last year marked an extraordinary rise in defaults in unfinished housing developments and condominium construction or conversions. Not surprisingly, the rate of defaults continues its steady increase. In many cases, these projects are simply being handed over to lenders by developers who see no solution to their lack of sales. Sales of residential real estate remain sluggish, and as a result, we can expect to see these defaults rise in numbers through 2009. With this in mind, it is beneficial to examine the related issues and potential problems such loan defaults present for lenders and receivers.
Typically, by the time the default has reached the stage for the lender to pursue a foreclosure, the previous funding has been exhausted. The general contractor and many of the subcontractors have not been paid and are no longer working, and substantial portions of the project may remain unfinished. By this time, if the developer/borrower has decided to walk away, there will most likely be a need for protection of the property — including construction or repair work, maintenance of buildings and personal property, upkeep of “curb appeal” and prevention of deterioration.
Most often, there are a myriad of reasons why the lender may not want to foreclose, among them homeowner association issues, health and safety concerns, possible future warranty issues, environmental questions and other reasons to avoid coming into title. In these cases, lenders should seriously consider using a receiver, who not only shields the lender from liability exposure, but also from “deep pocket syndrome,” which inevitably emerges when dealing with various interested parties. The receiver gives the lender impartial third-party control of the asset, and also allows a quick start on assessing current status, determining operating expenses, planning options for optimal recovery and preparing the property for sale through appropriate strategies.
The receiver will apply for and maintain all necessary permits and licenses, verify that documents are being properly recorded, secure approvals, select and monitor vendors and contractors, and, importantly, assure that the project moves along carefully and swiftly.
The veritable minefield of issues that may surface with existing condo and homeowners alone presents complex problems that the lender will not want to be directly involved in. A receiver has the additional benefit of direct access to the court and, as an agent of the court, is given wide latitude to guarantee that value of the asset – the lender’s security – is maximized.
The Order Appointing Receiver defines the scope of responsibility and authority for the receiver to continue, terminate or complete construction as appropriate (and agreeable to lender). The prudent receiver will review the order carefully prior to appointment. This will help ensure that the appropriate points are included — including the ability to sell property “as is, where is” — and that the Final Order Discharging Receiver removes any potential further liability of the receivership estate or the lender for claims of construction defects, title issues and other liability.
With distressed real estate assets and related business enterprises, as with hotels, the receiver will restore or create an environment of order and professionalism to project management, operations, accounting and reporting that has deteriorated during the period preceding the loan default.
The receiver’s ability to immediately begin the process of marketing the property is critical in a period of rapidly declining values – and will ultimately generate higher returns for the lender. The traditional – and lengthy — sequence of default, filing of the notice, waiting the jurisdiction period, conducting the foreclosure, engaging a broker, marketing the asset for a reasonable period and negotiating the sale can be dramatically shortened, which also helps maximize loan recovery.
Trigild was engaged by the lender of a casual dining restaurant chain to provide a complete operational, physical and financial assessment of the franchisor’s operations and its corporate-owned restaurants.
Kelley McLaren of Trigild was appointed to the board of directors for the San Diego chapter of the California Receiver’s Forum. Ms. McLaren and Ian Gomez also completed the Loyola 3 certification on receivership practice and law.
Trigild is pleased to announce that it has opened a satellite office in New York City, enabling us to expand our East Coast presence. We also have regional offices in OR, AZ, NM, FL and GA.
Trigild was appointed receiver of a 56 unit apartment complex in Tempe, AZ and has authority to sell the units with court approval.