Advantages & Disadvantages of Deed-in-Lieu of Foreclosure for Banks

Posted by admin | Articles | Tuesday 15 September 2009 10:12 am

By Robert P. Bayer, MBA & CPA

Among several possible remedies a bank may employ in dealing with delinquent loans and the assets that collateralize them is the “deed-in-lieu of foreclosure.” A deed in lieu transaction is a conveyance of the title of the collateralized asset by the borrower to the lender, whereby the lender agrees not to sue the borrower in a foreclosure action.

There are several reasons that a deed-in-lieu of foreclosure may be advantageous to a bank:

  • 1. Deed-in-lieu transactions are less expensive than are foreclosure actions.
  • 2. Deed-in-lieu transactions, for the most part, have a faster timeline then do foreclosures.
  • 3. By gaining control of the asset in a deed-in-lieu transaction, the lender can direct its operation, obtain all of its income, and put the asset on the market more quickly.
  • 4. If tenants are part of the asset, the bank can solidify and maintain the value of those tenancies.
  • 5. The bank avoids the risks of litigation.

There are several disadvantages of deed-in-lieu transactions of which bankers should be aware:

  • 1. Deed-in-lieu transactions do not eliminate junior liens on the property as foreclosure actions do. The bank takes back the property subject to all validly filed liens. If the borrower is cooperative, and the asset has significant junior liens, a voluntary foreclosure may be a less costly method of dealing with the liens against the collateralized asset.
  • 2. Typically for deed-in-lieu transactions, the borrower, in giving back the property, seeks to be released from the personal guaranty on any shortfall. If the borrower has significant personal assets, it may not be in the bank’s best interest to release the borrower from his personal guaranty.
  • 3. The bank takes back the property in “as is” condition. The bank should perform the same due diligence a prospective buyer would perform, including title review, environmental testing, surveys, and zoning. Additionally, it may be necessary for the bank to get an assignment of any leases as well as any personal property and equipment that is used in connection with the operations of the asset, which is to be conveyed to the bank in the deed-in-lieu transaction.
  • 4. The bank may be required to pay for all of the borrower’s unpaid utility, insurance, supplies and maintenance bills. These bills are not extinguished in the deed-in-lieu transaction. The lender should make sure that any unpaid bills are addressed in the deed-in-lieu agreement.
  • 5. There is no standard deed-in-lieu agreement.

Bankers should consult with their attorneys and strategize as to the best result in dealing with a troubled loan and the asset that collateralizes the loan. There is no one size fits all. A bank needs to know as much as it can about an asset and its encumbrances, before deciding on its foreclosure strategy.

Coldwell Banker Commercial Griffin Companies is poised to assist banks in managing, operating, leasing and disposing of real estate owned and operating assets.

Robert P. Bayer, MBA & CPA
Vice President – Special Asset Solutions
Coldwell Banker Commercial Griffin Companies

Advantages of a Court-Appointed Receivership for Banks to Handle Troubled Loans

Posted by admin | Articles | Friday 4 September 2009 9:20 am

By Robert P. Bayer

Banks have several remedies in dealing with both the loans that are delinquent and the assets that have been put up as collateral for these loans. Among these remedies are:

1. Deeds in lieu of foreclosure. This is a transaction whereby the borrower exchanges the deed of the loan collateral (commercial real estate, perhaps) in exchange for an agreement with the bank that the bank will not foreclose on the property. The bank is left to manage and dispose of the asset. In many cases the borrower has unpaid utility, insurance, supplies and maintenance bills that the bank ends up paying.

2. Force the borrower into bankruptcy whereby the borrower becomes a debtor in possession. The bank does not gain control of the asset and the cash flow generated by the asset is absorbed by the bankruptcy process (attorney’s fees)

3. Court-Appointed Receivership. A court-appointed receivership is part of a bank’s foreclosure action. Appointing a receiver is mandated by Minnesota Statute 576.01, Subd. 2, in the following situations:

    a. In a mortgage foreclosure pursuant to chapters 580 & 581 if the original mortgage amount is greater than $100,000;
    b. Or is a lien on residential real estate with more than 4 dwelling units and was not a lien on property that is entirely homesteaded;
    c. Or is a lien on residential real estate containing less than 4 dwelling units and at least one of the units is homesteaded;
    d. Or agricultural property.

Court-appointed receiverships are becoming more and more prevalent in this economy which is fraught with loan and mortgage delinquencies. Receiverships are especially advantageous in the following situations:

1. When the borrower stops communicating with the bank.
2. When it is unclear to the bank as to whether the borrower has:

    a. Paid the insurance on the collateral.
    b. Paid the real estate taxes on the collateral.
    c. Performed and paid for the necessary upkeep on the collateral.

3. When it is unclear to the bank what the borrower is doing with the cash he is collecting from the asset. Cash is generated through the running of the business, either from rental revenue or from operations. If the bank is not receiving its loan payment, where is the cash flow from operations actually being spent?

Advantage 1 – Receiver takes Possession of Collateral
When a receiver is appointed by the court (a process that is begun by the lender), the court orders the receiver to take possession of the asset (collateral of the loan, bank accounts, and accounts receivable) and the operations thereof, assuring both the lender and the borrower that the asset is insured, taxes are paid, and regular maintenance is done.

Advantage 2 –Accumulation of Cash
Since the receiver does not have to make a mortgage or loan payment, cash can be accumulated (unless the asset is non-revenue producing; i.e., a vacant rental property). The cash that is accumulated is frequently used to bring real estate tax payments current or to perform maintenance which often has been deferred by the borrower.

Advantage 3 – Receiver not responsible for Borrower’s Liabilities
The receiver is not responsible for the liabilities incurred by the borrower prior to the receivership (with the exception of real estate taxes). This means the receiver is not encumbered by past due and accumulating utility, insurance, supplies, maintenance bills incurred prior to the receivership. The receiver has a fresh start and must pay all expenses incurred on a go-forward basis.

Advantage 4 – As Independent Party, the Receiver Protects & Preserves the Asset
A receiver’s chief function is to protect and preserve the asset. The receiver is given the authority to collect revenues, honor the rights of tenants with leases, and safeguard the health and welfare of residents and guests.

Advantage 5 – Timely Reporting Ensures Bank Has Access to all Asset Information
A receiver has an obligation to make timely reports to the court, the lender, the borrower and their respective attorneys. Receiver’s reports should include all activities pertaining to the operation of the collateral-asset. Such reports include budgets, balance sheets, statements of income and expenses, cash flow statements and operational write-up of receiver’s actions.

Advantage 6 – Takes the Day-to-Day Headaches away from the Bank
The receiver is responsible for all of the day to day issues concerning the collateral-asset. Some bankers, seeking to save money by managing their own troubled assets, are overwhelmed with calls from tenants, vendors and neighbors all of which have emergent issues. A receiver, who is a professional asset manager, takes this headache away from the bank.

Coldwell Banker Commercial Griffin Companies is poised to assist banks, regardless of size, in managing, operating, leasing and disposing of its troubled assets.

Robert P. Bayer, MBA & CPA
Vice President – Special Asset Solutions
Coldwell Banker Commercial Griffin Companies

Troubled Assets by Robert Bayer

Posted by admin | Articles | Friday 28 August 2009 9:33 am

On August 11, 2009 the Congressional Oversight Panel issued a report titled “The Continued Risk of Troubled Assets.”

What is a troubled asset, also known as a toxic asset? The Panel defines a troubled asset as “a loan or security whose original credit risk assumptions have come into question.” In basic terms, this means the credit risk for a loan on the books of a bank has increased, so the value of the loan to the bank has decreased. The likelihood that a bank will receive the entire principal and interest for a loan has diminished, or has come into question.

In the Executive Summary of the report, the panel stated, “In the fall of 2008, the American economy was facing a crisis stemming from steep losses in the financial section, and frozen credit markets. The Treasury Secretary and Federal Reserve Board Chairman argued that a program of unprecedented scope was necessary to remove hundreds of bills of dollars in so-called toxic assets from banks’ balance sheets in order to restore the flow of credit.”

However, because of the deterioration of the situation and the problem of valuing and selling the “toxic assets” the Treasury Secretary (Henry Paulson) and Fed Chairman (Ben Bernanke) decided a quicker methodology to get the credit markets lubricated was to infuse capital directly into large banks to offset the impact of the troubled assets. The Troubled Asset Relief Program (TARP) gave banks breathing room by allowing them to build up loss reserves against future write-downs and increasing equity reserves.

But, “Ten months after its creation, TARP has not yet been used to purchase troubled assets from banks.” As just noted, Treasury’s methodology to make direct capital infusions has stabilized the financial system to some degree, however, “It is likely that an overwhelming portion of troubled assets from October, 2008 remain on bank balance sheets today.”

What does this mean for Minnesota banks? First, since no TARP funds were made available for small banks, and Minnesota has a great deal of small community banks (3rd most in the nation) the problem of troubled assets is especially serious. Small banks have a greater concentration of commercial real estate loans and mortgage loans than do large banks, which pose a potential threat of high defaults. As Federal Bank regulators require small banks to increase their loan loss reserves for this threat, this loss absorbs small banks’ equity reserves. The loss of equity means that these same stressed small banks have to enter difficult capital markets to raise investment capital. If they fail to raise the capital required by bank regulators to a safe level, they are taken over by the Federal Deposit Insurance Corporation (FDIC), and become a failed bank.

According to the Report, “We are not 10 months into TARP, and troubled assets remain a substantial danger to the financial system. Treasury has taken aggressive action to stabilize the banks…and have provided substantial protections against the repeat of 2008. Nonetheless, financial stability remains at risk, if the underlying problem of troubled assets remains unresolved.”

My assessment of this statement is that there is increased pressure on Minnesota’s small banks to rid themselves of distressed assets or raise equity capital. Additionally, it may take several years to clear banks’ balance sheets of assets that are troubled in nature and, thus, reduce the economic and failure risk that such assets portend.

Coldwell Banker Commercial Griffin Companies is poised to assist banks, regardless of size, in managing, operating, leasing and disposing of its toxic assets.

Robert P. Bayer, MBA & CPA
Vice President – Special Asset Solutions
Coldwell Banker Commercial Griffin Companies


Posted by admin | Articles | Tuesday 18 August 2009 2:27 pm

(Minneapolis, MN, 8/18/2009) – Dale Severson and Robert Bayer joined the team of Coldwell Banker Commercial Griffin Companies as a Vice Presidents in the Property Management’s Special Asset Solutions division.

Dale Severson comes to the company from Management Resolutions as a founding partner and manager. He specialized in Court Appointed Receiverships, property management with an emphasis in sales and marketing.

Severson is a member of Rotary International, TMA, RMA and actively involved in community events. He resides with his family in Eagan, MN.

Robert Bayer comes to the company from Management Resolutions, LLC; a company he co-founded. He specializes in court-appointed receiverships, troubled assets & financial analysis

Bayer is an MBA and an active CPA and currently lives with his family in Lino Lakes


Posted by admin | Articles | Monday 20 July 2009 2:26 pm

(Minneapolis, MN, 7/20/2009) – Coldwell Banker Commercial Griffin Companies has recently successfully completed over a dozen property tax appeals in the metro area. The properties included a variety of different types including retail, industrial, warehouse, land, and special use properties. Assessed value reductions ranged from 5% to 22%. In today’s market, many commercial real estate properties have declined in value over the last 1 – 2 years and in many cases that has not been reflected in the property’s assessed value.

Coldwell Banker Commercial Griffin Companies has a great deal of experience analyzing markets and working with assessors to correctly value properties in today’s rapidly changing environment. Company president Bill Ostlund says, “For many commercial properties, property taxes are the largest single operating expense so a reduction can have a large impact on operating income. The benefit of a reduction will usually last for two to three years before it needs to be examined again.” Property owners can still appeal valuations from January 2009 for taxes payable in 2010.

In addition to property tax appeals CBC Griffin Companies Realty Solutions initiative provides several other services to help owners reduce their cost of occupancy including: cost segregation, sale/leaseback analysis, lease renegotiation, and loan restructuring.

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