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
612.904.7841

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
612.904.7841

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