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
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