Receiverships: The New Sheriff In Town

Wikipedia, the online encyclopedia, currently defines receiverships as follows:

“In law, receivership is the situation in which an institution or enterprise is being held by a receiver, a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights. Various types of receiver appointments exist:

1.    a receiver appointed by a (government) regulator pursuant to a statute;

2.    a privately-appointed receiver; and

3.    a court-appointed receiver.”

Because of the recent financial meltdown, many loan portfolios, investment portfolios, and development entities and projects contain or are, troubled assets. The classic method for dealing with these has been, and remains, the appointment of a receiver.

Formally speaking, the receiver’s principal duties include:

·        Recover and take possession of the books, records and assets


·        Complete a physical and accounting review of the assets


·        Establish/adhere to a budget


·        Stabilize the assets


·        Establish the fair market value of the assets


·        Preserve, conserve and protect assets


·        Operate and maintain property


·        Pay bills


·        Avoid/settle liens and claims


·        Complete the development process, if so    directed


·        Otherwise control, oversee, supervise and direct all administrative, personnel, financial, accounting, contractual, legal, and other operational functions involving the assets

In simpler terms, the receiver’s duty is to mitigate as quickly and as completely as possible the lender’s, investor’s, or business owner’s (individuals and shareholders) financial bleeding. This is a two-step process.

First, the receiver must analyze the situation, mitigate costs and determine the intrinsic issues. The receiver also has to value the asset. Real estate valuations generally are thought to be the province of appraisers. But, at the risk of seeming a wag, didn’t the appraisal community contribute substantially to the over-valuing of real estate that led to the meltdown? Also, don’t appraisers generally use recent comparable sales as a method for determining a property’s value? If so, the danger is that recent sales in many cases have been of a distressed nature – short sales, foreclosures, bankruptcies, etc.

The second step is to recommend the optimal course of action designed to cut the bleeding and stop the burn.

In a nutshell, the receiver is operating the business, which, for our purposes, is a real estate development company or project. So why is it that receivers so often are drawn from the disciplines of accounting or lending? It is eminently more reasonable to engage as a receiver someone from the development community. Who knows more about the issues – large and small – involved in the day-to-day operation of a development project or company than an experienced developer? Who is better qualified to:

·        Determine actual value,

·        Restructure the operation for optimal cash flow,

·        Restructure capitalization,

·        Reposition the asset for added value, and

·        Dispose of the asset on optimal terms?

I’m not suggesting it be the same developer who was involved in creating this troubled asset, although that does sometimes happen. No, I’m talking about the new sheriff in town; the experienced developer who has a track record of successful completion of projects stretching back over past recessionary cycles in the economy. These individuals exist and have experience in successfully cleaning up troubled projects for lenders, investors, and development entities, adding value, and recouping capital.

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