Winter 2006 • Issue 20, page 1
Auctions: Resolving the "Distressed Receiver's Dilemma"
By Walters, Mike & Karbelk, Stephen*
Having worked with many receivers around the country, and having
occasionally served as receiver, we have come to identify what we call the
“Distressed Receiver’s Dilemma”. Like being the fifth person on a double
date, a receiver sometimes has trouble becoming comfortable in certain
situations because of the high level of scrutiny afforded a receiver’s
actions and the actual and potential liabilities every receiver takes on.
A commonplace distressed situation arises where a lender seeks and the
borrowers contest appointment of a receiver over a sub-standard and mostly
vacant apartment building, for example, or over a shopping center that has
lost its anchor and the smaller tenants have vacated. The
borrowers/defendants think they can turn the property around, but the
lender/plaintiff no longer trusts the borrowers and wants an independent
agent to take control. Add to this contentious situation the fact that
potential purchasers of the property already smell blood in the water and
want to try to steal the property at a bargain price through a quick,
In addition to these competing agendas, there is also the compensation
dilemma. If a receiver facilitates a quick sale, he or she may be
criticized for insufficient marketing.
But if the receiver takes his or her time in marketing the property,
incurring fees in the interim in maintaining the property, she or he may
be accused of milking the estate. Hence, the Distressed Receiver’s Dilemma
is born. How can a receiver avoid these pitfalls?
In his Receivership News article in this issue, Kevin Cavanaugh, a CPA
with the Douglas Wilson Companies, explains how a receiver can facilitate
marketing of a property by (a) assembling a detailed property information
package (with plenty of disclaimers), (b) extracting confidentiality
agreements from prospective purchasers and brokers, and (c) vetting
qualifications of prospective buyers.
An interesting aspect of this article underscores the Distressed
Receiver’s Dilemma – the cautionary tone Mr. Cavanaugh adopts with respect
to the receiver’s marketing actions, which is essentially to protect
thyself first, and rightly so. The potential for a receiver being sued
when thrust into a tinderbox of litigation is significant. We all know
that no receivership appointment is worth making one’s life miserable.
The Distressed Receiver’s Dilemma will never go away because it is the
essence of being a receiver – occupying the middle ground between
disputing parties. There are certain important choices the receiver of a
distressed property can make to minimize his or her legal exposure,
however, while doing what is best for the property and all interested
Private or Public Sale?
For some reason, there is a general misconception that a general brokerage
transaction is the safe way to sell real property. One assigns a listing
price, places the property in the multiple listing services, and waits for
the offers to come streaming in. While this process does work when the
broker has only one client to satisfy, such as where a non-distressed
seller wants to sell an asset at a particular price, the process does not
work especially well in contentious receiver’s sale situations. There are
several reasons why this is so:
The Listing Price Dilemma. If the Receiver has market knowledge and
authority to market and sell the property, the first step is to decide on
the listing price. This is fairly easy for a stabilized property with an
easily identifiable cap rate. But where the property is in distressed
condition, lacks any relevant income, and is hemorraging monthly losses,
the Listing Price Dilemma becomes much more serious. The lender
unwillingly funding the monthly losses may want a low listing price to get
the property sold quickly, but the borrower, who may be exposed on a
personal guaranty, will want a high listing price. If the lender’s
arguments prevail, the property may sell for too little, leaving a
substantial amount of equity on the table. If the borrower’s arguments win
out, the listing price may be set too high and the property will not sell,
resulting in a stagnant listing and ever-mounting losses.
The Preservation Dilemma. Receivers are generally prohibited from
improving property under their care, but they may take steps necessary to
preserve it. A leaking roof may need to be repaired to keep the property
from deteriorating during the receiver’s possession. On the other hand,
maybe the best way to remedy the deficiency is to put on a new roof. The
Receiver must often decide what needs to be done, and to what extent, to
preserve a property’s value. I imagine all receivers have lain awake at
night worrying whether he or she made the right decision to not incur an
expense as necessary for property preservation. Should the receiver
remediate actual or suspected mold? Should the receiver remove the
potentially/ actually leaking underground storage tank? Should the
receiver perform a build-out as a condition to attracting a tenant? And,
if so, will the receiver be able to recover the amount spent? Should the
receiver leave the work to be done by any subsequent buyer?
The Sales Price Dilemma. If the receiver receives an offer to purchase,
the receiver then has to decide if offered sales price is defensible. In
his article, Mr. Cavanaugh writes that “market knowledge equals power” as
it relates to deciding whether to accept an offer. The dilemma lies in
deciding whether or not the price offered is a market price. Was an
appraisal done? Were multiple offers received? What is the receiver’s
market knowledge and why is that knowledge better than someone else’s idea
of the “market value” of the property? It might sound heretical to assert
such questions but the reality is that any claim to possession of all
market knowledge necessary to make an absolute judgment as to market value
is probably an exaggeration.
In a hotly contested litigation situation, privately marketing and selling
a property may actually increase the potential liability of a receiver. He
or she could list the property at the wrong price, could choose to make
changes to “preserve” the property later deemed to be improvements where
the costs are never fully recovered, and might imprudently decide to
accept a purchase offer that proves demonstrably below true market in
hindsight or by way of a selling process later claimed to be not
There is an alternative way of selling that avoids some or most of these
problems. Selling a property by auction avoids these imponderables and, if
done properly, assures that the maximum market value will be achieved.
Employing a professional auction firm to assist in developing
comprehensive bidding procedures enhances a competitive sale. A level
playing field is necessary to create a competitive bidding environment.
When the terms of the sale are pre-defined, potential buyers do not have
an opportunity to independently negotiate responsibility for the myriad
costs, expenses and closing items that often make evaluating competing
private sale offers a comparison between apples and oranges.
Having the appointing court approve
the auction procedures in advance of sale, including terms of sale,
deposit requirement, closing period, allocation of
escrow and title charges and other costs ensures a level playing field,
the unquestionable legitimacy of the sale process and protects
professionals against liability that may result from the potential
infirmities of a traditional sale process.
(but here is everything we know)
Everyone knows the three most important elements of value in
real estate: location, location and location. For the receiver selling a
distressed asset the three most important elements of avoiding potential
liability are: disclosure, disclosure and disclosure.
Part of a true competitive bidding
environment is for every participant to be provided the same information.
By employing a professional auction firm to
develop (and assist in developing) a Property Information Package (“PIP”),
a receiver can be certain that full and uniform disclosure has been made.
customary prior to the bidding process to have auction buyers acknowledge
in writing receipt of all PIP documents and, again in writing, to accept
responsibility for their own due diligence. This shifts accountability
from the receiver to the buyer, unless some pertinent information known to
the receiver has been withheld.
(This concludes Part I of “Auctions: Resolving the Distressed Receiver’s
Dilemma”! The concluding portion will appear in the Spring, 2006 issue of
*MIKE WALTERS, senior partner of Tranzon Asset Strategies, a financial
company specializing in real estate sales, is also a member of Tranzon,
LLC, an auction marketing company with 20 offices nationwide.
*STEPHEN KARBELK is a partner of Tranzon Fox, a Tranzon, LLC affiliated
company specializing in real estate marketing and sales in the