Winter 2006 • Issue 20, page 1

Commercial Real Estate Dispositions 101: A Primer for Receivers

By Cavanaugh, Kevin*

In the course of administering a receivership estate, a receiver may be granted power by the appointing order to dispose of a commercial real estate asset. Even absent authority to market and sell the property, the receiver can always enhance the prospect of the property’s ultimate sale or accelerate the timing of a sale by preparing and organizing information for ultimate delivery to prospective purchasers or real estate brokers. Both groups will benefit from the receiver’s knowledge gleaned from operating the property. What information will be helpful to the marketplace?

Every property has distinctive, idiosyncratic features. From retail shopping centers to hotels and for every kind of commercial property in between, what information is required by the marketplace will depend on each property’s attributes. A non-exhaustive list of information that may satisfy a prospective purchaser’s informational needs (although additional data may be needed to evaluate a particular property) includes:

• Site plan;

• Lot size and zoning information;

• Architectural drawings;

• Photographs (both aerial and ground level);

• Legal description;

• Title commitment;

• Narrative portions of an appraisal;

• Capital expenditures (details of last 3 years, current and planned);

• Real property tax bills (last 2 years and current);

• Governmental inspection reports (description and status of any violations);

• Utility bills (one year);

• Licenses (description and name of licensed entity);

• Lease(s), sublease(s) and/ or operating agreement(s);

• Service agreements (cancellation rights/penalties);

• Occupancy information (current YTD and last two full years, both detail and summary information);

• Competitive market analysis;

• FF&E inventory;

• Environmental study – Phase 1;

• Life and safety information/inspections;

• Flood plain information;

• Income Statements (current YTD and last two full years, both detail and summary information);

• Balance Sheet (current and last two year-ends, both detail and summary information);

• Ground Lease.

This information should be well-organized and saved electronically for ease of transmission to the interested parties. It is useful to provide a detailed checklist of such items as a record of what was sent, including columns (a) with brief descriptions of each item and (b) identifying whether the information is available from a public source (tax assessor, recorder, superior court, etc). This column should also include the source contact information, including web site/email address, physical address together with both telephone and facsimile numbers. In the event that an item is described on the checklist but not transmitted, an explanation as to why it is omitted will help reduce further inquiries from prospects.

As any receiver can attest, information is often either hard to come by or of dubious reliability (at best), so the source of all information should be clearly indicated on the document(s) and should agree with the source identified on the detailed checklist. As an additional precaution, this checklist should include many of the disclaimers discussed below.

Though the receiver will disclaim the accuracy of the information and will make no representations or warranties, the disclosure of and accuracy of all relevant property information and facts will (a) limit post–closing issues and (b) save both time and money. Obviously, there are heightened risks to a buyer purchasing distressed real estate. Any inaccuracies in the information provided to potential purchasers will cast doubt on all of the information provided, leading to even greater uncertainties. Increased uncertainty equates to increased perceived risk, leading to increased return expectations and, consequently, a lower sale price.

A similar result occurs where a prospect receives incomplete information: the later discovery of undisclosed relevant information inevitably prompts the unanswerable question “what else has not been disclosed?” This uncertainty also exerts downward pressure on property value.

Inaccurate or incomplete disclosures inevitably result in the prospective purchaser spending more time in fully evaluating the property, which results in additional expense to the seller (additional expense of funding of the property’s operation and/or the opportunity cost of the non-working capital). This raises the next topic – the importance of making detailed disclaimers about the information provided to prospects.

Disclaimer
Precautions should be taken to protect the receiver from liability that could result from disclosure of information about the property even where the receiver retains the services of a professional real estate broker to market the property. The receiver’s primary precaution and first line of defense is the inclusion of a disclaimer in the body of the information transmittal cover letter and on every page of the information provided, if feasible. If placing a disclaimer on every page of the information provided seems excessive or hyper-cautious, much the same effect may be accomplished by placing the disclaimer in the transmittal letter and the document checklist. Each receiver’s perceived exposure and risk tolerance will decide the issue.

Disclaimer language can be tailored to a particular property, but the following basic elements to be included in a disclaimer are unchanging (my commentary on the crux of the disclaimer language in parentheses):

The information provided was obtained from sources believed to be reliable (however the difference between what we believe and reality could be enormous);

We have not verified the information and do not guarantee, warrant or represent that it is accurate (verify all information yourself);

It is your responsibility to indepen-dently confirm the information’s accuracy and completeness (we may have overlooked something);

Any projections, assumptions, estimates or opinions furnished or utilized are for illustrative purposes only and in no way represent the current or future performance of the property (we’re not certain about the source of the information- see number 1 above- so we aren’t making any representations regarding anything derived from that information);

The value of the property depends on each prospective purchaser’s tax and investment factors and should be carefully reviewed by each potential purchaser’s tax, financial, legal and investment advisors (our asking price may have absolutely no basis); and

This correspondence does not constitute an offer, and does not create or give rise to any agreement or contract, express, implied or in any other manner. Nothing in this correspondence creates any right or obligation. Only a written Purchase and Sale Agreement executed by all necessary parties will create any binding agreement (if it’s not in writing and fully executed, we don’t have a deal).

With these elements in place, the disclaimer should provide the protection necessary to defeat any allegation of liability arising from the information the receiver will be providing. This leads to the next principal question arising in the marketing of commercial property: how to protect the information that is being provided to brokers or prospective buyers?

(This concludes Part I of “Commercial Real Estate Disposition.” The concluding portion will appear in the Spring, 2006 issue of Receivership News.)

*KEVIN P. CAVANAUGH, CPA is the Managing Director of Douglas Wilson Companies' San Francisco office. He is also a licensed real estate broker in the states of California and Florida and has participated in more than $1 billion in commercial real estate sales.