Spring 2006 • Issue 21, page 7
Auctions: Resolving the Distressed Receivers Dilemma
By Walters, Mike & Karbelk, Stephen*
(This concludes the article on auction sale of real property to achieve
maximum value for receivership properties, begun in the Winter 2006 issue
of RN. Part One discussed how an auction sale avoids listing price and
selling price valuation issues and costs of property preservation
resulting from a conventional listing. It also discussed how all costs of
sale could be transferred to the purchaser and the property can be sold
without representations or warranties in an auction setting. Ed.)
Marketing
The key to ensuring a “commercially reasonable sale” is to expose the
property to potential purchasers through a strategically implemented
marketing campaign. While there is currently an abundance of capital
pursuing all types of real estate, there are many first time buyers
entering the market who do not work with conventional brokers. A recent
CCIM report disclosed that more than one-third of commercial real estate
buyers in 2005 were first time buyers.
Reaching out to this market is key to obtaining maximum value for a
property. Exposing the property through website placements, e-mail
campaigns, newspaper ads, direct mail pieces and other guerilla marketing
techniques accomplishes this task. A well-executed auction marketing
campaign will expose the property to conventional and nonconventional
buyers, adding legitimacy to the process while insuring a commercially
reasonable sale.
Positioning the Property
A little distress never hurt a sale. Buyers are looking for distressed
properties and value-added opportunities. In a recent sale of an
industrial property in Irvine, California, eleven buyers qualified to bid
for the property that had an estimated pre-sale value of $3,300,000. After
spirited bidding, the property sold for $4,400,000, a 33% increase. When
the successful bidder was asked what he planned for the property he
responded that he was going to tear it down and build an office building.
The property was not worth the bid price as existing industrial property
but the auction process brought out alternative users and added value.
We seldom recommend pre-sale upgrades or improvements to properties (in
non-contentious situations) because of this potential for value added
buyers. These decisions about the property should be left to potential
buyers, each with a long-term vision for the property. There are other
reasons to leave renovations or improvements to the purchaser:
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The buyer can usually make renovations for less than the receiver.
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The time it takes to recover the costs of renovation may be too long
i.e. doing tenant improvements on a shopping center can often take years
to recover.
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If a property has multiple potential uses, the repairs and improvements
(in a non-contentious sale) made might not be for the highest and best use
as defined by the market. For instance, if a big box is vacant in a
shopping center, how can the receiver know if that space is best suited
for another big box retailer, or should be divided into smaller spaces for
smaller retailers, or even converted into another use, like offices or
self storage?
There can be a large net benefit to selling a property as-is and letting
the potential buyers bid accordingly.
Creative Solutions
Every receivership has its own nuances. Each step in receivership
administration should be considered in terms of enhancing potential net
recovery
for the estate. Animosity often exists between the parties that can limit
potential solutions. Auction sales provide a tool for avoiding many such
roadblocks, however. In partnership disputes, for example, allowing the
competing parties to bid for assets at a properly conducted receiver’s
auction can be the perfect open forum to preclude any possibility of an
insider deal. Special allowances can be made for credit bidding and loan
assumptions, with prior court approval.
Conclusion
It is certain that the “Distressed Receiver’s Dilemma” and the receiver’s
uncomfortable position squarely between competing interests will not
change. But the open, public forum and level playing field of
properly-conducted real property auctions affords a tool to maximize
estate values while reducing potential liability to receivers.
*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
mid-Atlantic region.
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