Steve Katz:

Hi everybody, and thanks for taking time out of your busy schedule to listen in on our Hilco Global Smarter Perspectives Podcast. As return listeners know by now, I'm your host Steve Katz, and if this is your first time with us, well then welcome. We are glad that you could tune in. Today, we're going to be talking about how current economic conditions are likely to drive commercial real estate loan delinquency and default rates higher in the coming months, and why now may well be the optimal time for lenders with concerns about underperforming loans, or uncooperative borrowers to consider exploring receivership. That's going to be our topic today, and with us for that conversation is a first-time podcast guest, Mitch Vanneman, Vice President at Hilco Real Estate, and experienced receivership practitioner. Mitch, welcome to the podcast.

Mitch Vanneman:

Thanks, Steve for having me on. Greatly appreciate it.

Steve Katz:

Absolutely. It's great to have you here and let's get rolling. So for those in our audience who might not be too familiar with the ins and outs of receivership, to get us started, can you just provide a bit of a top-line on when that type of an approach should be considered, and how it can be beneficial?

Mitch Vanneman:

Happy to, Steve. Receivership is a legal remedy which exists in federal and state courts and provides a lender with the option of placing an asset legally in the hands of a court-appointed agent when concerns arise about a borrower's ability or willingness to operate or manage that property effectively. These agents are known as receivers. When receivers take possession of a real estate property, they collect the rents, they manage the property, or they could oversee the property's management, and under certain circumstances, will sell the property. Overall, a receiver's role replaces the borrower's in regard to the general operation of the subject property. The receiver and its agents are a neutral arm of the court. As such, on a monthly basis, a receiver is required to provide the court with a comprehensive report documenting its actions and decisions relative to the financials and operation of the property. The receiver's role also provides for court oversight, ensuring that interested parties have an opportunity in place to either challenge or support the receivers decisions or actions.

Steve Katz:

Okay. So that's a great way to ground conversation, I think. I know that government intervention that began during the COVID period allowed many loans that went delinquent during that time to be granted forbearance or other types of remedies, and that PPP funds also helped out tenants and borrowers. Most of that, if I'm correct in my assumption, has now ended. So what does that mean for these parties?

Mitch Vanneman:

Yes, Steve, you're correct in that assumption. So while delinquencies have trended down somewhat over the past 12 months, the general consensus among workout professionals at banks, insurance companies, private lenders, and special servicers is that the delinquency rate is likely to soon increase with the looming recession and a further expected rise in interest rates on the horizon. At the same time, many borrowers are being faced with the need to refinance debt at higher interest rates. Those same elevated rates are triggering debt-service coverage ratios and bringing down loan leverage. As a result, borrowers are finding a gap in the loan size, and an inability to refinance out the existing loan without bringing more equity to the table to pay off the existing loan.

Steve Katz:

Okay. So, then when or where does the receiver come into play in that scenario?

Mitch Vanneman:

So, it's important to know that a receiver owes a fiduciary duty to both the property and the court. Although a lender is typically the party requesting the receivership, the receiver does not act only on behalf of the lender but instead acts in the best interest of both the lender and the borrower. That said, the appointment of a receiver provides a valuable service specific to a lender involved in commercial real estate by safeguarding the long-term value of the subject property, and helping to pave the way for a clear path to either resolution with a borrower or foreclosure.

Steve Katz:

So interesting. I would think a lot of people may not realize, especially on the borrower side, that the receiver operates in their best interest as well. So what duties does the receiver actually perform in that role?

Mitch Vanneman:

Well, Steve, really there are two core duties involved. First, overseeing the property. A receiver's mandates are outlined in the court order, and the receiver normally takes a series of actions including the following when overseeing the associated property. One, execution of new leases, two, authority to grant tenant rent relief, three, collection of rents, four, day-to-day property management or oversight of property management services, five, payment of bills for utilities and contractors, six, repair of deferred maintenance, and seven, the correction of life/safety issues. Second, under certain conditions, receiver may also direct the sale of the property.

Steve Katz:

Okay, so let me hone in on that last thing you said, direction of the sale of the property. In terms of that, I'm assuming there are many advantages to having the receiver sell the property, correct?

Mitch Vanneman:

That's correct. If the subject loan is burdened with a high prepayment penalty or defeasance, the receiver can sell the property with a suitable loan in place. Importantly, a receivership sale of the property or note serves to keep the lender out of the chain of title, and therefore reduces the lender's liability for construction defects and other issues. The receiver is also empowered to widely market the property or loan, either selling the property loan themselves or hiring a knowledgeable third-party broker to help drive the highest possible sales price.

Steve Katz:

Okay. Well, that's a great, concise overview of how receivership operates. We are getting close on our time here. Any final thoughts for our listeners in regard to determining whether and when to engage a receiver?

Mitch Vanneman:

Listen, Steve, the rise in interest for aid and the unlikely event of more government intervention has the vast majority of loan-workout professionals expecting a significant increase in distress loans within their portfolios. Utilization of a receiver can provide a lender with the assurance that the collateral is being safeguarded, and mitigates risk to the lender on the property. This allows the lender to focus on resolving loan via foreclosure deed in lieu, note sale, or other means available to them. The confidence that the property is not being mismanaged, intentionally or unintentionally, during this process is beneficial to both the lender and the borrower.

Steve Katz:

Well, based on what you've shared, it certainly seems that the fourth quarter and the start of next year are going to continue to be difficult for many borrowers across multi-family, as well as office, industrial, hospitality, and of course retail. I guess the good news, as you've outlined for us today, is that receivership can clearly be an effective means for lenders to mitigate risk while also serving the best interests of the borrower as well, which was a good insight, at least for me today, and hopefully for our listeners as well.

Mitch Vanneman:

Yeah, I couldn't have said it better myself, Steve.

Steve Katz:

All right. Well see, I was listening, and I actually learned something. Seriously though, thanks, Mitch, for those insights and for joining us. How can people best get in touch with you?

Mitch Vanneman:

Absolutely, and thanks again for having me on, Steve. Best way to reach me is my direct line over my cell phone, which is my Trac line is (303) 641-0175. Then my email is my first initial M, and my last name vanneman@hilcoglobal.com.

Steve Katz:

All right. Well, thanks again, Mitch. Listeners, if borrowers in your real estate portfolio are becoming a greater concern than anticipated, or if your previous interventions to date have been somewhat ineffective, I would encourage you to definitely reach out to Mitch and the team at Hilco Real Estate, and discuss those situations and how they might be able to assist in either a receiver or other helpful role on your behalf. As always, we hope that this Smarter Perspectives Podcast provided you with at least one key takeaway that you can put to good use in your business, or share with a colleague or client to help make them that much more successful moving forward. One more thing, please remember that you can check out more great podcasts and articles featuring timely insights from experts like Mitch at Hilcoglobal.com/smarter-perspectives. Until next time, for Hilco Global, I'm Steve Katz.