In today’s complex environment, there is no such thing as a simple real estate sales transaction. The complexity is only compounded when the transaction involves a court-appointed receiver who protects the property for creditors and other stakeholders. Since 2008, the downturn in the economy has led to an increasing number of distressed real estate owners and properties and a corresponding increase in the use of receivers. While this scenario has created advantageous buying opportunities for investors, it is not without complexities and risks.
What is a Receiver Sale?
A receivership is an alternative to a foreclosure proceeding (a lender takes ownership of the project) or a bankruptcy proceeding (a trustee takes control of the project). Receivers are court-appointed individuals given custodial responsibility of a property that serves as the collateral for a loan in default. The receiver displaces the property owner as the active property manager and makes all decisions regarding management and operations based on the court’s best interests.
Typically, a market real estate sales transaction involves a private buyer and seller that come to terms in an arms-length transaction. After contract negotiations and a satisfactory due diligence period (title and survey review, property inspection, environmental investigation, and review of financials), the buyer can then close on the property and title will transfer. However, in a receiver sale, there are a number of additional steps—and potential pitfalls—that await a buyer.
In many situations, the purchase agreement is entered into by the receiver prior to a final appealable order from the court granting the receiver authority to enter the sale transaction. The purchase agreement will thus have conditions requiring that the receiver obtain court approval of the sale to the buyer, that all parties in interest be notified of the court hearing, and that the order not be subject to any further appeals.
In a traditional transaction, the right to terminate the agreement is unilateral on behalf of the seller only. However, in a receivership, any number of objections can derail the buyer’s ability to close, including an appeal by one of the creditors claiming that the court improperly granted the receiver authority to sell. A receivership scenario requires the buyer to undertake the risk, time and expense of conducting due diligence even while the purchase agreement could still be terminated by an appeal of the court order.
As such, it is critical not only to provide for as clean an offer with as few contingencies in the purchase agreement as possible, but also to provide substantiating evidence that the offer represents a reasonable value for the property given the current market conditions for similar properties in the area. Eliminating any financing contingencies and shortening the due diligence as much as possible will make an offer more compelling and increase the chance it will close.
How Allegro Handled a Recent Receiver Sale
Allegro recently represented a locally-based company that manufactures and sells professional beauty products worldwide in its search to acquire a permanent industrial home. Among other options, Allegro identified a property being sold through a receiver. The prior owner had built the building in 2006, financed primarily with bonds issued by the State of Ohio. After almost two hundred years in business, the owner declared bankruptcy and defaulted on the bonds.
The property was initially listed for sale by a third-party broker for $4.5 million, which was the break-even number for the State of Ohio’s outstanding bonds and the other outstanding creditors. After the broker unsuccessfully solicited sufficient offers for a period of six months, Allegro’s client submitted a signed Purchase Agreement with no financing contingency through its attorney. After several months of negotiations, the Receiver sought approval of the Court to countersign the Purchase Agreement. At that time, the State of Ohio did not give its consent to the transaction.
Within two weeks of requesting approval, the Court entered an Order granting the Receiver authority to execute the Purchase Agreement. Along with the client’s attorney, Allegro began its due diligence period, all the while understanding that closing on the property was still subject to a final, non-appealable order. The order would not occur until 30 days had passed and none of the stakeholders had filed either a motion to vacate the order or an appeal.
In a transaction like this, one of the main concerns is a creditor appealing the order after the buyer begins its due diligence, but prior to the end of the 30 day waiting period. This may happen due to another buyer expressing interest in purchasing the property for more money. In this case, the State became aware of another buyer’s intention of paying more for the property and thus filed a Motion to Vacate Order. The State did not withdraw this motion and allow the time for appeal to lapse until negotiations were completed with all of the parties and Allegro’s client minimally increased its purchase price. The property closed roughly two weeks later for a little over 50% of the initial asking price.
While receiverships do present opportunities to acquire distressed assets for aggressive prices, there are commensurate risks and additional costs associated with these types of transactions. It is critically important to fully understand the procedure and all the possible pitfalls and be supported by a strong team of professional service providers before undertaking such a deal.