When a commercial property goes into foreclosure, the lender will want to ensure that:

• the borrower is not damaging the value of the property in any way, and
• the income from the property is going towards paying off the loan and maintaining the property, and not for any other purpose.

To ensure this, a lender may seek the appointment of a receiver as soon as a commercial mortgage loan goes into default. A receiver is an unbiased third party (typically an individual person, though it could be a company) that is appointed by the court for the purpose of preserving the property securing the loan whenever there is a danger that the property will be damaged or rental income lost.

The Receivership Process

The receivership process typically begins when a commercial property owner stops making mortgage payments. The lender submits a petition to the court to appoint a receiver either prior to an action to foreclose or concurrently with the foreclosure. The court-appointed receiver is then responsible for managing the property until the foreclosure is complete. Once appointed, the receiver is able to:

• manage existing leases or enter into new leases
• collect all rental income
• maintain the property by arranging for repairs and maintenance
• secure the property to protect it from vandalism or damage by tenants
• obtain insurance and pay taxes
• take control of the bank account associated with the commercial property, and
• sell the property, with the court’s permission and if the lender, borrower, and any junior lienholders consent. (Sometimes, selling the property prior to the foreclosure will produce more net proceeds than a foreclosure sale. Moreover, the defaulting borrower may be able to avoid a deficiency judgment by agreeing to the pre-foreclosure sale of the property.)

Furthermore, the duties of the receiver include:

• honoring the rights of the commercial property tenants
• safeguarding the welfare of the tenants, as well as guests
• managing continued operations and expenses, while maximizing profitability, and
• submitting financial and property reports to all parties, including the property owner, the lender, and the court. In the report, the receiver must describe precisely what actions were taken, how much income was received, and how any money was spent.

Why Would (or Wouldn’t) the Lender Want a Receiver?

The main benefit of a receiver for the lender is the removal of the defaulting borrower from managing the income-producing commercial property, thereby reducing the risks of rent skimming and waste. Rent skimming is the use of rental income for a purpose other than paying the mortgage or maintaining the property. Waste is the unreasonable or improper use of property that damages the value of the property or allowing the property to deteriorate to the point of neglect and decay. An example of waste is if the borrower holds off on needed maintenance, like fixing a broken elevator or replacing broken windows.

However, hiring a receiver can be costly for the lender. Generally, receivers are paid on an hourly basis, with rates typically ranging from $250 to $500 per hour, although rates vary quite a bit based on the geographic location of the property. The lender is required to cover the cost of a court-appointed receiver. Moreover, a court-appointed receiver answers to the court, not the lender. This means that the lender must give up some control, which is of particular concern to lenders when it comes to selling the commercial property, setting a minimum sale price, and distributing the proceeds.

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