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Receivers’ Catch: Foreclosures
Banks Pass Wind-Down Work to Court-Appointed Pros
By DAVID A. GRAHAM
Some banks are starting to bypass foreclosure on large, troubled real-estate developments and instead are throwing the properties into receivership, a move intended to reduce some of the headaches associated with taking over problem assets.
When banks foreclose on delinquent borrowers, they often plan to sell the property to new owners. But while holding the properties, banks are required to maintain them and pay all fees and taxes associated with the real estate. In some towns, banks that hold foreclosed residential property may be fined as much as $1,000 a day for code violations or even be subject to arrest.
California Real Estate Receiverships
As banks look to avoid the hassles of the foreclosures process, receivers are gaining a more-prominent role. Here, a development in Peyton, Colo., that has languished unfinished since WL Homes filed for bankruptcy.
To avoid those hassles, some banks are asking courts to appoint receivers for large projects, especially residential developments in California, Arizona, Colorado and other Western states. The aim is to have the receiver, not the bank, eventually sell the property. By keeping the bank’s name off the title of the property, the bank hopes to stay out of trouble with the law.
“The fact is we are seeing a number of banks that don’t want to get in the chain of title,” says Douglas Wilson, a receiver in San Diego. He and other receivers report that business is booming. A trade association, the California Receivers Forum, has seen its membership increase to 550 today from 300 in 2007.
Banks have long used receivers to work with properties owned by borrowers in default, but their role was typically making sure utilities stayed on and thieves and squatters stayed out. Now, some banks are expanding the role of receivers by hiring them to also ready properties for sale and to handle dispositions.
“They’re putting in receivers with much more proactive roles — not just collecting money” from tenants, Mr. Wilson says. And since receivers are officers of the court, they can get some things done more quickly, such as getting permits or hiring contractors.
The cost of hiring a receiver can be a drawback. Receivers are paid with creditor funds — sometimes at great cost. In addition to hourly rates starting around $250, receivers employ staffs of their own and may choose to hire on-site property managers or contractors to complete developments. Dozens may be needed for larger projects.
Hiring a receiver to sell a property also means that banks relinquish some control over the sale prices, although courts often work with banks to set minimum amounts. In addition, banks have more control over proceeds from a sale in a foreclosure than they do when a receiver sells them. Spokesmen for Citigroup Inc. and GMAC LLC said they don’t use receiverships often because of the expense.
But Wells Fargo & Co. and Bank of America Corp. are giving lots of new work to receivers, according to industry participants. Wells Fargo declined to make anyone available for comment, but a Bank of America spokeswoman said the bank uses receivership because it is efficient and avoids disputes among multiple creditors.
The bankruptcy of WL Homes LLC exemplifies the trend. The company, parent of John Laing Homes, was one of the West Coast’s biggest home builders during the real-estate boom. But after its Dubai-based owner, Emaar Properties PJSC, cut off funding, it filed for Chapter 11 bankruptcy-court protection in February, then Chapter 7 liquidation in June.
After the bankruptcy, Bank of America found itself with collateral comprising 31 separate assets in 19 locations across California, Arizona and Colorado from one $130 million loan. The properties ranged from raw land to partially completed developments to half-filled condominium buildings, meaning the bank would have to deal with everything from hiring contractors to wrangling with upset and cash-strapped homeowners’ associations if it foreclosed.
And by taking the title on the building, Bank of America could be liable for any construction defects for a decade in California or for any injuries on unsecured construction sites.
Rather than deal with the litany of issues, Bank of America turned to Taylor B. Grant, a veteran real-estate receiver based in Newport Beach, Calif.
“It is extremely complicated,” Mr. Grant says. But he adds: “Anything that we’ve seen, we’ve seen before.”
Since his June 10 appointment, Mr. Grant has visited the properties and hired asset managers, and is deciding how to dispose of the holdings.
Some tasks are mundane, like making sure fire alarms and security systems have power connected. Otherwise, he says, “on Friday they strip the copper, and Monday it’s a meth lab.”
He also will begin deciding whether he can get a better value from hiring contractors to finish partially completed homes or from tearing them down and selling vacant lots. After that, he will be able to sell the properties and distribute proceeds proportionally among creditors.