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.)

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:

  1. The buyer can usually make renovations for less than the receiver.

  2. 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.

  3. 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.

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.