As an office building tenant, you may not understand the concept of a receivership until you’re caught in one.
At that point, you’d likely have a myriad of questions about what this means for your lease and the building overall.
To help you better understand, we share details about what a receivership is, some of the top challenges for tenants, and tips on how to navigate and avoid one.
What Is a Receivership?
A commercial real estate receivership is an affordable alternative to a foreclosure proceeding (a lender takes ownership of the project) or a bankruptcy proceeding (a trustee takes control of the project). Some common causes of receiverships include:
- Tenants downsizing or eliminating office spaces.
- Rising interest rates.
- Economic conditions, like recessions and inflation.
- Poor building management.
The receiver is a neutral third party appointed by the state or federal court who controls either all of an entity’s assets or only specific assets. In general, a receiver may be appointed to sell assets, streamline operations, maintain a property, and/or find alternatives to bankruptcy.
What’s the Difference Between a Special Servicer, Master Servicer, and Receiver?
Upon entering a receivership, you may come across the following terms: special servicer, master servicer, and receiver.
While the three may seem similar, they play different roles in commercial real estate receiverships. We detail them below:
- A special servicer manages assets when a commercial mortgage-backed security (CMBS) loan goes into default.
- A master servicer services the loan unless the borrower defaults.
- A receiver oversees assets when a building owner defaults on a traditional loan or forecloses.
Overall, these factors will determine which type of third party you’ll be working with.
Challenges For Tenants Caught in Receiverships
There’s no doubt that receiverships can cause challenges for all involved parties—especially tenants. Below, we detail some of the top hurdles you may face if your building goes into receivership.
1. Unclear Communication With Building Ownership
With the receiver in control of the building, it may be difficult to contact building ownership. This is because tenants will have to go through additional parties, including the receiver or servicer, to ultimately reach building ownership.
2. Difficult Lease Negotiations
Because the receiver or servicer may not be aware of local market trends, negotiating a new lease can also pose a challenge. For example, a receiver from Chicago might not realize the average cost of a lease in a Class A building in a smaller city, like Tulsa.
3. Lack of Capital For Improvement
Because the owners of the building in receivership are dealing with bankruptcy or foreclosure, there’s usually not enough—or any—capital to invest in the building. This can delay or completely cancel plans to upgrade building common areas or provide tenant improvement allowances, complicating or ruining the tenant.
Advice For Tenants Caught in Receiverships
As a tenant caught in a receivership, what can you do? Unfortunately, tenants cannot end their leases prematurely (without consequences) or easily renegotiate their terms after their building goes into receivership. If asked to sign an *estoppel, however, it’s important to speak with legal professionals before taking action.
This further enforces the importance of signing a lease with a building owner that’s reputable and financially stable.
*An estoppel is a statement signed by a tenant confirming that a lease agreement exists, facts stated within the agreement are valid, that no defaults exist, and that they agree to pay rent to the landlord on a specified date.
Are You a Tenant Caught in a Receivership? We Can Help.
At Allegro, we’ve successfully worked through a myriad of receivership transactions, which means we understand the challenges you may experience if you find yourself in one. Contact our team of experts today and we can help you navigate this challenging situation.