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Receiverships grow amid foreclosures

by J. Craig Anderson - May. 31, 2009 12:00 AM The Arizona Republic

Phoenix-area real-estate brokerages and property managers are gearing up to ride an anticipated wave of business in managing financially struggling apartment, condominium, office and retail projects as court-appointed receivers.

Receiverships, seldom seen in the past two decades, are on the rise again.

"There aren't a tremendous amount - yet," said Craig Henig, senior managing director of commercial real-estate services firm CB Richard Ellis in Phoenix.

"It's the trend everybody is waiting for."

Receivership is a process courts can initiate when a commercial real-estate owner is in jeopardy of losing one or more properties, usually because of an outstanding debt. The court appoints a neutral third party, known as a receiver, to manage each property while the lender and borrower resolve their mutual money problem.

Because the expected commercial real-estate crash is still gathering momentum, a number of notable Phoenix-area projects have gone into receivership in recent months. Those include Wigwam Golf Resort and Spa in Litchfield Park; Century Plaza high-rise condominium building at Lexington and Central avenues in Phoenix; and 13 Valley apartment complexes formerly owned by apartment-investment firm Bethany Group of Irvine, Calif., now defunct.

Tenants living or working inside properties in foreclosure or bankruptcy are like innocent bystanders in a financial shootout. The receiver's job is to make sure they don't get hurt and to protect the property's future revenue-generating potential.

At Bethany Group apartments such as Alante at the Islands, 2222 N. McQueen Road in Chandler, much of the damage to tenants was done by the time a receiver was appointed to take control in March, Tempe-based tenant advocate Ken Volk said.

Volk, who runs the non-profit Arizona Tenants Advocates & Association, said that he has assisted in 10 cases so far in which former Bethany Group tenants sought to break their leases because "they were worried about the place being a dump."

Volk said things were particularly bad at Alante, where trash bins overflowed, algae conquered community swimming pools, weeds spread across courtyards and calls to maintenance staff went unanswered.

In addition, security and cleaning deposits that were supposed to be refundable disappeared along with the properties' former owners, Volk said.

Former Bethany Group executives could not be reached for comment. Alante's new property manager did not return calls.

Bob Burnand, an expert on receiverships, recently was hired by Colliers International in Phoenix to expand that part of the company's business. He said that while Colliers was not involved in the Bethany Group situation, it appeared to be an unusual case.

"My understanding is that Bethany Group basically just walked away," he said, adding that in most receivership cases, tenants barely notice that a property has changed hands.

In any case, Burnand said the receiver was there to solve tenants' problems, not to create new ones.

"The role of the receiver is to protect the asset," said Burnand, director of asset services.

Firms such as Colliers are hiring people like Burnand, a veteran of the savings-and-loan crisis of the late 1980s and early 1990s, because of a troubling national trend in commercial real-estate financing.

The majority of financing for commercial real-estate loans issued during the new-millennium boom came from private investors purchasing commercial mortgage-backed securities.

Now, roughly $700 billion worth of securitized commercial loans nationwide is in "special services," Burnand said, which means the borrowers have missed payments and are in danger of foreclosure.

"The amount of CMBS (commercial mortgage-backed securities) loans going to special servicers rose by 48 percent in the first quarter," Burnand said.

Most commercial mortgages are high-interest loans with terms of five years or less. When the loans mature, they must be paid off in full, usually by refinancing or selling the property.

More than $150 billion worth of loans are scheduled to mature by 2012, Burnand said, adding that many analysts estimate two-thirds will not be paid off.

"The CMBS market is gone," he said. "There isn't the infrastructure to replace these loans."

As a result, companies seeking work as receivers expect to be managing those properties for a long time.

Robert Hicks is Southwest regional vice president of Phoenix-based property-management firm Alliance Residential Co. He said his company was looking for receivership business despite challenges such as the potential for tenant hostility and negative news reports.

Hicks said companies such as Alliance can't afford to ignore any potential new business - even the temporary kind - in the current economic climate.

And always, the possibility exists that what begins as a temporary role could become permanent if tenants are satisfied, the property is well-maintained and its new owners have not chosen another management firm, he said.

Both Hicks and Burnand said it's possible that court-appointed receivers could be managing Phoenix-area properties for years to come, until the demand for investment in commercial real estate resurfaces.

Still, Hicks was less sure about the legal system's ability to avert serious problems for tenants if the need for receiverships becomes widespread.

"I don't know if Bethany was the exception or the norm," he said. "We're going to find out."

Original article


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