The Newpoint Advisory Partners have managed over 50 distressed property assets valued at over $1B across all asset classes and locations in Australia. We are often asked for advice on realisation strategies for distressed property assets, particularly when related to partially completed development sites, to maximise value and to understand its impact for stakeholders. This article investigates practical opportunities to lower the costs of a receivership.
Most stakeholders would view receivership as a process that yields a reduction in value and is only required in circumstances where a borrower is not cooperative or is impacting negatively the value of the security property. Newpoint supports this view and encourages developers to work with financiers to avoid this situation. In circumstances where there is no alternative, however, Newpoint challenges the industry to look for opportunities to improve efficiency, lower cost and improve outcomes for all stakeholders.
Other industries have evolved pricing models to improve competitiveness and efficiencies, however the insolvency industry is still heavily time-charge based. Newpoint highlights below alternate ways to manage and price this service:
How does a receivership compare to other types of insolvency appointments?
|Description and Purpose
|Voluntary Administration (VA)
|Deed of Company Arrangement (DOCA)
Why don’t financiers do it themselves?
Financiers have the option of taking possession of a distressed development as a Mortgagee in Possession (MIP), however this is rarely done by financiers due to the following:
- They can recoup the receivership cost from the security property. Internal costs cannot be recovered.
- A MIP can only control the security property, it doesn’t have the same powers as a receiver to bind the mortgagor entity
- Generally, they simply don’t have the necessary time and resources to manage a distressed development. This is a particular concern for non-bank lenders who have limited workout staff resources
- Risk management, utilising a professional to undertake a specialised service
- Receiver generally will have a better understanding of ‘duty of care’ and ‘market value’ obligations when realising assets of a mortgagor
- Management of the developer and litigation if required
How can stakeholders improve outcomes and reduce cost of receivership?
Provided below are a few practical points (in order of priority) that Newpoint recommends to financiers, developers and other creditors:
- Receiver selection: Select a receiver that specialises in distressed developments and understands the property class and/or location. Receivers are no different to lawyers, builders and other professionals that have specific expertise in a chosen industry or asset class. Some specialise in retail, manufacturing or mining etc. and some specialise in property. Specialists in an industry will have extensive networks, intellectual property, knowledge, skills, experience and an appreciation for the industry that can be accessed to drive efficient and better outcomes. The selection of a receiver on a distressed development that provides this specialisation will impact both on outcome and cost to stakeholders.
- First port of call: Financier should identify who the receiver reports to, how often they report and the format. For example, Newpoint suggests avoiding lengthy formal reports, preferring to update the financier regularly under an agreed email format detailing the key issues. Typically, we have delegation to deal with day to day issues directly. This reduces time and cost and can improve engagement by other stakeholders.
- Strategy implementation: Generally, it’s better for a lender to act quickly when serious problems are identified. Delays in decision making and obtaining credit approvals for additional funding will increase costs. Significant delays can be the difference between a surplus or loss to the financier.
- Managing work streams: direct the receiver and the lawyer’s focus to the key recovery lines, avoiding processes and workstreams that don’t add value. Monitor the progress on workstreams regularly. On a distressed development, these are generally:
- Securing site from damage, deterioration and OHS
- Negotiating with existing builder or securing a new builder to recommence works. Retain an experienced builder on a fixed price basis, and avoid cost plus arrangements
- Getting the development completed and titles registered to facilitate presales settlements
- Managing the sale process
- Work with stakeholders: can the developer and their staff assist with management aspects of the development to lower cost? In most cases, Newpoint retains the services of key employees that have knowledge of the development as their cost is lower than equivalent resources provided by the receiver and other professionals.
- Negotiate fees: a fixed monthly retainer might be considered as it would satisfy excessive cost concerns of stakeholders.
Is there be an alternate pricing model for Receivers?
Most service providers, particularly builders and subcontractors provide fixed quotes for construction work. In fact, it is always Newpoint’s recommendation that when completing a distressed development that the financier is protected by a fixed price and time building contact to gain certainty on the delivery cost. Similarly, why don’t financier’s tender receivership matters?
Receivers are normally appointed by a financier under a few circumstances:
- Financier panels: banks have receiver panels and will generally make panel appointments
- Receiver known to the financier: some financiers will have a go-to provider for their matters
- Introduction by a lawyer or other professional: financier does not have a go-to provider or it is the first time they are using a receiver
Financiers could adopt a similar model to builders, where they tier or rate them for the size and complexity of a receivership matter (i.e. a distressed development) and then tender the work at a fixed price given a set scope (as mentioned above in workflow). Any variations to the agreed scope can be discussed and a price variation agreed. The benefits of this model are as follows:
- Makes it an open competitive tender process that creates competition amongst providers
- Forces all stakeholders to consider the development and the realisation options upfront and consider the costs in making any decisions
- Encourages efficiencies on the part of the receiver
- Forces the receiver to consider and estimate where they plan to spend time and minimise work streams that do not add value
- Limits disputes in relation to receiver’s fees
This could be based on a series of objectives, for example, completing the development within the revised budget and/or time, the sales rates and gross realisations achieved, etc. The outcome should be based on a detailed scope and circumstances, designed to motivate an improved outcome.
Percentage of Asset Sales
Fees could be based on a percentage of realisations achieved. It would provide an incentive for the receiver to maximise the outcome for all stakeholders. Furthermore, payment could be deferred and paid from development sales proceeds.