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Receivership of Real Estate Developer: Untangling a Mess
Situation:
The situation at this developer of office condominiums was dire. The company was insolvent and an investigation initiated by the shareholders revealed that a large portion of the company’s real estate holdings had been fraudulently conveyed to other companies controlled by the company’s President. The resulting lawsuit led to the appointment of LMG as Receiver for the company and eighteen other related companies.
A situation analysis preformed by LMG quickly revealed a host of issues requiring immediate attention. There was no immediate source of incoming cash. Employees hadn’t been paid in weeks and accounts payable were in excess of $700,000. One office condominium development had just been started and two others, while complete, were languishing and had virtually no occupants. There was a significant amount of equity in real estate but over $4.5 million of the $17.5 million in real estate holdings were either in foreclosure or had already been sold at sheriff’s sale. The redemption period for many of these properties was within weeks of expiration in which case the equity in these holdings would be lost to the company.
Task:
The task LMG faced was how to prevent the loss of equity in these properties while simultaneously addressing the short-term liquidity issues in addition to developing a longer-term strategy for managing the sale process and maximizing value.
Actions:
Since there was no immediate source of incoming cash LMG addressed the short-term liquidity issues by identifying assets that could be converted to cash quickly. Company vehicles and other non-essential assets such as equipment trailers were sold. The proceeds provided enough working capital to pay employees and address immediate cash flow concerns.
In order to redeem the properties under foreclosure and prevent any further loss of equity a number of investment groups and other potential buyers with the ability to move quickly were identified. The ensuing series of fast-paced negotiations resulted in the sale of a number of properties and generated enough excess cash to cure the remaining foreclosures.
Once the situation was stabilized and the immediate cash flow issues resolved LMG negotiated loan extensions and cured the defaults on the remaining secured debt. This allowed time to complete the construction and properly market and sell the remaining properties.
Result:
Within twelve months of LMG being appointed Receiver all secured debt and unsecured debt was paid. The total proceeds from the sale of the properties exceeded initial estimates by almost $3 million and nearly $4 million in equity was recovered for the principal shareholders.
