The collapse of the housing market has hit condominium sales hard. As a result, lenders and note holders have increasingly found themselves foreclosing on broken condo developments.

I was recently appointed the receiver of a condo project entitled for 50 townhouse units, really more of a zero lot line development. Two of the model homes were complete and ready for sale. Ten others were partially complete, with the structure and all electrical and plumbing work finished, but no fixtures, appliances, doors or cabinetry had been installed. The borrower abandoned the development and construction had not started on the remaining 38 units. The note had been acquired from the construction lender by an investor who felt completion of the unfinished units and the subsequent sale of the 12 units to homebuyers-rather than a bulk salewould help maximize its recovery.

In light of the note holder's objectives and the nature of the project, there were a number of unique issues with which to deal. For instance, the court order appointing the receiver of a broken condo project must grant significantly more authority to the receiver than in typical receiverships, where the receiver need only collect the rents, pay the bills and maintain the status quo. With a broken condo project, in addition to the usual granting provisions, the court order should give the receiver authority to secure the site, borrow funds from the note holder to complete construction of the unfinished units, hire and pay consultants, construction managers, contractors, appraisers, real estate brokers and the like, maintain construction and casualty insurance, and sell the units to the public upon completion.

Furthermore, the court order should establish that funds advanced to the receiver be deemed "protective advances" to preserve the collateral. This type of advance maintains the same priority as the deed of trust or mortgage encumbering the project. Each advance to the receiver should also be evidenced by a "receiver's certificate," which under most state laws enjoys a super priority over otherwise senior liens.

As a receiver, the very first order of business was to secure the site from vandalism and theft. In my case, it was critical to promptly install the missing entry doors to restrict access to the site and partially completed units, particularly since all the copper plumbing was in place and could easily be ripped from the walls. Although the site appeared fenced, there were unfenced areas in the back large enough for a truck to drive through. So I contracted with the original fence company to plug the gaps. Of course, I had to first pay them what the borrower owed.

Meanwhile, it was also important to agree on a budget to complete the unfinished units. I suggested to the note holder that advances to me pursuant to the budget should be distributed in accordance with the disbursement controls found in the original loan agreement. This was for both my protection, as well as the note holder's.With the project now secure and a budget established, I could focus on completing the unfinished units. My next column will discuss what was required in that phase.

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Receiverships for Broken Condo Deals

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