The receiver's fee is on an invoice. The rent the borrower keeps and the value lost to unmanaged leases are not, and they are usually ten times larger.
Yes, whenever the building produces income the lender is not already receiving, because a receiver's cost is a small slice of the rent it captures. On an illustrative €40.0 million defaulted loan secured on a let office worth €34.0 million, a receiver costs about €0.24 million over the twelve months to sale and captures €2.48 million of net rent plus an estimated €1.70 million of value that unmanaged leases would lose: a net gain of €3.94 million, 9.84 cents on the euro of loan. The decision only turns against the receiver when the borrower is already paying over nearly all the income and the building is not at risk.
Worked in full in The Real Estate Workout by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A receiver (in England usually a fixed charge or LPA receiver appointed under the mortgage, elsewhere often a court-appointed one) takes control of the property's income and management on the lender's behalf without the lender becoming owner. The alternative, during a workout or before an enforcement sale, is to leave the defaulting borrower in charge. The question is not whether receivers are expensive. It is what the lender receives, and what the building is worth at sale, with and without one.
| Input, € millions | Value |
|---|---|
| Loan outstanding, in default, no interest being paid | 40.0 |
| Market value of the property, managed | 34.0 |
| Gross rent passing, a year | 3.00 |
| Share of rent actually collected | 96% |
| Non-recoverable operating costs, a year | 0.40 |
| Months from appointment to sale | 12 |
| Legal cost of the appointment | 0.06 |
| Receiver's fee, share of rent collected; fixed costs | 5%; 0.04 |
| Value lost at sale if leases go unmanaged | 5.0% |
| Share of net rent the borrower pays over without a receiver | 0% |
Rent collected = 3.00 × 96% = 2.88; net income = 2.88 − 0.40 = 2.48
Receiver's cost = legal 0.06 + fee 5% × 2.88 = 0.144 + fixed 0.04 = 0.244
Income captured = 2.48 × (1 − 0%) = 2.48
Value preserved = 34.0 × 5.0% = 1.70
Net benefit = 2.48 + 1.70 − 0.244 = 3.94, or 3.94 ÷ 40.0 = 9.84 cents on the euro of loan
In Excel: =(B1*B2-B3)*(1-B4)+B5*B6-(B7+B1*B2*B8+B9) with gross rent in B1, the collection rate in B2, operating costs in B3, the share paid over anyway in B4, value in B5, the impairment in B6, legal costs in B7, the fee rate in B8 and fixed costs in B9.
| Route | Net rent to lender | Sale value | Receiver's cost | Recovery | Cents on the euro |
|---|---|---|---|---|---|
| Receiver appointed | 2.48 | 34.0 | 0.244 | 36.24 | 90.6 |
| Borrower left in control | 0 | 32.30 | 0 | 32.30 | 80.7 |
| Difference | 3.94 |
The receiver's cost is 9.8 per cent of the net income it captures, and the benefit is 17.1 times the cost. Most of the case rests on the income line, not on the softer estimate of value preserved.
| Net rent paid over anyway | No value at risk | 2.5% value at risk | 5.0% value at risk |
|---|---|---|---|
| 0% | 2.24 | 3.09 | 3.94 |
| 25% | 1.62 | 2.47 | 3.32 |
| 50% | 1.00 | 1.85 | 2.70 |
| 75% | 0.38 | 1.23 | 2.08 |
| 100% | −0.24 | 0.61 | 1.46 |
With no value at risk, the receiver pays for itself until the borrower is voluntarily paying over 90.2 per cent of the net rent. Only in the bottom left corner, a fully cooperative borrower on a building that needs no management, is the appointment a pure cost, of 0.24.
| Gross rent | Net income | Receiver's cost | Benefit, no value at risk | Benefit, 5.0% at risk |
|---|---|---|---|---|
| 3.00 | 2.48 | 0.244 | 2.24 | 3.94 |
| 1.50 | 1.04 | 0.172 | 0.87 | 2.57 |
| 0.75 | 0.32 | 0.136 | 0.18 | 1.88 |
On a largely vacant building the income argument almost disappears, and the appointment is justified, if at all, by protecting value: insurance, security, the letting of the remaining space, and an orderly handover to a buyer. A receiver on a building with negative net income also has to be funded by the lender, which turns the fee into new money at risk.
Comparing the receiver's fee with nothing. The fee is visible on an invoice; the rent the borrower keeps and the value lost to unmanaged expiries are not. The opposite mistake is to book the 1.70 of preserved value as certain. It is an estimate, and a credit committee should see the decision hold without it, as it does here with 2.24 of benefit from income alone. Time matters too: every month of delay before the appointment is a month of rent the lender does not see, the same arithmetic as in what a month of delay costs in an enforcement. The sale value the receiver protects is itself discounted when the sale is forced; see how to calculate the forced sale value of a commercial property.
Price a receiver as the income it captures plus the value it protects, less its fees. On a let building whose borrower has stopped paying, that is €3.94 million on a €40.0 million loan, about ten cents on the euro, against a cost of €0.24 million. The answer reverses only when the borrower is already handing over almost all the rent and nothing about the building is at risk. The enforcement alternative every option is measured against is modelled in the free workbook for this case.
Costs are typically a fee linked to the rent collected plus fixed charges and the legal cost of the appointment. In the illustrative case, 5 per cent of 2.88 million of rent collected is 0.144 million; with 0.06 million of legal costs and 0.04 million of fixed costs, the total over twelve months is 0.244 million, 9.8 per cent of the net income the receiver captures.
When the borrower is already paying over almost all the net rent and the building needs no active management. With no value at risk, the illustrative receiver stops paying for itself once the borrower voluntarily pays over 90.2 per cent of net rent; at 100 per cent it is a pure cost of 0.24 million. On a largely vacant building, its case rests on protecting value, not income.
In the illustrative case, yes, from 80.7 to 90.6 cents on the euro before sale costs. Without a receiver the lender receives no rent for twelve months and sells at 32.30 million after 5.0 per cent of value is lost to unmanaged leases; with one it receives 2.48 million of net rent and sells at 34.0 million, less 0.244 million of costs.
This article is one calculation from The Real Estate Workout. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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