19 Sep Receivership of a Melbourne CBD Commercial Office Building
A secured lender appointed Greengate Advisory as receivers and managers of a 16-level Melbourne CBD office building. The building secured borrowings of about $50 million. The receivers stabilised the property, commissioned technical reports, ran an open sale campaign and sold the building to a local Melbourne developer.
Capability: Receivership & Asset Realisation
Industry: Commercial Property / Real Estate
Appointment: Receivers and Managers
Overview
Greengate Advisory was appointed to a complex receivership involving a 16-level commercial office building located in the Melbourne CBD.
The property was bought in 2018, when it was almost fully let. In the years after, too little was spent on maintenance and capital works, and the building slowly ran down.
Tenant vacancies increased over time, with the impact of the COVID-19 pandemic further accelerating the decline in occupancy and placing additional pressure on rental income.
The company had borrowings of approximately $50 million from a foreign bank and had been in default of its loan obligations for some time.
Following the continuing defaults, the secured lender appointed Patrick Loi and John Chand of Greengate Advisory as Receivers and Managers of the company and its property.
Challenges
Upon appointment, the Receivers and Managers were faced with a number of significant financial, operational and property-related challenges.
For years, too little had been spent on capital works and maintenance. Early assessments put the likely cost at about $10 million over the next five years, covering building infrastructure, services and other works.
The property also relied on too few tenants. One remaining major tenant provided more than 50% of the rental income, on lease terms that favoured the tenant. That made the building’s future income harder for buyers to rely on.
The Receivers and Managers were also required to deal with:
- ongoing repairs and maintenance issues
- declining occupancy and leasing risk
- collection and management of rental income
- assessment of the condition of major building infrastructure
- preparation of the property for sale
- consideration of alternative uses for the property, including potential residential conversion; and
- investigation of historical rental receipts and the application of company funds prior to the receivership.
These issues had to be managed while preserving the value of the secured creditor’s asset and maintaining the property as an operating commercial building.
Greengate Advisory’s approach
Immediately following appointment, Greengate took control of the property, rental collections and day-to-day financial management of the building.
Specialist consultants were engaged to assess the building and its key infrastructure. Their reports were commissioned so buyers could judge the condition of the asset for themselves.
Greengate chose to be open about the building’s problems rather than play them down. The specialist reports and property information went into the information memorandum and the data room. Buyers could then weigh the condition of the building and the capital works it needed.
Greengate also obtained an updated Building Energy Efficiency Certificate (BEEC) and completed the necessary preparatory work to enable a comprehensive marketing campaign.
Several property agents were interviewed, and specialist agents were appointed to market the asset. The campaign was aimed at both commercial property investors and developers, including buyers who might convert or redevelop the building.
An extensive Expression of Interest (EOI) campaign was subsequently conducted.
The campaign drew several competing offers. They differed widely on price, conditions, due diligence and the risk of not completing. Price alone was therefore not enough to judge them.
Greengate evaluated the competing proposals having regard to price, conditionality, funding certainty, due diligence requirements, settlement risk and the likelihood of each transaction successfully completing.
Negotiations then ran for about six to nine months. Throughout, Greengate kept running the property: collecting rent, handling repairs, and staying in touch with tenants and other stakeholders.
Investigation and asset tracing
As part of the receivership, Greengate also undertook a tracing exercise in relation to historical rental receipts and company funds.
The review set out to find how rental income received before the appointment had been used. That mattered because little had been spent on the property and a large amount was still owed to the secured lender.
This required reviewing the company’s available financial records and tracing relevant transactions to better understand the historical movement and application of funds.
Pre-settlement challenges
Following extensive negotiations, Greengate secured a sale of the property to a local Melbourne developer.
However, the transaction remained challenging even after contracts had been entered into.
During the pre-settlement period, the property experienced break-ins and the theft of certain building infrastructure and equipment. These incidents occurred shortly before settlement and required immediate attention.
Greengate coordinated the response. It assessed the damage and the missing equipment, arranged urgent repairs where needed, and negotiated with the purchaser to settle the issues that followed.
The break-ins happened only days before the expected settlement. Even so, the issues were resolved and the sale settled about a week later than planned.
Outcome
Through active management of the receivership and a comprehensive sale process, Greengate successfully:
- maintained control and operation of a complex 16-level Melbourne CBD commercial property
- managed rental collections, tenants, repairs and ongoing building issues throughout the receivership
- commissioned specialist building reports to identify and transparently disclose significant future capital expenditure requirements
- addressed the risks associated with high tenant concentration and tenant-favourable lease arrangements
- conducted a competitive EOI campaign that generated multiple offers
- considered both traditional commercial property purchasers and alternative-use/development opportunities
- negotiated competing proposals with materially different commercial terms and execution risks
- completed an investigation and tracing exercise into the historical application of rental income and company funds
- managed significant last-minute property damage and theft immediately before settlement; and
- successfully completed the sale of the property to a local Melbourne developer.
The engagement demonstrates the importance of combining property management, financial investigation, stakeholder management and transaction execution in complex property receiverships.
How Greengate Advisory can help
Receivership appointments involving commercial property often require considerably more than simply placing an asset on the market.
The receivers and managers may need to stabilise the property, keep rent coming in, manage tenants and deal with deferred maintenance. They may also need to cost the capital works, investigate past transactions, and design a sale strategy that draws competing buyers without adding risk.
Greengate Advisory works with secured lenders, property specialists, lawyers and other advisers to take control of distressed assets, preserve value and implement an appropriate realisation strategy.
Early engagement gives secured lenders a clearer view of the asset’s condition, the enforcement options open to them, and the strategy needed to protect and realise their security. See our insolvency services or contact us for a confidential discussion.
Read more: our guide to receivership.
Common questions
What is receivership?
A secured creditor, or sometimes a court, appoints a receiver to take control of assets covered by the creditor’s security so the debt can be recovered. Receivers and managers can also run the business or property while they do it.
Who appointed the receivers in this case?
The secured lender, a foreign bank owed about $50 million. The company had been in default for some time. Patrick Loi and John Chand of Greengate Advisory were appointed receivers and managers.
What do receivers do with a commercial property?
Take control of the asset, keep rent flowing, manage tenants and maintenance, assess what capital works are needed, and then prepare and run a sale campaign.
What happened to the building?
It was sold to a local Melbourne developer. The specialist reports and property information were given to buyers in the information memorandum and data room during the campaign.
Does receivership wind up the company?
No. Receivership deals with the assets covered by the security. The company can separately be placed into voluntary administration or liquidation.
