19 Sep Receivership of a Melbourne CBD Commercial Office Building
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 had been acquired in 2018 when it was substantially fully occupied. Over subsequent years, however, insufficient expenditure on building maintenance and capital works contributed to a progressive deterioration in the condition of the property.
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.
The building had suffered from insufficient capital expenditure and ongoing maintenance over a number of years. Initial assessments indicated that approximately $10 million of capital expenditure could be required over the following five years to address building infrastructure, services and other works.
The property also had a significant tenant concentration risk. One of the remaining major tenants accounted for more than 50% of the property’s rental income, with lease terms that were relatively favourable to the tenant. This created additional risk for prospective purchasers when assessing the sustainability of the property’s future income.
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.
Given the condition of the property, specialist consultants were engaged to undertake detailed assessments of the building and its key infrastructure. Relevant technical reports were commissioned so that prospective purchasers could properly assess the condition of the asset.
Rather than seeking to minimise disclosure of the property’s issues, Greengate adopted a transparent sale strategy. The relevant specialist reports and property information were incorporated into the information memorandum and due diligence data room, allowing potential purchasers to assess the building’s condition and future capital expenditure requirements.
Greengate also obtained an updated Building Energy Efficiency Certificate (BEEC) and completed the necessary preparatory work to enable a comprehensive marketing campaign.
Multiple property agents were interviewed before specialist agents were appointed to market the asset. The marketing strategy was deliberately structured to capture interest from both commercial property investors and developers, including parties considering the potential conversion or redevelopment of the building for alternative uses.
An extensive Expression of Interest (EOI) campaign was subsequently conducted.
The campaign generated multiple competing offers. The offers contained materially different pricing, conditions, due diligence requirements and execution risks. Accordingly, the assessment could not be based solely on headline purchase price.
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.
This was followed by an extensive negotiation process over approximately six to nine months, during which Greengate continued to operate and manage the property, collect rent, address repairs and maintain engagement 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 purpose of the review was to determine how rental income received prior to the appointment had been applied, particularly given the limited capital expenditure on the property and the outstanding amounts 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 necessary response, assessed the impact of the damage and missing infrastructure, arranged urgent rectification where required and entered into further negotiations with the purchaser to resolve the resulting contractual and commercial issues.
Despite these unexpected events occurring only days before the anticipated settlement, the issues were successfully resolved and the transaction proceeded to settlement approximately one week later than originally scheduled.
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, preserve rental income, manage tenants, address deferred maintenance, assess capital expenditure requirements, investigate historical transactions and develop a sale strategy capable of maximising competitive tension while managing execution 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 can provide secured lenders with greater visibility over the condition of the underlying asset, available enforcement options and the strategy required to protect and realise their security. See our insolvency services or contact us for a confidential discussion.
