James Schaff Interview

With the imminent change of government and the expiration of certain relief packages, we're talking to senior bank offices and REO asset managers and banks on the West Coast about issues in the real estate market. This conversation explores court-appointed receivership, both from a receiver’s perspective, as well as the clients that are carrying notes from folks who might fall into distress.

In this conversation, we talk to James Schaff, an expert in receivership strategies to preserve wealth in real estate.
We're expecting there to be changes in the law in the new year that will lead to a lot of foreclosures. How does receivership play into that?

So there are a few circumstances under which receiverships make a ton of sense. So I'll start with a couple of things. First, very rarely, would it ever make sense on a single-family property or something that was relatively small, unless there's absolutely a danger to the collateral.

Two, receivership is probably the quickest way to take the control of the property. You can get into court in a week or two and have a receiver appointed perhaps even faster in an emergency situation and the receiver can take control of the property. If there's imminent danger of damage, if there's something going on that's kind of the sudden, is where it makes the most sense. Also when there is cashflow to be captured or there's a need to reposition the property or take advantage of an opportunity and it's going to take too long to get through the foreclosure process.

Other instances where receivership comes into play is you're either going to lose out on grants or the borrower is using your own rents to fight you and paying their legal bills in their own fight, using your money in essence. And so a receiver, in essence, is appointed by the court and has the right to take over the property.

There is now a receivership statute in Oregon, previously, where we relied on case law. So it's a little more clear-cut than it used to be. The receiver has to complete some legal requirements, register with County, the IRS and make sure everything gets paid.

In addition, they can take over and they can actually borrow, in advance, funds from the lender in the right circumstance. So I've had circumstances where there was a significant lease transaction to be done, and that was going to require several hundred thousand dollars worth of tentative improvements and submissions, the borrower simply didn't have the money to do it and the bank wasn't willing to lend to the borrower, but when they had control of the building, then they were able to take advantage of those opportunities.

What are other circumstances where receivership might make sense?

The other place is the 40 or $50,000 worth of rent. They're not paying their bills. They're not paying the bank and you're going to sit there with a pile of leans in front of you. A receiver can clean that situation up pretty well as well. The other place where it makes a ton of sense is if there was an environmentally challenged property and the lender does not want to expose themselves to liability for the damage done by changing the title on the property. This can be facilitated through a receiver sale and that way they never appear on the title and there aren't those deep pockets that somebody will eventually go to.

The other case that happens from time to time is when you've just got a borrower who's angry, I'm going to do damage to the property and like I said, that's the fastest way to get control of that property.

When you take control of the property, who makes the ultimate decision about dispositions?

The receiver has full authority to basically make decisions. The lender's control tends to come from the fact that they are the purse strings. So if the receiver needs money, they probably have to get permission from the lender to get the money. So money talks in many cases, but the receiver is working for the court and therefore if it is possible the borrower can get control of the property back. I have given properties back to borrowers, I've fixed the problems and given back to the borrowers or was able to help the borrowers or solve their own problems and that ultimately helped the bank as well as the lender.

At what point does it make sense to bring the receiver into the conversation?

I would say as soon as it's legal, it probably makes sense. It will, again, depend on the cooperation of the borrower. If they're not running with your money and they're doing what you would do, it doesn't make a lot of sense. If they are utilizing your funds, not paying you, then it makes sense. Again, I am not certain that the current laws would prohibit a receiver, even today, where they prohibit foreclosure.

But I don't know that it prohibits a receivership. Now I think a court would look and say, if you went in and to sell the property, that would be frowned upon, but if you went in and took control of that property. I think that probably would still remain legal. That's a question for the courts and I suspect it would be hard to get appointed unless it was an extreme case right now. There's just the legislation slate of intent that’s pretty clear there was a protection offer. But at some point here, if it's pretty clear that they're taking your money and running with it, there's things that can be done and you know, the legislature did not specifically bar the appointment of a receiver.

If you know that you're going to want to, when the law changes, how far in advance would you want to start to work with a receiver to put the process in place?

That's a little bit of a circular question. It's generally a two to three week process from the time that I'll end up being contacted by a prospective client to the time that we're named. Mostly that has to do with filing timelines for the courts and it can be more than that and it can be less.

The nice thing is it's a very good leverage point with the borrower. If they're not doing something that you want them to do at the very least, you can say, well, listen I'm going to take this out of your hands and that by itself is known to solve the problem. I actually think it's probably an underutilized tactic in some portions of the market

What’s the state of the law regarding recievership in the Northwest right now?

Like I said, Oregon did not have a receivership bond until this last year or about two years ago. They finally passed a receivership. Washington didn't have a statute for some time and there's limited circumstances that you can do it.

Why would it be important for an REO manager sitting in Nebraska who's got properties in Oregon, Washington to have a stable, have access to a receivership or receiver?

Well, for one thing, you get talent on the ground day one, and you can secure an asset, understand what's going on with it and get direct information on what's going on. It's not filtered through the lens of a borrower. A receiver can get to the right kind of professionals, whether it's a broker, a contractor any number of professionals that would potentially protect the value of the property and that's just not something that can be done from a remote location. For instance, we have the expertise in our geographical footprint, we’re a one-stop shop. We don't act as the broker, but that's the only thing that we wouldn't do as far as management and receivership services. If it's outside of our footprint, we know the right manager or the right person to do the job and that's something where local knowledge is very important in the market, particularly when you're getting distressed assets. Sometimes creativity is what it takes to solve these problems and it's literally knowing who to talk to in many cases.

What's the typical expense for this process?

Depends on the project. I think it's generally not worth anybody's time to take a case that's going to pay less than 500 or $750 a month and often there's a setup fee and then a fee on top of it. If it's reasonable, we'll do it as a fixed rate fee and then a percentage of the sale because it incentivizes us to maximize the proceeds. We generally work with a flat monthly fee that usually includes the management fee. If it doesn't, we will engage a third-party manager and charge a 25 to 50% premium above what a normal property management with fee deal would be. That's because it's a lot more work. There are times when we do it on an hourly basis and that's because you don't know what you're getting into, and I won't touch an environmental case on a flat 50 basis and the more complex it is, the more likely you're going to see an hourly fee structure.

Would you describe the typical process?

The first 60 to 90 days of receivership is there's a lot of work, you have to figure out the building, you’ve got to figure out what's going on, where the market is and what the problems are. Then it becomes a process for those circumstances and when you run a sale it can become a pretty significant process.

In your experience, how long is, is it normal for an engagement today?

I’ve had some as short as six weeks, and I've had some that went on for three to four years. We had a very large office complex in Spokane that we ran as a receiver for North of four years.

Craig Russillo