Issue Date: March 2009, Posted On: 2/15/2009

Consider Receiverships to Boost Business

The Insider recently spoke with commercial property management veteran Richard Muhlebach to gain insight into one approach to boosting business during an economic downturn: managing properties in receivership. With almost 40 years of experience in commercial property management and leasing, Muhlebach has co-authored 17 books, including Managing and Leasing Commercial Properties, and teaches internationally.

Insider: In light of the sagging economy and high vacancy rates, what are property management companies doing to stay alive?

RM: Many of them are looking at receivership opportunities. A receivership occurs when the courts appoint a disinterested third party to manage a property that's either struggling financially or that is involved in some sort of legal proceeding, such as a bankruptcy or foreclosure.

Insider: Is this a new concept?

RM: No. Receiverships have always been around and were very popular in the '90s when the economy was struggling, much as it is now. But when the market took off, receiverships were rarely utilized because money was plentiful and there were virtually no foreclosures or bankruptcies.

The main reasons why receivership is starting to make a comeback are that vacancy rates are increasing while rents are declining, and many commercial loans are coming due in the next three years. With the economy like it is now, some borrowers/owners won't be able to refinance. The end result will probably be a lot of distressed properties.

How Receiverships Work

Insider: How does the receivership process work?

RM: The specific rules vary from state to state, but some general features apply to all receiverships. When a borrower/owner is struggling to make its mortgage payment, the lender may become concerned that the owner is using the funds from its property for other business ventures not related to the property, or simply is not putting the funds back into the property. So, to protect its interest, the lender petitions the court to appoint a receiver to come in and manage the property.

The court appoints a receiver who is responsible for the day-to-day operations of the property. The receiver makes all decisions about the property that would have normally been made by the owner, and maintains its responsibilities until there's a resolution on the loan and the property comes out of receivership. Receivers are often property managers or other real estate professionals, who in turn are likely to hire a property management company to handle the day-to-day operations.

Insider: What happens to the borrower/owner and its on-site property staff after the building goes into receivership?

RM: When the receiver and property management company are appointed, the borrower/owner no longer manages the property. The borrower/owner doesn't lose title to the property, but the new property management company is fully responsible for operating the property. Usually, the new property manager hires the existing on-site staff.

Insider: How long does the receivership last?

RM: Each case is different. But my experience is that a receivership usually lasts one year. I've been involved in receiverships where the owner was able to refinance the property and take it out of receivership in three months.

In many receiverships, however, the lender ends up with the property in a deed in lieu of a foreclosure agreement. In that case, the lender becomes the new owner, and the management company that had been serving as receiver is hired by that lender to continue to manage the property until it is sold—which could be nine months to two years.

Understanding Your Role

Insider: What exactly is the property management company's role in the process?

RM: Once appointed as receiver, the property manager operates the property—it collects the rents, pays the bills, and ensures that the proceeds are being spent wisely.

But property management companies can have two roles in the receivership process—the role as the receiver and the role as the property manager. For example, in two cases, my company was the property manager working for the receiver, who was an attorney, and in several other cases, we were the receiver and we hired ourselves to be the property managers (of course, that was disclosed upfront, and we charged a market-rate fee).

The receiver is the person appointed by the court. The receiver takes orders directly from the court and is responsible for working to protect and, if possible, enhance the value of the property while in charge.

Insider: Isn't it a conflict of interest for a receiver to hire itself?

RM: As long as you disclose everything upfront and charge market-rate fees, there shouldn't be a problem. In the case where we hired ourselves to manage the property, the lenders actually preferred the receiver and the property manager to be one and the same, because they felt that it was more cost effective.

Charging Appropriate Fees

Insider: Speaking of fees, how do you determine them?

RM: If you are the property manager and the receiver, you may choose to charge an hourly rate to be the receiver and then get a market-rate management fee to manage the property.

Insider: What should the fee be?

RM: Obviously, it needs to be a market-rate fee, but if the property is in disarray, it's not uncommon for property managers to charge a double fee for the first couple of months—because records may be disorganized, the property may have deferred maintenance, and tenants may need extra attention. And then after that, you would charge a normal market fee, based on the challenge of managing that specific property.

Meeting Challenges, Avoiding Common Mistakes

Insider: What are some of the biggest challenges that property managers face when dealing with a receivership?

RM: One of the more prevalent challenges of managing a property in receivership is that the property may not have enough cash flow to pay all of the bills. When you're responsible for the property, you have to prioritize your spending, with safety being the primary concern.

Often the owner/borrower does not have the funds for major maintenance and capital improvements. And the lender may be reluctant to advance funds for the property because it does not know if it will acquire the property.

My experience is that, after they acquire ownership of the property, most lenders want to sell the property as-is. But the property manager may be able to persuade them that by investing in the property, they can substantially enhance the value of the property. But they make that decision in a relatively short period of time, and as a property manager, you have to be ready to respond to the goals and objectives of the new owner of the property, the lender.

Insider: What's the most common mistake that property management companies make in a receivership situation?

RM: Many property managers think that they are working for the lender, because the lender petitioned the court for them to be appointed the receiver. But actually, the receiver is working for the court and can't show any favoritism to either the lender or the borrower/owner. Showing favoritism to the lender can get receivers sued by borrowers/owners.

Marketing Yourself to Lenders, Attorneys

Insider: If property management companies want to be considered for receiverships, where should they start?

RM: Definitely start with real estate attorneys and lenders. Market your services just as you would if you were trying to manage space. Let them know that you are qualified and can act quickly—that's important, as receivership opportunities move fast. If you get appointed today, you better be ready to go today. You don't have a week or two to gear up to operate the property.

Insider: What do lenders and real estate attorneys look for most in property management companies when dealing with receiverships?

RM: Usually they are looking for real estate professionals—property management companies or other real estate professionals—with experience in a specific property type. It's very important to them that they get a receiver that has experience managing the type of building that is the subject of the receivership.

The same goes for property management companies. If you appoint yourself as property manager, make sure you have experience managing the type of building; otherwise, you risk failing miserably.

Insider: Any closing advice for property management companies that want to consider receivership opportunities?

RM: A few things: First, have a clear understanding of the receivership process.

Second, be prepared to take on a property at a moment's notice. If you get appointed today, be ready today.

Also, don't show favoritism to the lender. If you do, you could end up getting sued by the borrower/owner.

Finally, communicate equally with all parties, including the court, about all activities related to the property. Don't have one-sided conversations with any party, particularly the lender.

Editor's Note: It is helpful to have the management agreement between the receiver and the management company approved by the court. An approved agreement that describes the management company's responsibilities will help reduce the need for frequent trips back into court to seek approvals for simple decisions.

Insider Source

Richard Muhlebach, CPM, CSM, CRE: Woodinville, WA; (206) 660-6902; muhlebach@comcast.net.

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