Business is Booming for Real Estate Receivers
Thursday, August 20, 2009
What happens to those half-finished construction projects when they are abandoned by the developer? The properties are often times handed over to a receiver, who is tasked with managing the distressed property and eventually producing some form of income for the lender. We speak to Doug Wilson about what he does as a receiver, and about why his business is booming right now.
MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh and you're listening to These Days on KPBS. While most of the real estate and banking industry is slowly trying to get back on its feet, there is one area that is experiencing a boom. Real estate professionals called receivers can, when appointed by the court, take over properties that are on the verge of bank foreclosure. The receivers manage the properties until they are eventually sold. Sometimes receivers are used in residential real estate, but their biggest potential market is distressed commercial properties, everything from unfinished housing projects to hotels that can't pay their mortgages. Receivers, these days, can do a lot more than keep the lights on as they get the distressed property ready for resale. To learn how receivers operate and why they've lately become a bank's best friend, is my guest Doug Wilson, founder and CEO of Douglas Wilson Companies. Doug, welcome to These Days.
DOUG WILSON (Founder, CEO, Douglas Wilson Companies): Good morning. Thank you for having me.
CAVANAUGH: And I want our listeners to know if you have a question about how banks are dealing with distressed properties or you want an informed opinion on where the real estate market is right now, you can give us a call, that's 1-888-895-5727, 1-888-895-KPBS. And so, Doug, I tried to describe what a receiver does but I'm sure you can do it a lot better than I can. What does your company do?
WILSON: Well, we – The company actually does a number of things. It's a pretty diversified national operating company dealing with institutions, primarily large financial institutions, offering a variety of services but the receivership piece of what we do is particularly active today. And, in a nutshell, a receiver is put in place when you have a secured lender, the bank, that may have a concern about the underlying value of their collateral. Obviously, real estate values have been diminished. Because of that, oftentimes, the operator, the borrower, no longer has any equity, they no longer really have an alignment of interest with the lender and the lender may not know what's going on at the property level. They might be concerned about life safety issues, entitlements, completion of construction. If it's a residential project, it can be HOAs and it's dealing with the Department of Real Estate. And so, oftentimes, they will adopt a remedy to put in to ask a judge to put in a court appointed fiduciary, a receiver, who is working, again, for the court but to go in and really be the replacement operator.
CAVANAUGH: Right. So you manage the place and, in some instances, finish construction.
CAVANAUGH: And just make sure that the property is kept in good condition while it is going through the process of being resold.
WILSON: Yes, we – You know, it can be as simple as taking over an apartment building that is up and stabilized and just collecting the rent or it can be as complex as a large project we just took over in Washington, D.C., where it's nearly a $200 million, only 50% completed office building where the operating company in that case filed bankruptcy. The lenders already have $90 million advance and want me, as receiver, to really be put in place and, essentially, to complete the project. And so I'm really doing what I learned years ago on projects like Symphony Towers but I'm doing it under judicial supervision.
CAVANAUGH: Now why is it that banks would prefer to do this than just simply have the – foreclose on the property? Why would they want to go through this procedure?
WILSON: There are a number of very sound reasons, both practical and legal. Banks never want to act like what is called a lender in possession. They never want to be put, themselves, in a compromising position. They have learned, and their lawyers have taught them through the years, that oftentimes they ought to fall back upon a remedy that's provided for in their deed of trust, again, to put a court appointed receiver because in that capacity I have judicial immunities. I can have – my authorities can either be very narrow or very broad, depending on the issues at the asset level and how the order addresses that. And so, it – Let's take residential real estate. A lender, if they foreclose would then be getting the chain of title. If I am the receiver and I'm going to be the one completing the construction, the lender is insulated from potentially construction defect litigation. I, as receiver, as long as I behave properly, am equally insulated because of my judicial immunity. I further am able to sell those real estate assets, and lenders don't like to be in that position. So oftentimes, as a receiver, we can do a number of things operationally with the asset and we also have the ability to sell the asset.
CAVANAUGH: Right. I'm speaking with Doug Wilson, he's founder and CEO of Douglas Wilson Companies, and we're talking about receiverships. In fact, we're talking about distressed properties, how banks are dealing with them and we're talking about the real estate market right now. 1-888-895-5727 is the number. John is calling from La Jolla. Good morning, John. Welcome to These Days.
JOHN (Caller, La Jolla): Good morning.
CAVANAUGH: How can we help you?
JOHN: Well, I had a question for Doug. On a smaller scale, Doug, if it's a – how is this different than, say, an REO agent acting on the bank's behalf and basically managing and paying expenses and that type of thing? And then my second part of the question is, and what does a receiver get paid as the receiver? I guess, he gets paid by the bank.
CAVANAUGH: Okay, thank you, John. We'll have to explain what REO agent is. What – In your answer, if you would, Doug.
WILSON: No, thank you. First of all, REO really refers to the concept of real estate owned and, typically, that's when a bank has already foreclosed and taken into their portfolio an asset, and so they would have title. And so oftentimes, in that case, they could just hire a manager pursuant to a management contract to manage that asset. A receiver is put in prior to that happening because it's part of the foreclosure process and the bank may or may not elect to ever foreclose. As to compensation, receivers are typically paid on a time and materials basis, hourly, not dissimilar from lawyers except we happen to be paid somewhat less.
WILSON: But that – And why is it that way? Because when we get involved in projects, we never know the complexities. You never know the variety of issues we may be confronted with, and so we're really crisis managers. We aren't just property managers. We're dealing with, you know, a litany of more complicated issues, many of which we don't uncover until we're actively involved and under – kind of peeling back the layers of the onion to understand what the underlying issues are at the asset level.
CAVANAUGH: I want to ask you about some of those underlying issues that perhaps you've discovered on some of the properties you've taken over in receivership but I also don't want to leave this issue of compensation because in doing my reading about the receivership, it is a rather expensive proposition for the banks. They – Because receivers in general do $200, $300 an hour, something along those lines.
CAVANAUGH: And so they're paying a lot of money to be insulated, as you said, from the potential liability of being on the title.
WILSON: That's correct. I mean, it's – it's not free. But when the lenders look at the spectrum of their options and they realize that they're probably better off to spend that money up front and to make certain that they are taking the proper steps so that they are, in fact, protecting themselves and not acting like a lender in possession and not getting in the chain of title and not getting in the way of sales and potential litigation. And so you're right, it's dissimilar from property management, it's not inexpensive, but, in fact, today lenders are finding it a very powerful remedy that they're falling back to more and more frequently even than we saw in the early nineties.
CAVANAUGH: I think, you know, I'd like to talk a little bit more with you, Doug, about the kinds of properties that your company has taken into receivership and the kind of issues, as you say, you know, peeling the onion kind of issues that you've found because I think it gives us an idea of actually what the real estate climate is across the country. You're dealing with a number of different properties from condominium developments to golf courses, and tell us a little bit about that.
WILSON: Well, I've often said that what we are is a bit of an early warning barometer for where the economy is going because we are a national platform. Although based in San Diego, we have offices around the country and the lion's share of the assets we have are not located here. And so we started to become increasingly active about two and a half years ago, then with residential assets, specifically condo conversions, other forms of condominium, then residential land, master planned communities both in California with a real focus on Florida, obviously Arizona, in the Las Vegas area. And over – That escalated as the credit crunch began to escalate through all of last year and then with the economic debacle of last year, we began to see defaults in other sectors. The areas that we're seeing now are hospitality is obviously seriously challenged at all levels, especially high end. We’ve been seeing quite a bit of retail the last nine months, and we're now starting to see more commercial, even traditional office. And so what had started as a wave impacting then residential is now beginning, in the early stages, to rear its head with respect to commercial assets.
CAVANAUGH: So when you talk about hospitality, you're talking about, I would imagine, hotels and places like that, resorts.
CAVANAUGH: What do you do when you – When you get a hotel in receivership, what is it – what is your main focus? Is it keeping the business running?
WILSON: Correct. The main focus is, in any receivership what you want to be sensitive is you're there to preserve value. You're not there to rape and pillage and plunder. You want to do everything in your power to make certain that to the buying public, be it the guests of the hotel, be it the – someone shopping in a regional mall that may be under receivership, you don't put up a big sign that says 'under receivership.' To the contrary, you want to be as invisible as you are – as possible. We've recently taken over several large resorts-slash-prominent hotels. One is the Stanford Court in San Francisco, old line, well known landmark institution. One is the Wigwam outside of Phoenix with five golf courses. In both of those cases, you know, we have worked very hard to make sure that we keep the management in place. In one case, it's a Marriott Renaissance manager. In the other case, our big challenge, frankly, was that the existing management company, Starwood, told us they wanted to leave within 30 days so we had to bring in a replacement qualified management company and do such and have that transition occur in such a way that to the guests, to the buying public, it was invisible.
CAVANAUGH: I'm speaking with Doug Wilson. He's CEO of Douglas Wilson Companies. Taking your calls about real estate at 1-888-895-5727. With such a wide ranging operation, Doug, across the country I guess you have a very clear idea of how San Diego is doing in its real estate market as opposed to other areas of the country. How are we faring?
WILSON: Well, I think that all areas are challenged and continue to be challenged. But I think San Diego, especially with respect to residential was one of the earlier markets to experience some difficulty. I think we are seeing some signs now, as evidenced by sales especially at the lower end of the market, that there is some increased activity. The amount of inventory is diminished, rates are really in – are low at this particular point, but the commercial sector is still going to be challenged, as it is around the country, mainly because there is no credit. I mean, what we are really dealing with is the result of the fact that values have diminished and there is no debt available and, therefore, very few assets are trading today.
CAVANAUGH: And as – I'm going to ask you, as I think you mentioned it in a couple of your answers but I want to address directly the – what you see coming in the future. You've been dealing, as you say, with the condominiums and then it's worked into other areas of real estate. What is the next shoe to drop, so to speak, in real estate?
WILSON: Well, I think the commercial sector, which incorporates both, you know, hospitality and resort, which we have been seeing, as I indicated. We're beginning to see retail. Obviously, with the bankruptcies and the operators and the like that – it's, you know, has its struggle. If the – As the economy overall begins to improve, retail should, at some point, rebound. Pardon me. I think the ultimate – But I don't see any of this improving radically until such time as there's more liquidity in the market, until you can get people that want to buy some of these distress assets have the ability to buy them not just with equity but to also have debt available. And so until that occurs, and we have not seen that as yet, but until that occurs I don't really see a sea change.
CAVANAUGH: How long are you keeping these properties in receivership?
WILSON: It varies significantly. Some are for a matter of just a few months. Oftentimes, however, lenders who are apprehensive to foreclose today are keeping receiver in place significantly longer and especially if we have a lot of issues we're dealing with at the asset level and especially if they'd like us to sell it out of the receivership to another buyer who can buy the note, then they can foreclose. There are number of different strategies.
WILSON: And so it could be a few months to several years.
CAVANAUGH: Excuse me, but you would like to see more banks actually step up and foreclose on some properties in order to get a true idea of what their assets are, is that correct?
WILSON: Well, I think that many of us in the industry have realized that right now there's a real log jam within the banking world and there are a lot of these, quote, toxic assets on balance sheets. We – I recall well that many years ago, in the early nineties, we had a global resolution called the RTC that went in and extracted these assets and then sold them into a marketplace that began to have some order to it. Right now, we don't have that national program in place. We have a lot of capital that's been put into some of these banks, which would allow them to hold these assets for a longer period of time, but that does not solve the underlying problem. And so at some point, I think that it will be inevitable that there has to be a kind of a merger between the buyers and the sellers and there's going to have to be some liquidity as the economy improves, and then I think you'll see these assets being sold into the marketplace and things becoming stabilized.
CAVANAUGH: Let's take another call. Dennis is calling from Carmel Valley. Good morning, Dennis. Welcome to These Days.
DENNIS (Caller, Carmel Valley): Howdy. Here's my question. There's a lot of talk on the websites about shadow inventory and what that means is that if you look at the housing market in San Diego County, the available amount of homes is dropping. And I think there's a four and a half month supply and it used to be seven months. But if you look at the notices of default, they're higher than the sales so, therefore, there should be more defaulted properties coming onto the market since it's higher than sales, and everybody's wondering where this inventory is. Where are all these defaults going? And I was hoping your guest could shed some light on that.
CAVANAUGH: Thank you for the call, Dennis.
WILSON: Well, Dennis, I think you're referring to, obviously, residential assets, which I know enough about to be generally dangerous. That's not really my finite area of expertise. But I think your question's very legitimate and because to really understand the total inventory, it's a combination of what's out there for sale and what potentially could be for sale through these other foreclosures. And so I can't answer that specifically but I think that's – but I think you're spot on. You've got to add both of them together to really understand what's going on in the market. But the one thing I do see in residential, especially at the lower end, there's a lot more activity. There are clearly more buyers in the market. And a lot of these properties are involved in multiple offers.
CAVANAUGH: And for the properties that you manage in receivership, when the bank really does want to sell the property, is that when you run up against the problem of not being able to find sellers who can buy it – I mean, buyers who can buy it because there's no liquidity in the market?
WILSON: Yes, I think – First of all, there is a tremendous amount of private capital sitting on the sidelines, billions and billions of dollars, and much of has been there for the last year or year and a half waiting to step into the market to buy these distressed assets. But when you have to buy an asset with 100% equity with the returns that equity demands as opposed to being able to say, okay, let's put in 30% equity and get debt for 70% of it, obviously you can't pay nearly, nearly as much. And, therefore, the underwriting assumptions that the buyers are able to use today because of that basic disconnect in the financial architecture of how these deals are structured is just leading to a frozen marketplace.
CAVANAUGH: I want to ask you about your own journey, professional journey, because I know you started out as a developer with Symphony Towers, other developments around San Diego. And when did you see that perhaps you should change your direction in your real estate career and perhaps go into this receivership?
WILSON: Well, Maureen, I learned that based on real life experiences. In the eighties, when I moved here in my thirties, to develop Symphony Towers, I, on a concurrent path, had been an entrepreneur in Colorado which, during the eighties, was impacted by the energy correction, which was a powerful thing and so I would, here, talk to the Chamber of Commerce about Symphony Towers and at night go home and call my lawyer and say, how am I doing with the assets, you know. And he said, Doug, if you're breathing, it's through a snorkel. So I learned the power of cycles, the inevitability of cycles. And I further felt that most developers had a very flawed business model because I determined that economic cycles, credit issues, were inevitable, and most developers are so dependent upon one or two particular deals that when the music stops, if you don't have cash flow, you have to sell your assets at the wrong time in the market. And so I, in the late eighties, said I'm not doing that again. I'm going to come up with a countercyclical business model that could not just get by but, in fact, prosper in more difficult times and determined there was an opportunity to provide support to these financial institutions in – because most receivers are very localized. It's a mom and pop, they're out of work developers, property managers, but my whole goal was to develop a much more institutional platform, which we have now done on a national basis because we have offices in Orlando and Miami and Washington and in Las Vegas and – And so, you know, I never looked back. A lot of people get in this business, then when the economy improves, they get out again. But as a core competency, as a core underlying business, I said, you know, I've got to pay attention to cash flow.
CAVANAUGH: Well, since you are so attuned to cycles, I'm going to ask you to do some predicting here. What do you see? When do you see this recessionary trend in real estate turning around and perhaps your business not being needed as much as it is right now?
WILSON: Well, I – You know, I do not prescribe to what some people think. They say this is doom and gloom and this will be this way forever and ever. I think everything is cyclical. The power of this – of the last couple of years, the impact upon all of us that own assets, myself included, has been rather amazing because we've really kind of dismantled the financial architecture as we know it. That having been said, I think we'll look back three, four, five years from now and say that was difficult, it was painful, we pressed the reset button for most of us and many of the things that we do, we've essentially releveraged the entire financial system. All – Many of us personally have been deleveraged, obviously. That probably, long term, is a good thing. So I think we have a few tough years ahead of us here but also with that there's great opportunity.
CAVANAUGH: Three, four, five years, okay, I'll keep that in mind. Doug, thank you so much for speaking with us today.
WILSON: My pleasure. Thank you.
CAVANAUGH: I've been speaking with Doug Wilson, founder and CEO of Douglas Wilson Companies. I want to remind you that you can post your comments about what you hear on These Days on our website, KPBS.org/TheseDays.