Receivership Strategies: Turning Around Problem Projects for Lenders

Steven E. Ernest:

We thank you all profusely, genuinely, and from the bottom of our dead cold hearts today for joining us for this receivership focused webinar. It's going to be terrific. Like I say, I hope on your screen you have a picture of me, a picture of Laura Blair and a picture of John Bohannon, and at the end of all of this you'll get our contact information as well, and you say, well, Steve, what if you scroll through that slide too quickly and I don't get the opportunity to write it down.

I have a solution for you because we will share all of these slides following the conclusion of this webinar. We will also share the recording of all this, so if you feel like there's something that you may have missed or you just want to enjoy the splendor of probably 90 minutes of receivership instruction again and again and again, you can do that at no extra charge or yeah, no extra charge. You can do that for exactly what you've paid for. This already here is one of the rules that we have for all of this though, I believe at the bottom of your screen, potentially at the top, depending on the browser you're using, there's a little button that says chat, and there's a little button that says q and a. If you have anything that you want to tell us, put it in the q and a.

If you have something that you just want to write down that you want us to either ignore or never see, put it in the chat because we're never going to look in there. This is only a q and a based program that we have going today. So without further ado, we're going to get started and I think I've wasted two minutes waiting for the late people now. Anyway, so everybody's here. What is receivership? Well, what we do with receivership in lending is it's someone to kind of stand next to the court or in between the lawyers who are suing your borrowers and your borrowers themselves. Hey judge, there's a bunch of money over there and it's going to disappear before the wheels of justice can spin to their resolution in my case. And so I need you to get my stuff now because the world is burning down.

The receiver is the person who receives that money and we have one of them with us today. You're going to hear from her and him in just a little bit, so that'll be exciting for most of us. With asset protection, a lot of times those are things like lots full of tractors or cars, things that are valuable that might disappear if someone is nefarious, value preservation, those are things that if not properly maintained, are going to be worth a lot less in six months than they are now. Think about if you have a resident somewhere and your borrowers using it as a meth lab, those things tend to explode. You might want to get somebody in there to preserve some value. The last category I think are the most obvious ones and potentially the most often used rent collection and tenant stabilization. Those are a lot of times hotels, apartment buildings.

I did one once on a nursing home, so places like that where there's a bunch of individuals participating in providing money that ostensibly your borrower is using to pay his ongoing obligations including you, but obviously since we're having this discussion, they're not doing that. And so you need the receiver to stand in there and kind of take the money from the tenant or whomever it is that's paying the rent and stick it in their pocket and then send it to either the court who sends it to the lender or send it directly to the lender because the borrower can't be trusted anymore to pay the bills that they're supposed to be paying. So there's an overview assignment of rents and receivers. What is a receiver? Well, it's a property manager that's on the court's approved list. It's also an agent of the court, not of either party.

So you as a lender are not necessarily hiring a receiver. A lot of times you're going to select the receiver and suggest to the court that this is the receiver to be used, but they're not your employee. You don't get to call and tell them what to do, only the court gets to tell them what to do. The court's going to do that with a lot of your input or the input that you're giving your attorney that your attorney is giving to the court, but this isn't someone that you can just call and bark at and tell them what to do all the time. It's the court that gets to instruct them. In California, which is where, well, this presentation is based on California law, so that CCP doesn't refer to the old Soviet Union. That's the California Code of Civil Procedure, and that is the place where a lot of times we get the authority from the court to have these receivers appointed and I know how much people who are over the age of six enjoy being read to.

So I'm not going to read that quoted section to you, but like I said, we're going to share the slides at the end. You can read it for yourself and if not when you hire us or really any other good lawyer to get a receiver appointed for you, this section is probably going to populate a good part of one of the first couple three pages of your motion. So it should be in there and if it's not, you might raise an eyebrow and think if you're think about whether you're using the right guy or not. All right, so the next one, the assignments provision is ordinarily found in your deed of trust. It's usually a couple of paragraphs that's in your long form deed of trust. Those are 1720 pages ordinarily in California. It's probably found in there if it's not. Not to worry. Do not let your heart be troubled.

There is more than likely another writer is a fancy way to say another document which was a part of the closing. It'd be surprising if it weren't, and it's easier to find because usually it's headed assignment of rents and it has bold letters right on the top so it's easier to find and all. Well, not all it's going to say, it's going to say a lot of things, but what it's going to do for you is say, Hey, in addition to all the other items of collateral, the rents or any profits that are being generated by this property form a part of our collateral as well, and in the event of a default, we're entitled to have that rent or the bag of diamonds or whatever else it is that might be hanging around there as part of our collateral, and we can get that too.

If you have that, your glide path to getting a receiver appointed is somewhat smooth. If you don't, you need to do two things because they know most of the lenders that are going to be on this webinar have a portfolio of loans and not just one. So if it's not in one of your loans, it's probably not in most of your loans and that's a problem. There's ways to remedy it looking backward, not a lot of good ways, but there are ways. But think about your loans going forward. If you're closing six loans a month and you don't have assignment of rents provisions in your standard closing documents, find a way to get them in there in all the rest of these and it won't be a tough sell to your borrowers. They're probably expecting that they're going to be signing these in all of your loans.

And I know that Lightning Documents, one of the products offered by my law firm always has assignment of rents provisions in it. So if you're not using Lightning Documents, you probably should, but we're not selling anything today in this webinar, so we're going to move on from that. If you don't have an assignment of rents provision in your loan documents, there are ways, like I say, not a lot of good ways, not a lot of easy ways, but you still have a puncher's chance of getting a receiver appointed and one of the ways is using this subsection B two and that tells the court, my God, the world's going to end. There's a great risk of loss here. Part of our collateral is going to be removed. There's going to be injuries. These circumstances where that happens, like I mentioned or alluded to before, that's a car lot.

If you go to, maybe you didn't know this, but if you go to your local Mercedes-Benz dealership, there are hundreds of vehicles on the lot and you think, wow, this guy Fletcher Jones must be really wealthy and in fact he is, but those are not all of his cars. Those cars belong to the manufacturer which then finances them for the dealership until they sell. Well, if a car dealership is falling on hard times, what they do a lot of times is collect money from their customers and then they don't pay their lender, and then when the lender starts to rattle savers at them, the cars start disappearing. That can happen. Same thing happens in hotels and nursing homes and department structures when they're not servicing their debt, they've got tenants in there. Most of the tenants are paying their monthly obligations. Here's a better one.

Section eight housing, I think Section eight in California pays twice a year every six months, and those checks come very regularly. And when the borrower gets this enormous check from the government or a thousand of them from their tenants, what they're supposed to do is account for part of it to pay their bills. And if they are running out of money, a lot of times what they'll do is just keep the money and not pay their bills. So if you didn't have an assignment of rent provision, those are the kinds of concerns you would raise to the court saying, look, the section eight payment is coming again in 60 days and we want to make sure that there's a receiver to get it and send it to us because if there's not using the past eight months as a guide judge, the checks are going to come and the money's going to disappear and that's our collateral and is not allowed to do that.

So even without an assignment of rents provision, many times you can make a compelling argument that a receiver is justified. Nonetheless, this B nine subsection, that's the property itself is in danger. There are two circumstances I would raise in that or tell you that they might fit in and they're both kind of good ones. One of 'em, there's a meth lab there, judge, those things tend to blow up and burn everything down and the structure, the improvements on this property are still valuable and we would prefer that they didn't explode. And so we need a receiver. The second is squatters. Squatters somewhat of a diminishing problem in California, but a problem nonetheless, when you have vacant property, people move into it. They tend to not do or conduct routine maintenance on buildings the way a homeowner would. Let's say there might be a flock of geese living in the second floor and a bunch of people living in the first floor and they're not paying anyone anything, and so your receiver can help you, and that's kind of a B nine circumstance that I might raise.

Good. So how does one get a receiver appointed in the process? On this left column that you can see here, you're going to have to file a lawsuit, but Steve, I'm doing a non-judicial foreclosure. I have a trustee sale going. Can I still file a lawsuit lawsuit? Absolutely, yes. You can double track those and if you wanted to, I think, I don't think I know if you called me and said, this is my circumstance and I want a receiver and I've got a trustee sale going, I would file a lawsuit for all of your judicial foreclosure stuff and your deck relief action, which is going to probably and specific performance, which are going to be the vehicles that get you to your receiver, and I would file that and you file that lawsuit on Monday. Well, how long does it take to get the receiver?

Well, it depends on how hot burning a fire your risk is, but you can get them appointed on ex parte notice. And you know how we law types love to use Latin words. This one's kind of obvious. Parte just means without a party you can go in on Tuesday and ask the court or tell the court about the problems that you're having and get a receiver appointed that next moon to appoint a receiver. I think that one is a typographical error. I've been practicing law 28 years now. I think I have on somewhat regular occasions during my career, had a receiver appointed and talked to a judge about doing that. I have never used the strategy of mooning a judge in order to have a receiver appointed. I'm not going to tell you that it wouldn't work, but it's never been a strategy that I've employed.

I don't think I'd recommend it, but I don't want to stifle anyone's creativity. Do what you want. The receiver generally is going to have to post a bond. The receiver themselves is going to know how to do all of these procedural things and it makes sense that they would need to post a bond because they're kind of a stranger to the transaction between the lender and the borrower and say the tenants the most obvious person that's giving the money around. So instead of the tenant paying their rent to the borrower and the borrower paying their rent to paying the mortgage to the lender, the tenants pay their rent to the receiver and you can't just have a receiver stranger to this transaction taking all this money and putting everybody else at risk. So the bond is what protects the borrower from the receiver stealing their money, which I have never seen happen, but the bond is always there.

Nonetheless, the receiver is also going to provide monthly accounting. We don't just give them all this rent and say, do your best and please be honest, they're going to give a monthly accounting to everybody including the court and then to be discharged. That is essentially when the receiver completes their tasks or is fired or the case is over, they've got to move for an accounting and terminate the receivership with the court collecting rents without a receiver. This one does not come with my recommendation, but you can do it and it always must be accompanied with an assignment of rents provision and without the receiver, what essentially happens is the lender just sends a scary note through his counsel ordinarily telling the tenants, Hey, don't pay money to your landlord, my borrower anymore. Pay them directly to me. You can do it. It's kind of a prickly pair though. Be careful with that one.

So the takeaways on collecting rents, does your deed of trust have an assignment of rents provision? Like I say, it should. It is going to be surprising if it doesn't and if it doesn't, make sure that you get that remedied and all your future ones do. If it does, it's not too difficult to get these receivership remedies that we're talking about does make economic sense to you. Everybody needs to be paid, right? You're going to hire a lawyer to file a lawsuit, the receiver's going to need to be paid. What are the economics of this transaction? And maybe you don't care about the economics. Maybe you just want to get some leverage on your borrower who has one foot in the grave and the other one on a banana peel already. If that's the case, you make your own decisions. I'm not here to tell you how to run your life, but put everything on a balance sheet and see how it's going to work out.

Are there non-economic factors warranting the receiver? These are some of them that we've talked before. This is a fun phrase. You're borrower, they rent skimming in California. It's against the law, can't rent skim. You might want to pack your toothbrush if you're going to do that because you could wind up in jail. Unlikely. I don't think I've ever seen it happen. In fact, I know I've never seen it happen, but you could. And sadly you can't even rattle savers about that happening because you can't if you're a lawyer anyway, threaten criminal punishment in order to elicit civil gain. But if you're not an attorney, I guess you can say most of whatever you want. So put that one in your back pocket and consider it as the necessities arise. There's a need to file a lawsuit to obtain a receiver. We talked about that. There are good reasons to do that anyway.

Even if you have your non-judicial foreclosure, you can sue for judicial foreclosure. And in that same lawsuit you can sue your guarantors for a breach of guarantee. You would also sue for deck relief and specific performance and you're paying for the lawsuit anyway. You might as well add as much as you can in it and you get a receiver appointed. And if you do all of that, you're putting an awful lot of pressure on your borrower in a really short period of time. And like I say, I've been at this just short of three decades now in my experience, the one thing that parties always respond to in lawsuits always is pressure. If you gain some leverage, you put some pressure on 'em, they're going to start doing the things that you want them to do rather than simply doing the things that they want to do in this circumstance, which is not paying them. And you want them to stop doing that and start paying you. So there you go. Thus concludes my part of this and I'm going to now pass it to a brilliant mind in the field of Receiverships. John Bohannon here you are. Welcome to the Geraci webinar family.

John Bohannon:

Well, thank you Steve. So this first part of the presentation, we've heard about the law and the procedure to start a receivership, and you heard a lot about rent collection and I think a lot of receiverships for years were used to preserve income, and so it made sense that we talked a lot about that in recent years. It's become more and more popular to use receiverships for construction loans. And there's a couple of reasons for that. A big outlier for this is the fact that in the state of California, it is almost a foregone conclusion that if you foreclose on a condo project as the lender and become the owner of that asset, you will need to finish the condo project, sell the units, and you will 75% likelihood that there will be a construction defect lawsuit filed in the first 10 years of that asset's life.

We tried to fix this in California with SB 800, which was the right for the builder to cure any construction defects. You also hear the term construction effect tell this has a couple different intervals, four years for meps, mechanical electrical plumbing, 10 years for everything else. So you got this long window of potential legal action and there's a lot of law firms out there, not this one, but other firms that I know that actually just go out and pursue HOAs on newly constructed condo projects and say, Hey, we can get you some free repair work by filing a lawsuit against the builder. And so I'm not here to suggest that any lender, a construction lender of record that provided the capital to complete a condo project will actually be found in wrongful of anything. But the fact is that it's still a lawsuit you will be named in.

It's a process you're going to have to go through, it's legal bills, you're going to have to spend money on and on and on it goes. So what's happened is oftentimes lenders who are financing construction of condo projects instead of foreclosing, they will use the receivership model. And the goal here is we do not want to take title to this asset. We're going to have the receiver finish the work and sell the units and avoid this whole thing. And so we did, Laura and I here, we did a lot of this post great recession. We were out there finishing a lot of condo projects where there was a lack of performance and we had to get these done and we wanted to limit any future liability or even being named in a lawsuit for the lender. And so you've seen a lot of receiverships pop up for condo projects, and so that's increased the use of receiverships on construction loads.

We've also seen that the increase of syndication to raise the capital stack for construction loads, so you got a large loan and the equity requirement for that loan could be 10 million, $20 million or more. And so you go out to market and you raise a bunch of capital to satisfy your equity requirement. I am sure you already know that if you filed a foreclosure and on a project that isn't done yet, you're going to have a lot of investors that are going to muddy the waters. This is excessive complaints from, I mean let's say there's a hundred different investors to raise 20 million. Each one of them is going to have their own opinion as to their priority of recovering their original investment. And so it gets very complicated and one way to avoid that is to point a receiver and have the receiver deal with all of that.

So those are two primary reasons why we've seen an increase of receiverships used on project construction loans that do not get finished in the regular course and term of loan, but other reasons could happen. And the idea is that we want to preserve the work that's already been done. So it was after the great recession where banks decided that the only way they were going to start doing construction lending again is to work on a progressive payment schedule before the Great recession. Many lenders said, you need a million dollars to build it. Here's your money, go build it. Lenders didn't want to do that anymore. So they're like, okay, we want you to, we will commit to a million dollars. Why don't you start some work? And as you get work done, we'll release money to pay for that work. And thus the actual outstanding liability of the bank and the progress on the job site and equity increase in that property, that real property was commiserate.

It went together all the way up. So by the time you were fully disperse your loan funds, your construction holdback funds, the equity should be there on the real property. We do not want to get that out of balance. And so this is what happens on a construction loan that starts and then something goes wrong, whatever that is, and then you actually start to seeing a decay in the value of the real property as unfinished work sits and loses its value and equity gain in the property. So we want to preserve the work that's already done on site and the equity for the amount of the construction holdback you release. So that's a primary reason. This is a little testimony that I will give to d Rossi. They have great construction loan docs. They have a contractor diligence agreement built into their construction loan docs.

These are milestone markers with a date associated with it. These are major milestones, say foundation framing, meps, drywall finishes, certificate of completion. These are major milestones and what they do in their document is they put a date by it and then this is signed by both the borrower and gc. And so now you have a barometer in which to judge the progress of the construction loan you made and it's a really valuable tool. And so the best way to prevent problems is to actually keep an eye on it. And so I love their contractor diligence agreement. You can talk to Steve more about that, but they have it. It's a great document and it's a great way to just check on your construction load and make sure things are progressing as planned. And if they're not, this could be a good time to ask why.

And so this leads me to construction receivership. You're pretty much sure you want to do a receivership, that decision's been made. You've called Steve, you filed a lawsuit, and so then what are the next big steps and what are some of the important contributions that receivership does? It starts with, hey, where are we right now with this project? How did we get here and what is the quickest way to resolve this? And so if we answer those questions, we're actually putting together the receivership is putting together a business plan to complete this project to the exit desired by lender and borrower, and that could be for sale, our lease up, our sell the note, whatever the exit may be. So what are the things we look for as we design this business plan for the exit? This slide really hits on all the things you forget to think about.

So what's going on onsite? How do we get onsite? How do we preserve the equity that's already been invested in the real property through construction progress? Protect it. If there's materials on site, we want to get them secure. If there's squatters, we want to deal with that. Whatever the case may be, we want to quickly do that site assessment and actually visit the site and see what is going on and what do we need to preserve and protect. And then the one that always gets missed is insurance and bonds. With construction loans, you often have to post the bond with the city. If there's infrastructure work, you may have a completion bond posted, you have permits posted, which is number three here, but they intertwine here. It's like, Hey, if there hasn't been an inspection called in the last 90 days, your permit may expire.

We want to address that immediately. We want to get on the phone with the insurance and say, do we have, if it's condos, do we have wrap insurance in place? Do we still have a valid general liability? We need to make sure all of that is in place and there. So those are some of the quick things you need to address. Steve, if you could go to the next slide please. There's a few more items we like to do and this is a surprise. Fact number four is very surprising. I don't have an exact stat on it, but I would estimate 60 40, usually the GC is not the problem on the low. I would say 60% of the time they are not the problem. 40% they are usually what the problem is is borrowers centered and it's usually dealing with cashflow on the project, meaning there have been excessive change orders, change in scope of work or requirements of the city, something that's increased the budget that they've been hiding from you, the lender are avoiding telling you.

So they've been playing games with cashflow. They've submitted draw requests that the lender has funded and then that money has been misappropriated to pay for an early on change order so that the contractor wouldn't lead the job and would continue working. And then that works for a little bit and then it gets out of control and you can't continue progress and disbursement of funds. If the contract, the lender is doing a good job and has funds control in place, the site inspection would determine, hey, you don't deserve any more money, so we're not going to give you any more money. So cashflow disruptions are usually the culprit and that's usually the bar work, guarantor centered and not the gc. So we would get in there right away. We would try to figure out that how again, how did we get here? Is the GC a good 60% of the time?

We find out that retaining the GC with proper documentation and on time draw request payments for work done can be the quickest way to finish the project and exit the asset. And so that determination needs to be made. This is where it's also very helpful to have GI Rossi's loan docs with that diligence agreement in place and you can actually reference that. But again, most of the time, 60% of the time the GC is probably good and can stay in place and is the quickest way to finish the project and not disrupt warranties, which is the next number. And huge, the last thing you want to do is disrupt a warranty in place. What is the biggest lawsuit named in condo litigation? Waterproofing? It's number one. I mean you got a little bit of moisture in a window that some law firm's going to say, Hey, we need to replace all the windows and that's probably not the case, but water intrusion is a big culprit in the construction litigation and what we want to do is preserve warranties of the original manufacturer and installer.

So if we get in there, take over and dismiss everybody, we may be rid of some very important warranties that aren't worth doing. So we really want to address it even on now that we've gone from the GC level of review to a subcontractor level of review to a manufacturer supplier level of review, like do we have warranties in place that we can point to in the future that when not, but when your condo project gets a litigation lawsuit, especially in California. So we do a very thorough review of that. And then the last thing we do is the completion value preservation, which I've hit on throughout all of these. This is key. It's number one, we want to get in and out as quickly as possible. Our goal is actually no, not to build a job forever. We have plenty of jobs we want to get in and get out.

It's the best thing to do on any construction job. And so we actually have to submit a business plan to the court, which indicates how we plan on finishing this project and exiting it as quickly as possible. So we all have a game plan. This is invaluable for you, the lender to your potential investors that you might be talking to. What's going on? We have a plan, right? This is also for the sponsor who's been told to sit in the corner, time out on you, you screwed up. Here's a new business plan we're going to implement. And so it's a great tool that gets submitted to the court, approved by the court and now we're back to the legal talks. So I will turn it over to the fabulous Laura Blair.

Laura Blair:

Hi everybody, I'm Laura Blair from BuildZig and I'm a court appointed receiver and have been so for at least 12 years and I've worked a lot with John and the BuildZig team on both construction completion projects as well as some hotel projects and some right collection projects. And the first example that we're going to talk to you about is a condo completion project. The reason that I was a qualified as a receiver, you have to be qualified as a receiver by the court as an expert in order to in that particular project in order to be able to take on the position as a receiver. My background is I'm an attorney, I'm also a licensed real estate broker and have a lot of experience with permits and entitlements. I've worked for local jurisdictions for my career and also BuildZig has a general construction license, so we have that in-house experience being our own developers for working for other people as well as this extensive legal and entitlements experience.

So we were able to get qualified in this project. It was a high-end condo construction project and the project had really fallen apart. I do want to say when appointing a receiver, a lot of times people are very apprehensive. Both the lender and the borrower are apprehensive about the cost of a receiver because it is an additional cost. But waiting too long in these projects, both in a rent collection scenario and a construction scenario can be more damaging and end up costing more for the receiver to do the remediation work. So in this project in particular, the construction project had lost most of its permits at this point. Contractors had not been paid. The general contractor was still around but malingering onsite, not getting a lot done. Maybe there was a guy there one day, maybe not the other day. The overall site was just a mess.

So neighbors were filing code enforcement complaints and once you get the neighbors upset, especially in kind of a high-end area, then you have the city really looking at you to say, when are you going to complete this project? In that scenario, especially with where contractors and subcontractors and vendors are not being paid, where the city is really tired of your project and tired of the borrower coming in with their excuses, it is really helpful to come in as a receiver and a new face and start just asking neutral questions about what has happened. So in terms of this project and the lesson to learn is as soon as the borrower is not meeting those milestones, take a proactive position and finding out what's happened and then really try if you think that a receiver is appropriate, contact your attorney and try to have that discussion because the more that the city is frustrated, the more that the neighbors are frustrated and outside stakeholders, the more you're going to have to pay your receiver and specialist in order to repair the project. But in this case, this project was very broken. The permits had not been attended to and there was just an absence of project leadership so that any possible relationship with any of the contractors or the city was in disarray and we were asked to come in and pointed as a receiver. Next slide.

So as I mentioned, the benefits of working with a receiver is in this case I was able to come in and engage with city officials and they were really frustrated with both the contractor and the borrower and to come in and say, I have the authority of the court. I've come in here to fix the project, then they're going to give you more of a permission structure and flexibility in working through the permits than feeling like they need to take a punitive that borrower, that property owner needs to learn a lesson. They don't like to follow the rules, which is how they have probably been. They had been approaching the borrower in this case with a lot of fee fines that we were able to get waived, which allowed for more money for the actual project and really having that, hey, the court has come in, they want this project to be solved and I have the ability to solve it.

Really helped with that. Another thing that we were able to do on this project is the stakeholder coordination. So when the lender is coming in through the receiver, they don't know what's been happening on the project and a lot of times what they've probably been hearing as the lender is that it's all the GCs fault and the GC is horrible and you can't trust him and it's not the borrower's fault, it's just a mess because everybody hates contractors and we come in with really a neutral position to find out what has happened and have discussions with everybody who's engaged with the project, the subcontractors and the vendors. A lot of times we find deposits that are still outstanding and we work to develop a relationship to see if this sub or if this vendor or this GC is able to finish the project and that's really the best possible outcome for all of the reasons that John stated.

If we can keep the existing warranties in place that is really and keep the existing contracts in place, it is a lot cleaner in terms of a potential lawsuit or potential issues later on if we bring in a new GC and sometimes we do have to do that, the GC is going to or the new contractor is going to exclude all of the prior work. And so if you have a case like we did here with waterproofing, how do you know if it was the first guy or the second guy? If it was the person who did the initial trenching or the guy that closed it up, it's really hard to know and everybody's going to point fingers and what you're going to end up with in a context like that when the building is all closed and you have a new owner in the building and they're complaining about waterproofing is it's really going to be hard to enforce a warranty in that context.

So with the stakeholders, we're not only focusing on what can we do to get this project done now and preserve the value but also preserve the warranties to the extent possible. Obviously if somebody's not working well with the project, then we have to weigh that, but we also think about is this something that is going to potentially come up later? A of times also the subcontractors and the vendors know where the, for lack of a better phrase, the dead bodies are buried and you're going to want to find that out in the project as you move forward. There is a reason why this project has not been able to move forward and speaking with the different stakeholders really helps out. Sometimes receivers like to come in and bring their own team, but then you don't know what has happened on this project to date. And with so much liability related to a construction project, it is better to at least give people an opportunity to share what they know and to be able to help you try to resolve the problems. I've also found that people like to problem solve and like to participate. The reason that they contracted with this project was because they wanted to see it finished. If you're able to find those helpers and get them to assist you on the project, you save money for the overall project. Next slide.

So the other benefits of working with a receiver is being able to reactivate the construction activity. So either re-engaging the prior vendors and subcontractors and negotiating payment amounts. Normally we are going to re-execute contracts and develop new lien releases and get all of that and straight so there is some accounting with those folks. We're able to reactivate construction activity and normally because we are coming in with the authority of the court with that new neutrality and with honestly treating everybody with respect, we're usually able to get that construction activity started much faster than if a borrower was just given more money. And so that's definitely a benefit and the city starts to and neighbors once they start to see that the project is moving forward, those things like the nasty letters to code enforcement and fee fines start to go down because they see that the receiver has started to create progress in the project.

And of course we are able to maximize the asset value in the high, high-end condo project that I'm talking about here, selling a construction condo project. They're the only buyer out there for this kind of project is somebody that's going to give you a bargain basement price for less than for the loan. In this case, we were able to build four high-end units. We were able to deal with all of the waterproofing issues. Actually there hasn't been any litigation in this case and we worked with a high-end broker in the area who was able to sell all of the units to people that were really paid top market. So it was a successful case that started out in quite a level of disarray. Next slide.

So in terms of this project that I mentioned, what we were able to do in the course of about two years all the way to the end of the sale of the final unit, we were able to activate construction activities and permits. We were able to resolve the payment disputes, get the lien releases. There were also liens on the property and we were also able to complete the construction project, fix liability issues, create preserve the chain of the warranties, retain a broker and sold the condos. And we also developed the HOA to maintain the property moving forward. Next slide.

So I'm going to go over the construction completion project sample outline. This kind of puts together the information that Steve gives you about the brass tacks of how you can appoint a receiver in terms of what to expect, whether or not you're hiring Gisi and BuildZig or another law firm and a receiver. So the first step is to get that receiver appointed as I mentioned, that the court is going to be looking for a receiver that has experience in that area of property management or construction completion and has a team around them that is capable of handling that project. And then we develop a scope of work for the receiver that the court authorizes normally, as Steve was talking about, this is oftentimes discussed between the borrower and the lender and agreed to and the court just signs off on it. And then the receiver does have to obtain a bond which is determined based on the project value or the amount of funds that they'll be holding.

Then the receiver takes possession of the property. We do a pretty extensive assessment of the property conditions to both secure the property and really makes sure that the paperwork is taken care of and all of the insurances. That's something that if a borrower is in distress, in addition to letting the construction slide, they're also going to not attend to their paperwork. In California there are so many requirements for your permits that people don't think of especially well all over the place. There might be a stormwater permit if you're on the coast, there might be particular requirements about how the water is discharged. When folks have gotten into trouble, they don't attend to those tiny little details, but those are the things that can end up with major fee fines or completely stole out your project. So after we've gathered all of the documents, talked to all the necessary parties, we develop a scope of work and a budget and this provides all of the parties with the lender and the borrower and your stakeholders with a roadmap of how we are going to get back into a productive property.

As the project goes along, we provide monthly accounting and reports to the court about what is happening. This is super helpful to lenders who have multiple stakeholders because you're able to provide to folks what is happening on the project on a monthly basis, especially on a project where maybe there has been a delay about what has been happening. And we're always driving towards an optimal exit strategy, which might be returning the property to the owner or mostly in construction completion projects. It's selling the property and providing all of the necessary documentation to the court accounting for that final sale. Next slide we're going to talk about another example. This was a rent collection case and this was actually an office building and a day care facility in default right now we anticipate that there's going to be a lot more office building defaults based on everybody working from home.

And so we thought that this would be a good project to talk about. And in this case, the borrower had stopped maintenance of the property and it resulted in also a decline in the building conditions and the tenants had, there was just one main tenant and they had stopped paying rent because of the deteriorating conditions in the property. Also, it was a daycare facility. So the lender was pretty concerned about this combination of having somebody not paying rent, having deteriorating property conditions, creating property liability and a bunch of toddlers on the site. So they appointed a receiver, which was BuildZig. Next slide. So the first thing that we did was we came in and we met with the primary tenant as well as the local jurisdiction because I will say that the tenant also had some issues related to their licensing. So we also met and followed up on their licensing because there were certain requirements about how the property would be maintained in order for them to keep their daycare license.

So a lot of these physical conditions were impacting the property. Then we developed a strategic plan to address the repair and also get the tenant back into compliance. And that was a working with them to develop a good faith effort. We made the repairs, we performed as we promised, and then they started to pay rent. And that really shows the power of coming in as a third party appointed by the court and coming in, not assuming that anybody is a bad guy and just listening and doing what you say you're going to do. So we prioritized urgent repairs and including HVAC, plumbing and electrical and we engaged the contractors to address the safety issues first. A lot of times when you meet with tenants, they want maybe more than you're able to provide under your budget. So we really had to focus on what would get the permits operational again and allow an uninterrupted operation of the daycare facility. Having that really solid line of communication with the tenant helped get that rent flow coming back and really being open and transparent about what you're able to do and not able to do allows for the site to become productive again in terms of rent flow because people are no longer feeling like they have a landlord who skipped town. Next slide.

So we negotiated some rent payment plans with the tenants and we did offer some temporary relief which allowed the building to keep its existing tenant. It was a really specialty building, which I think was one of the reasons why the property was in distress. It was only possible to have a daycare in that facility. So strategically we decided that we would give some temporary relief too in terms of rent payments, forget some prior rent in order to keep that tenant in the building rather than having to completely restructure the building or perform other improvements to get another tenant in. And that was the strategy to bring it back up to being a productive building and also not having litigation or an eviction, which would have not helped the property at that point as having additional litigation. Next slide. So the outcome on this project, which was a rent collection case, is we performed the critical repairs which reduced the liability. We facilitated new rent payments, improving the cashflow, and we prevented litigation and eviction by minimizing legal risks. Next slide. So John, I'm going to kick it to you to do our summary.

John Bohannon:

Okay, happy to do so. I think the biggest thing, the takeaway we would talk about with receiverships is that it's a very powerful tool and it really starts, you never want to use it, think about using it, but if you have to, it's very, very effective. And I think it starts really with doing a good job with the loan docs. So already said, G rossi's loan docs are excellent with their contractor diligence section that gives you a tool in which to monitor progress and have a discussion with your borrower and contractor over lack of progress. It starts with good funds controls, not a commercial for be zg, but any funds control, like why are you dispersing funds at any time in a project and what's the rationale for that? Do you have a line item budget you're checking against? Do you have it site inspections to determine that the work that is done onsite and that is commiserate with the amount you're dispersing. So those documents are invaluable when you have to take over a position on a deal and figure out, okay, where are we at and what has happened to date? So those are powerful things that you do that's just a good lender that attends educational events like this, right? And then next slide please.

But when you get in this situation and you want to try to figure out what to do and you have maybe an issue, a lot of issues between borrower guarantor and GC or an owner builder and you got investors independent, third party receivership is very effective and really what are we doing? What we're doing? Everything the Lord just talked about. So we're getting in there, we're trying to figure out what's going on. We're gathering all the information from all stakeholders. It's not just your borrower, it's the contractor, the subcontractor's, warranty insurance, the city jurisdiction. And when you talk about jurisdiction, now you're talking about planning department, building department, public works, coastal commission in certain areas like on and on it goes. And you don't even know all the people you need to talk to to make sure that everything stays compliant or doesn't expire and you can get your project done.

So it's a deep dive into that and then putting together a team that can execute a business plan is really key components of a good receivership. So no matter who you hire, this is where you start. Steve, if you could go to the next slide there. I'm reemphasizing all stakeholders, there's so many, and if they've done syndication raises to complete the capital stack, now potentially you're going to be hearing from all of these other investors that have an opinion and all of these jurisdictions. So you really need to have a plan and a mechanism to communicate to all parties. I do know from past experience that every month Laura submitted a progress update report to the court saying, here's how we're doing based on our plan, our goals, and our objectives. We found out that the lender of record was actually taking that report and communicating with all his investors. It was a fund and he wanted to keep them all up to date on how things were going and what the proactive nature of his management of the funds and his investors. So that was a great tool for him. He loved it. We were happy to supply. So this all gets down to the continuous communication, right? You now have something built in a mechanism and that independent third party nature of a receivership can really add some validity to it. So next slide.

Steven E. Ernest:

Oh, look at that. We've come to the end. Excellent job everyone. I hope that this was received well by everyone. Just listen. Let's see if we have any questions. It would seem we may have five. Tamir Abdu. Does the receiver industry need licensed civil engineers? I'm a civil engineer. Well, it sounds like maybe we've got an applicant for your company build Zg. What I would suggest to you to Moore is that you reach out to the BuildZig people on, link it in, and that might be a good avenue for you. So there you go. Oh wait, what did I do? Done industry. All right, same one. Are civil engineers subbed out on a per project basis? I would assume that would be a relationship that's defined by the employee and his employer and it would surprise me if the answer was anything but yes. But

Laura Blair:

That's correct.

Steven E. Ernest:

Yeah, we'll let you guys sort that out after you get hired. Arnold TiVo, what should the client expect to take to get a receiver assigned under normal court conditions? Expect to take. I'm thinking this one is how much does it cost? Steve? Answer question.

Laura Blair:

He clarifies in the next he's asking how much time?

Steven E. Ernest:

Oh, how much time? Okay, good. This isn't a cost thing because I was going to have to do a little dance, but timing is much simpler. So when we talked about it, you'd file your lawsuit on Monday and you can seek to appoint a receiver. Ex parte means without a party in Latin. And you can do that the very next day. Actually, you could do it the same day if you really wanted to, but you could do that on Tuesday. You'd get that approved if it's really a hot burning fire, it can happen pretty fast. And if you have experienced counsel with a known quantity receiver who can have the documents ready, it's not unreasonable to think that you could have the receiver in place on Wednesday if you want. If it's not really that much of a hurry. If you're not in that much hurry, then you can do it on ordinary notice, which is 16 court days. Take about a month is what you would anticipate. It's a little bit cheaper if you do it that way, but it depends. Usually these are circumstances where there is quite a lot of emergency going on. What's the, okay, we got that one. Good. Okay. How long does it take? That's one that we did. No more questions. The presenters were all also thorough and informative today that those are all the questions we have. Thank you both Laura and John. Great job. It was a pleasure. Any closing comments from either of you?

John Bohannon:

I just want to point out, Steve we finished on time. I know how punctual you like things.

Steven E. Ernest:

Wait, we have more questions now.

Will and capital, does the foreclosure process have to be started before receiver can be requested? Answer no. Or can it be requested before if that project is simply going poorly? Answer yes. Anybody have anything to add? One word answers. I guess everyone agrees from the lender's perspective. At which project scale does it make sense to hire a receiver? So we talked a little bit about the economics. What is your goal? Is your goal just to get your money? Is your goal to put a bunch of pressure on your borrower and you kind of want to hold his head underwater until he starts kicking? But the economics do need to be evaluated. I don't know that there's a project scale. Hey, this has to be a 16 unit condominium building before it's ever going to make sense, or a $17 million loan. I don't know that there's really a threshold there that I would recommend, but it's certainly worth evaluating. Is this going to pencil out for us? Laura? John, do you have anything on that?

Laura Blair:

Well, I guess I would say that the two projects that we talked about today, the one project was just a four unit condo project and the other unit was a single tenant building with a daycare. The issue really was not just finances, but overall liability. The construction project had been, there was just no end unless they were going to appoint a receiver and the idea of the fee fines were collecting and there was no other path to completing the project. So it's not just in terms of the evaluation, it's not just finances, it is also what is the risk and in terms of the lender getting anything back or any kind of liability to the borrower because the borrower agrees to it. In this case and the other case, there was this project where there were significant code violations and toddlers roaming around the building. So it didn't make sense to continue to have that. I also say that, and I guess this is to be transparent, a plug for Build Zg. We do work with the parties to try to see if it can make sense. So if it's a question that you're having, we can definitely have that discussion. And the amount of time that's invested in a 16 unit condo project or a hundred unit condo project is definitely going to be different than that single tenant unit. And we keep that in mind.

Steven E. Ernest:

Yeah. Good. All right. Our receivership laws differ or do they differ greatly by state? Quillian is in Georgia. Answer, yes. So each state has its own receivership set of statutes. Statutes. I would assume that all 50 states have them, Guam, Puerto Rico, they're going to have their own too. So you can add those in. They're generally going to be similar animals, though. There are going to be particular differences, but the differences are not going to be vast from what we told you, IE likely a single family home isn't an economical collateral. Well, Timor, I'm going to disagree with you. I think there are plenty of circumstances where probably it is, but it's going to matter in evaluating before litigation or foreclosure, however you're going to do it. All right, Timor. Excellent. Thank you so much. Well, you're so welcome, Tim. Oh, Tim. All right, well that's easier. Good. You're welcome.

Laura Blair:

No one asked about the mooning. That was my favorite part of the whole thing.

John Bohannon:

Mine as well. I think that's a great new strategy.

Laura Blair:

Yeah, I wanted to know more.

Steven E. Ernest:

Well, Laura, you are licensed statewide. You can give it a go and then do a follow up seminar and tell us how it went.

Laura Blair:

I thought you were going to teach me.

Steven E. Ernest:

Yeah, those days are gone. All right, everybody. I thank you so much, Laura and John, and everybody that tuned in we look forward to. Is there one more? This is never going to end. Oh, smiley face.

Laura Blair:

Tim. You're killing Steve.

Steven E. Ernest:

All right, guys. Have a wonderful rest of your Thursday. Thanks for tuning in. We look forward to seeing all of you at Captivate.