Single Asset Real Estate: What are the characteristics and benefits of this type of chapter 11 case
Clients ask, what is a Single Asset Real Estate bankruptcy case? If you or your company owns a single building or piece of land, cannot pay the lender and decide to file bankruptcy, then you probably have a “Single Asset Real Estate" case. Special rules apply if you are thinking about filing bankruptcy under Chapter 11.
A Single Asset Real Estate case can work for a property owner even in these troubled times. But you have to understand the rules, parameters and guidelines if you want a Single Asset Real Estate case to work for you. Chapter 11 can help you save your property. However, Congress amended the Bankruptcy Code to make it easier for banks to foreclose on your property. They convinced Congress that a company held just to own one parcel of real estate had no real reason to survive. Congress bought this argument – hook, line and sinker. So, Single Asset Real Estate cases are challenging, but not necessarily dead on arrival.
A Single Asset Real Estate case usually involves a commercial building, apartment complex, or even vacant land. Generally, a Single Asset Real Estate case concerns a piece of property, or a project, owned by an an entity (a limited partnership, or more commonly now, a limited liability company). The entity’s sole purpose is to operate the property with funds generated by the property.
The most important creditor in a Single Asset Real Estate case is the entity’s mortgage lender. In some deals, the entity has secured financing from second-tier or mezzanine lenders. The Singe Asset Real Estate entity may also owe debts for taxes, utilities, or property management fees.
Under the Bankruptcy Code, a Single Asset Real Estate case has the following three characteristics:
- a single piece of real property or project (excluding residential property with less than four units);
- which generates substantially all of the income for the debtor (who is not a family farmer); and
- the company (or debtor) operates no substantial business other than operating the property or project.
A Single Asset Real Estate case is not limited to small projects. It can include large commercial properties. Even a large shopping center worth millions of dollars could be Single Asset Real Estate case. If you are the member or owner of a Single Asset Real Estate entity, there are benefits to filing a chapter 11 case. However, you have a more difficult road than a typical debtor in chapter 11. Our third and final blog in this series will explore the benefits and difficulties associated with a Single Asset Real Estate case.
One significant benefit of a Single Asset Real Estate entity filing chapter 11 is the automatic stay. The Bankruptcy Code provides that all foreclosure and collection activity must stop when a debtor files bankruptcy. If your company is facing an imminent Motion to Appoint a Receiver or a Foreclosure Sale in a state court case, filing chapter 11 will temporarily stop the state court action from moving forward.
The automatic stay will also provide the Single Asset Real Estate debtor some flexibility to develop cash if the property has tenants and is producing cash flow or rental income. If there is sufficient cash flow, a Single Asset Real Estate Debtor will be more likely to develop cash when the value of the loan is worth less than the value of the property.
While the automatic stay is beneficial for many debtors, the automatic stay has a limited shelf-life in a Single Asset Real Estate case. The automatic stay is limited to a 90-day period in Single Asset Real Estate case. At the conclusion of the 90-day period, the Single Asset Real Estate debtor must propose a plan of reorganization or begin to tender monthly payments due to the lender(s) of the debtor. Through planning prior to filing for bankruptcy, you can prepare for the difficulties presented by the limited application of the automatic stay.
Despite the abbreviated period for the application of the automatic stay, a Single Asset Real Estate case still has benefits. Generally, with proper planning, a Single Asset Real Estate debtor may be able to successfully cram down a lender. A cram down, under the Bankruptcy Code, allows a debtor to modify the monthly payments (and the amount of principal) due to a lender under loan. If a Single Asset Real Estate debtor can propose a feasible chapter 11 plan of reorganization, then it is more than likely that the entity can:
- Reduce the monthly payments which may have caused the entity problems prior to filing bankruptcy; and
- Allow the debtor (or its investors) to enjoy any appreciation in the value of the property after the chapter 11 plan is confirmed.
To be clear, while there are some risk in filing a Single Asset Real Estate case; with the right counsel, strategy and planning, there are many rewards which may be realized by an entity (or its investors).