Single Asset Real Estate Cases in Chapter 11[3].pptx

Single Asset Real Estate Cases in Chapter 11- Both the Debtor and Creditor Perspective

1. Single Asset Real Estate Cases in Chapter 11 Overview of single asset real estate cases in Chapter 11 bankruptcy proceedings.

2. What is a SARE Chapter 11 Case? Definition of a SARE Case A SARE (Single Asset Real Estate) case refers to a specific type of Chapter 11 bankruptcy case where the debtor's primary asset is a single piece of real estate property. Removal of Debt Limit in 2005 Prior to 2005, SARE cases were limited to debtors with less than $4 million in secured debt. The 2005 changes to the Bankruptcy Code removed this debt limit, allowing more businesses to qualify as SARE cases. Key Elements of a SARE Case For a case to be considered a SARE case, the debtor must have only one piece of real estate as their primary asset, have no more than 50 creditors, and the real estate must generate substantially all of the debtor's gross income. In summary, a SARE Chapter 11 case is a specific type of bankruptcy filing where the debtor's primary asset is a single piece of real estate property, and it is subject to certain requirements and changes introduced in the 2005 Bankruptcy Code amendments.

3. The Goal of the SARE Case The primary goal of a SARE (Single Asset Real Estate) case in Chapter 11 bankruptcy is typically to avoid foreclosure, buy time to sell the property, raise capital, or refinance the existing debt. This allows the debtor to restructure their financial obligations and potentially preserve the value of the real estate asset.

4. Testing for a Single Property or Project Debtor's Intent Examine the debtor's purpose and intent in acquiring and using the property. Integrated Operations Analyze whether the parcels are operated as a single, integrated economic unit. Financial Interdependence Evaluate the financial interdependence and shared resources among the parcels. Ownership Structure Consider the ownership structure and whether the parcels are under common control. Physical Contiguity Assess the physical contiguity and proximity of the parcels.

5. Determining Core Operations Identifying Core Operations Examining the debtor's primary business activities and determining whether the management and operation of the real property is a core function or merely incidental to the overall business. Analyzing Revenue Sources Evaluating the relative contribution of rental income from the real property compared to other revenue streams to assess its importance to the debtor's operations. Evaluating Staffing and Resources Assessing the personnel, equipment, and other resources dedicated to the management and operation of the real property as opposed to other business activities. Considering Day-to-Day Activities Examining the debtor's day-to-day involvement in the management and operation of the real property, including decision-making, maintenance, and tenant relations. Reviewing Contractual Obligations Analyzing any contractual agreements, such as leases or management contracts, that demonstrate the debtor's commitment to the real property as a core business function.

6. Substantially All of the Debtor's Gross Income Relative Income Test Examines the relative income from the property compared to the debtor's other operations to determine if it generates substantially all of the debtor's gross income. Percentage Threshold Typically, courts have found that if the property generates 80% or more of the debtor's gross income, it meets the substantiality test. Income Sources Considered All sources of the debtor's gross income, including rental income, business revenue, and other investment returns, are taken into account in the analysis. Fluctuations in Income The test examines the debtor's income over a representative period, such as the prior year, to account for any seasonal or cyclical variations in the property's contribution to the debtor's gross income. Exceptions and Flexibility Courts may consider exceptions or provide flexibility in the percentage threshold based on the specific circumstances of the case and the debtor's overall financial situation.

7. SARE vs. Normal Chapter 11 Comparison of time to file a plan or start making interest payments (in days) Time to File Plan - SARE 90 Time to File Plan - Normal Chapter 11 120 Time to Start Interest Payments - SARE 90 Time to Start Interest Payments - Normal Chapter 11 On court order/ confirmation

8. Good Faith in Filing SARE Cases Subjective Good Faith Test Objective Good Faith Test Factors Considered for Lack of Good Faith Importance of Establishing Good Faith

9. Treatment of Deficiency Claims Court Decisions Ability to Separately Classify Deficiency Claim Minority View Secured creditor's unsecured deficiency claim can be separately classified from other unsecured claims. Majority View Secured creditor's unsecured deficiency claim cannot be separately classified from other unsecured claims. *This data is compiled from an analysis of court decisions on the treatment of deficiency claims in single asset real estate cases in Chapter 11 bankruptcy proceedings.

10. The 1111(b) Election What is the 1111(b) Election? The 1111(b) election allows an undersecured creditor to waive its unsecured deficiency claim and be treated as a fully secured creditor, rather than being partially secured and partially unsecured. Eligibility Requirements To be eligible for the 1111(b) election, the creditor must hold a claim that is secured by a lien on the debtor's property, and the value of the collateral must be less than the amount of the claim. Implications of the 1111(b) Election By making the 1111(b) election, the creditor forgoes its unsecured deficiency claim and is instead treated as fully secured, which can have significant implications for the debtor's reorganization plan and the distribution of assets. Timing and Procedure The 1111(b) election must be made by the creditor within the time prescribed by the bankruptcy court, typically prior to the confirmation of the debtor's reorganization plan. Advantages and Disadvantages The 1111(b) election can be advantageous for the creditor by maximizing its secured claim, but it may also have negative consequences for the debtor's reorganization efforts.

11. Practical Considerations for SARE Debtors Costs of SARE Designation SARE debtors must account for additional legal and administrative costs associated with the SARE designation, including appraisals, expert witness fees, and increased reporting requirements. Negotiating with Creditors SARE debtors must be prepared to negotiate actively with secured creditors, who may have heightened leverage due to the expedited timeline and limitations on the use of cash collateral. Confirmation Challenges SARE debtors may face unique hurdles in obtaining plan confirmation, such as demonstrating the feasibility of the plan, satisfying good faith and the 'fair and equitable' requirement. Timing of SARE Designation The timing of the SARE designation can have significant impacts on the case, as it triggers a 90-day deadline for plan confirmation and limits the debtor's use of cash collateral. Navigating the practical considerations of a SARE case in Chapter 11 bankruptcy requires careful planning, strategic negotiations, and a deep understanding of the unique challenges posed by the SARE designation.

12. Strategies for SARE Lenders Attend the § 341 First Meeting of Creditors: Participate in the 341 meeting, which is the meeting of creditors, to gather information about the debtor's financial situation and the SARE property. Seek SARE Designation Actively work to have the court designate the property as a single asset real estate (SARE) case, which triggers specific deadlines and limitations for the debtor. Move to Lift the Automatic Stay File a motion to lift the automatic stay, which will allow the lender to foreclose on the SARE property if the debtor fails to meet the strict timelines and requirements for a SARE case. File a proof of claim to be sure to get paid Confirmation : participate, vote, object