SINGLE ASSET REAL ESTATE CASES
I. WHAT IS A SINGLE ASSET REAL ESTATE CASE Under the Bankruptcy Code, a single asset real estate means real property constituting a single property or project, other than residential real pr operty with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental thereto. II. FILING THE CASE AND KEY ISSUES THAT ARISE A. The State Court Process 1. File before the foreclosure sale and potentially before the appointment of a receiver. Usually the case is filed after the lender initiates a state court foreclosure proceeding. Be careful not to wait too long to file. If the property has already been sold at a foreclosure sale, the bankruptcy will not help. If a receiver is appointed already, the lender may ask the bankruptcy court to allow the receiver to remain in place during the bankruptcy. B. Use of rents and adequate protection. The rents generally can be used to operate the property. Plowing the rents back into the property protects the value of the rents and the property. C. The lender usually seeks to get the stay lifted to proceed with the state court foreclosure action. 1. Section 362(d) authorizes relief from the stay under three conditions:
- The lender is not adequately protected;
- There is no equity in the property and it is not necessary for an effective reorganization; or
- The debtor has not filed a realistic plan within 90 days or the debtor is not paying debt service.
2. The request for stay relief has to be addressed fairly quickly in the case. Because of this, there are advantages to getting a plan on file as soon as possible. III. A SHORT PRIMER ON CRAMDOWN A. Methods of Cramdown Cramdown is the process whereby the debtor tries to restructure its debt over the objection of a the secured creditor. Historically, there are three statutory methods of cramdown: (a) providing the creditor with the indubitable equivalent, which typically meant a swap of one parcel of real estate for another or to permit the debtor to tender the collateral back to the lender in a "dirt for debt" plan); (b) sale of the collateral, or (c) deferred cash payments. In a real estate case, the more prevalent method is the third method: lien retention by the lender, and restructuring of the mortgage debt through deferred cash payments. The underlying logic of cramdown is that it insures that a lender will receive periodic cash payments, for a determined period of time, which must have a present value, equal to the value of the lender's collateral. This appears to be the functional equivalent of a state law foreclosure, in which the lender is only assured of receiving the real estate collateral. Cramdown, in essence, gives the mortgage lender the economic equivalent of a state law foreclosure, though the secured lender does not obtain control over the property at issue. B. Issues related to the most prevalent method – deferred cash payments 1. The first task is to determine the allowed amount of the secured claim. This sometimes involves a protracted hearing on value where each side presents an appraisal and the court issues findings based upon the testimony. In 1997, the Supreme Court in Associates Commercial Corp. v. Rash held that in a chapter 13 case, the correct method of valuation where collateral is retained by the debtor is the replacement value standard. This has little relevance in a chapter 11. Generally speaking, the value is determined by discounted cash flow method. 2. Once the value is determined, the next step is to apply an appropriate cramdown interest rate. The state of the law on this is the Till case from the Supreme Court, which adopts a prime plus 1% to 3% presumption, depending upon the risk profile. 3. The next step is to determine the amortization period. No hard and fast rule on this. Most plans provide for a long amortization period, with a balloon after a certain time period. IV. MEASURES TO OBJECT TO CONFIRMATION OF A SINGLE ASSET REAL ESTATE PLAN. A. The 1111(b) election. 1. The purpose of the section 1111(b)(2) election is to prevent an undersecured mortgage lender from being "cashed out" in a plan. Such an outcome could result, for example, where a borrower proposed to pay the mortgage lender, in cash, only the current market value of the collateral. 2. Section 1111(b) allows a creditor to have its claim treated as fully secured, notwithstanding the value of the property. In In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596, 600 (7th Cir. 2013), the Seventh Circuit held that this applied even when the lien was completely unsecured. Reasoning that “[t]he value in the collateral is immaterial; § 1111(b)(1)(A) treats the [claim subject to a security interest] as a recourse loan.” 3. Under Section 1111(b), the nominal amount of the entire claim has to be paid over time, although present value considerations also enter into the equation. B. The absolute priority rule, the retention of equity and the new value plan. 1. Under the absolute priority rule, equity cannot receive or retain any property unless all creditors are paid in full. 2. There is a general consensus that there is an exception to the absolute priority rule known as the “new value exception.” It allows the equity to essentially be purchased through an infusion of new capital or new value. Historically, the existing equity holders provided for the infusion of new capital under the plan. The requirements are that the new value be (a) new, (b) substantial, (c) money or money's worth, (d) necessary for a successful reorganization and (e) reasonably equivalent to the value or interest received." 3. In the 203 N. Lasalle case the Supreme Court held that the right to infuse the new capital was a property interest that was provided on account of an existing owner’s equity interest and thus a plan that allowed existing equity the exclusive right to propose a new value plan was not fair and equitable. 4. In order to propose a new value plan, the opportunity to propose the new value is a property right that has to be offered to others through a competitive process or otherwise. Generally this means the equity in the debtor has to be subject to competitive bidding (i.e., a market test). Courts also indicate that the competitive bidding requirement can be satifisfied if the exclusivity period has expired. In that situation, any party can propose a plan and thus old equity does not have the exclusive right to make the new value infusion. 5. The Seventh Circuit has suggested (some say it has held) that a plan of reorganization that includes a new investment must allow other potential investors to bid and that “in this competition, creditors can bid the value of their loans.” In re Castleton Plaza, LP, 707 F.3d 821 (7th Cir. 2013) (citing RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 182 L. Ed. 2d 967 (2012)).