The economic struggles of the past several years have put significant pressure on many aspects of the U.S. economy, none more so than the real estate market. For owners of single asset real estate in distress, the question can become: do I let the property proceed to foreclosure, or do I try and wade it out, potentially restructuring through a chapter 11 bankruptcy filing? Chapter 11 bankruptcy can be a particularly attractive option, if the owner is prepared to move with efficiency and purpose.
Real property is considered “single asset real estate,” or “SARE,” when it is a single (or standalone) project that is responsible for generating all, or nearly all, of the debtor’s income such as shopping malls, industrial and commercial properties, and apartment complexes.
Initial time restrictions are unique to a SARE chapter 11 case. Specifically, within 90 days of the date of filing, or within 30 days after determination that it is a SARE case, the debtor must file a plan of reorganization that has reasonable potential of being confirmed or, alternatively, commence monthly payments to the debtor’s secured creditor in an amount equal to interest at the then non-default rate on the value of the secured creditor’s interest in the real estate. This provision ultimately limits the time the debtor can spend in chapter 11. In order to evade the SARE-specific provisions of the Bankruptcy Code, and in an effort increase its time in bankruptcy, a debtor may not, initially, deem itself a SARE entity. This strategy is risky and rarely successful as the debtor’s secured creditor can challenge the designation.
Although the timeframe is shortened, chapter 11 bankruptcy is still an option for real estate borrowers in distress. The “pause” immediately after a filing can allow the debtor to market the property, raise capital and/or formulate a legitimate and reasonable plan of reorganization. Chapter 11 bankruptcy, particularly for a SARE debtor, should not be a rushed decision, but rather a thoroughly considered option that may, in fact, assist in the retention of the real estate.