Commercial Real Estate Foreclosure

With the latest changes in the economy and real estate market, commercial real estate has had its share of foreclosures.

Commercial Real Estate Foreclosure
With the latest changes in the economy and real estate market, commercial real estate has had its share of foreclosures. Throughout the United States, commercial real estate foreclosure happens more often than you may think. Just like the residential real estate market, apartment complexes, shopping centers, office buildings, land developments, strip malls, shopping malls, and industrial properties are not immune to foreclosure.

There are a significant number of Chapter 11 Bankruptcy cases which involve partnerships, limited partnerships, corporations, LLCs or other entity debtors whose sole significant asset is a commercial real property. In the majority of cases, the primary creditor is mortgage company, lender, or sole lien holder. There are numerous reasons commercial real properties end up facing foreclosure. Many find themselves in foreclosure due to a decrease in vacancy, an increase in property taxes, an increase in interest from a hard money lender, unexpected repairs, a balloon payment that has come due, or an increase in insurance or escrow requirements by their lender. When a commercial property becomes unable to pay its obligations or fails to maintain debt service on the property, they are treated no differently than a residential property. As a result of falling behind, the mortgage on the commercial property goes into default, which in turn initiates the foreclosure process by the lender. In the vast majority of situations, the lender fails to provide any reasonable workout options for the owner, so the debtor often considers filing for Chapter 11 Bankruptcy in order to stop the foreclosure.

A single asset real estate debtor as they are referred to under the Bankruptcy Code is subject to special provisions in the bankruptcy law. The term "single asset real estate" is defined as "a single property or project, other than residential real property with fewer than four 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." So if an apartment complex, commercial building, or shopping center is the only thing your company owns, it will most likely be considered a single asset real estate debtor in bankruptcy.

Chapter 11 Bankruptcy is initiated by filing a petition which is the official documentation that lists basic information about the debtor, the approximate amount of debt owed, the approximate value of the assets owned, and any prior bankruptcies. Shortly thereafter (15 days), the Schedules, Statement of Financial Affairs are due. If they aren’t timely filed with the Bankruptcy Court, the case can be dismissed. In most Chapter 11 cases, a bankruptcy trustee is not automatically appointed; instead, the debtor remains in possession of their property and is referred to as a debtor-in-possession. If there is fraud, mismanagement, malfeasance, or a recommendation by a creditor, creditor’s committee, or the US Trustee, a bankruptcy judge may appoint a trustee in a Chapter 11 case. This is usually the exception rather than the rule but it does happen.

After the Schedules and Statement of Financial Affairs are filed, there is a meeting of the creditors. The meeting of the creditors is a mandatory hearing, usually held within 45 days after the Chapter 11 Bankruptcy filing. At the meeting of creditors, the trustee and creditors may examine the principals of the debtor regarding the assets and liabilities of the bankruptcy estate. At the meeting of creditors, the debtor or their representative can be asked questions under oath as to the condition of the debtor and the viability to reorganize the property. If more information is needed a 2004 examination can be requested. A 2004 examination is an extended examination of any person pursuant to Federal Rule of Bankruptcy Procedure 2004 regarding one or more aspects of a debtor’s financial affairs. A Rule 2004 examination is similar to a deposition in a non-bankruptcy proceeding.

In the interim, the debtor has time to file a proposed plan of reorganization along with a disclosure statement. The disclosure statement is a document filed in a Chapter 11 proceeding that describes a debtor’s reorganization plan, its effect upon the creditors, the ability of the plan to be performed, along with a comparison of the reorganization plan's repayment proposal to the results likely to be obtained in a Chapter 7 proceeding for the same debtor. The creditors of a Chapter 11 debtor-in-possession may not vote for or against the reorganization plan until the court approves the contents of the Disclosure Statement at a Disclosure Statement hearing.

The Chapter 11 plan of reorganization sets forth in detail how the debtor intends to conduct its business, while continuing to make payments to its creditors. In certain situations, the creditors can also propose their own plans of reorganization. In a Chapter 11 plan, creditors are divided into different classes with different rights depending upon what types of debt claims they hold. Getting a Chapter 11 plan approved often involves diligent and skillful negotiation by the debtor’s counsel with input from creditors. In the end, a Chapter 11 plan of reorganization has to be approved by the Bankruptcy Court. In certain cases, the Bankruptcy Court can approve the plan even when some of the creditors did not. If a plan cannot be approved, the Chapter 11 Bankruptcy is oftentimes converted to a Chapter 7 liquidation or alternatively the Chapter 11 case may be dismissed.

In a commercial real estate case such as with an apartment complex, shopping center, strip mall, office building, or other single asset real property, a Debtor can do many things to help aid in its reorganization and regain control of its financial affairs. Getting a Chapter 11 plan of reorganization “confirmed” or approved by the Bankruptcy Court is the key.

Chapter 11 Bankruptcy can allow a commercial real estate debtor to:

Reject and get rid of leases
Reject and get out of contracts
To pay unsecured creditors less than 100% of debts owed
To extend repayment of taxes
Reorganize finances
Stop lawsuits or initiate lawsuits
Stay in business or remain in control of the property
Sell assets
Liquidate the property
Repay creditors
Get time to market the property for sale
Get time to increase occupancy
Obtain new financing or refinancing

A Chapter 11 Bankruptcy has many benefits when facing foreclosure. Depending on the facts of a particular property situation, Chapter 11 Bankruptcy can be an excellent option to reorganize a commercial real property when facing imminent or irreparable financial damage due to a pending foreclosure, a pending lawsuit, or the collection efforts of creditors.
In some commercial foreclosure situations there are also alternatives to bankruptcy. Such options include out of court workouts and settlement arrangements, assignments for the benefit of creditors, as well as receiverships and forbearance agreements.

If you own commercial real estate and you’ve fallen behind on the mortgage, property taxes, or had an increase in escrow, but a decrease in vacancy, a lull in cash flow or need repairs, contact your lender and try to work it out. Believe it or not, the lender usually just wants to avoid foreclosure and simply get paid. They’re like any other business in that they have policies and procedures as well as accountability to their shareholders and investors. That being said, if nothing can be worked out, there does come a point where the commercial lender has no choice but to initiate foreclosure proceedings to collect what’s past due. If your property is facing a foreclosure, contact an experienced bankruptcy lawyer that has experience with commercial real estate, and both bankruptcy and non-bankruptcy workout options.

Copyright: Copyright © 2008 RJ Atkinson LLP – Attorneys At Law

About the Author:
Rogena Jan Atkinson of The Law Offices of RJ Atkinson,LLP, (rjabankruptcy.com) is a bankruptcy lawyer & foreclosure attorney who has stopped thousands of foreclosures with bankruptcy. Visit www.rjabankruptcy.com to learn more about foreclosure and bankruptcy.


Local Articles
Legal
Home