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Mixed-Use Bankruptcies – Not Trying to Please Everyone

When a real estate development is carved-up in such a way as to create multiple owners with different types of interests, trying to structure a workout package that pleases everyone can be extremely difficult. Often, the debtor’s tools in bankruptcy – to discharge, prioritize, bring in new money, avoid, recapture, limit, and cramdown – are the only ways to try to salvage the development. This program examines the use of such remedies in the context of one such multi-owner structure – the condo/hotel – and why receiverships simply don’t provide enough recognized controls.


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PROI)ERTY • ESTATE LAW Americlll1 Bill’ Association i);;{m;jlRiliiberiySection of Real Property, Trust & Estate Law Punuitlg ,u~ke
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TUITION/FEES Foreclosures and workouts are complicated enough when they
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1. In addition to the Q&A session at the end, one advantage of these e-CLE programs is that they provide a post-program discussion board. That allows you a wider opportunity to think about the materials, to get your thoughts and experiences out there, and to interact with the panels and the rest of the audience. Therefore, I hope that you will choose to participate in the Discussion Board. However, I have to admit that no one in the audience has ever reported back to me that he or she got a job out of those contacts; so, there’s only so much that we can accomplish with these programs.

2. I see that our audience today includes at least 2 experts whom I recognize – Nancy Little, Rob Friedman and Sid Saltz. I hope that they will participate in the discussion and that we all will get the benefit of their experience.

3. Condo/hotels are just one way of breaking up, and re-packaging, the bundle of sticks that constitute property rights. That can be done in a variety of ways. They may consist of a single condo/hotel building, or single-family type of cottages surrounding a resort. The main thing was to bring-in equity capital by creating bite-sized chunks that an investor could see, invest in, get write-offs, and even occupy if appropriate.

(a) However, they all have three things in common:

(i) A legal structure calling for different property owners or occupants to share rights and responsibilities, including payment responsibilities, where the whole is supposed to be worth more than the sum of its parts or to consist of investable pieces; where

(ii) One or more of the parties cannot afford to live up to their share of those responsibilities, i.e. the planned structure for a shared good is not working for at least some of the folks; and

(iii) They combine the intricate arrangements involved in operating a hotel, with the condominium laws which are generally designed to protect residential buyers. And now they also involve the Federal Bankruptcy Code.

4. In this program, I going to start with my outline, starting on page 26, but jump around a little in order to show the relationships in the time I have available.

5. To present my materials, I’m going to think of myself as the hotel lender. I’m going to think of the developer as Nancy Haggerty (our panel leader), and call the project “Nancy’s Place”. And I’m going to think of the flag or hotel management company as Bob. In addition, there are many other players.

6. We start by trying to figure out what the problem is that the project is failing, and how we can attract new debt or equity monies.

(a) Hotel flag or management company – Bob.

(i) Help or hindrance? Hotel mgmt. contracts are much longer and much broader than office building or shopping center management contracts. Length of term, controls over revenue and expenses, concerns about the reputation of its brand or flag, etc.

(ii) Who has the right, under the Agreement, to terminate it.

(iii) Maybe trade rights to payment for equity.

(iv) Importance of the SNDA more than in office or retain context. Termination rights, restructuring cram-downs or at least a duty to cooperate

(v) BK is the only to get rid of it. May get rid of it for Nancy’s sake, too. Foreclosure does not go far enough.

(b) Unions and Other Employees.

(i) The only way to break the collective bargaining agreement is to reject it in BK. However, 11 U.S.C. 1113 provides additional protections for collectively bargaining agreements. Those additional requirements can be satisfied with additional negotiations, but may take time.

(ii) 29 U.S.C. §623 protection of older workers

(iii) WARN statutes

(c) Onerous junior liens, contracts and leases. Example: Retail leases. BK as the only way to get rid of them. But remember that, except in certain non-shopping center sales under §363 and with respect to anti-assignment or anti-BK clauses, a BK court does not have the power to re-negotiate the contract or lease; need a workout for that.

(d) Splitting off losing or valuable pieces, such as the catering operations.

(e) Potential condo unit purchasers cannot get financing. Lender may need to re-structure the project to make units more financable. May need to de-condo’ize, or separate, condo portions. Buy-outs of unit owners to gain super-majority control to terminate condo regime. Equity as a payment mechanism where unit financing is not an issue? However, is the lender willing to halt the on-going unit sales process, to allow this to happen, no matter how slow that process may be?

(f) Condo unit owners or their association is running amuck: excessive rules, excessive condo. fees, etc. Reputation of the project.

7. Who else can we turn to solve the problems?

(a) Developer/Owner – Nancy. Nothing unusual about the structure. Classic workout as described in my materials from 2010. Maybe recourse that worth something, sweat equity, additional equity capital or subordinated loans, particular knowledge or expertise, save state and local recordation and transfer taxes, maybe I need her cooperation to assign contracts or permits. Certainly, I can use her cooperation in making a foreclosure or BK friendly and in transferring possession vs. receiver or a BK Trustee other than a debtor in possession. One thing for sure is that the condo unit owners probably hate her, and are thinking of suing her for securities fraud, for inadequate condo docs., etc.

(i) Getting waivers, from the Developer, may be useful.

(ii) However, getting more reps. and warranties, from the Developer, especially one that he will not declare Bankruptcy, is generally not – he’s bankrupt.

(b) Lender – me. Is it better for the lender to keep funding the deficits or additional construction costs, or to close down the hotel? Throwing good money after bad? Fixed costs of maintenance and repairs, risks of losing an important flag, sale of an on-going business as opposed to a vacant building or its parts, increased costs of insuring a vacant building, loss of necessary permits, re-start-up costs, difficulty of keeping open just the profitable parts, and getting financial help?

I’m also worried about

(i) successor liability – taking too much control; therefore, a receiver or trustee in BK

(ii) lender liability – therefore, pre-negotiation agreements

(iii) legally implied duties of good faith and fair dealing, or to mitigate

(iv) cover-over missing or deficient loan documents

(c) The TIF or other gov’t agenc

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