Could an increase in bankruptcy sales change the game?
The recent bankruptcy filing by retailer Syms signals that the distressed asset
fallout is far from over in the commercial real estate market. In addition, roiling
credit markets and the reduction in both commercial and residential real estate values
have resulted in a new interest in the impact of bankruptcy filings upon real estate
investments. As banks succumb to the pressure to move bad loans off their books, more
distressed properties will come onto the market this year. Here's a look at what this
can mean for investors and landlords.
Are asset sales in bankruptcy cases an opportunity to buy real estate on the
Although it might seem counterintuitive, the distressed nature of bankruptcy sales
doesn't always lead to depressed sales prices. While I have recently seen more real
estate sales in bankruptcy cases than at any other time in my nearly 25 years as an
insolvency attorney, whether those sales resulted in good investment opportunities
still depends upon the investor's knowledge of both the asset being sold and the
particular market niche involved.
However, knowledge of the bankruptcy sales process helps to increase the chance of
getting a good buy. All bankruptcy sales are subject to overbid, but the process for
obtaining the highest bid is somewhat malleable. Most sales occur only after a separate
notice and a hearing establish sales procedures. These often include provisions such as
breakup fees, bid deposits, and bid qualification deadlines that ostensibly streamline
the process but can also operate to restrict the number of bidders.
Inherent in the process of restricting bidders is the potential that a debtor's
management could be attempting to steer a bankruptcy sale toward
a desired bidder. Thus, the most successful investors in this arena are those who
realize how the sales process works — that it is based upon the inherent
contradiction between the creditors' interest in obtaining the highest sales price and
the desire of a debtor's insiders to maintain control of an asset or steer the sale
toward a preferred purchaser. To be successful, investors must understand the target
asset, the details of the sales process, and how to combat any attempts at manipulation
of that process. These goals are more likely to be achieved if the investor is involved
in the early stages of a debtor's bankruptcy case and is nimble in its due diligence
Has the proliferation of single-asset real estate cases increased the likelihood
that the bankruptcy sales process will result in a good investment opportunity?
The bankruptcy code was revised in 1994 to apply special rules limiting the
automatic stay in single-asset real estate cases and those rules were expanded as part
of the bankruptcy code revisions of 2005. Limiting the automatic stay was intended to
expedite SARE cases involving "real property constituting a single [nonresidential]
property or project … with fewer than four units … on which no
substantial business is being conducted by the debtor other than the business of
operating the real property" [11 U.S.C. §363(d)(3)]. But it hasn't quite played
out that way.
Instead, many courts have loosely applied the SARE standards. For example, one court
held that the "historic synergy" between multiple single-asset properties in a case
prevented the single-asset standard from being applied to any of those properties,
while another court held that a hotel was not a single-asset property because room
cleaning, Internet service, and food service constituted enough business beyond the
mere operation of the real property.
These types of exceptions to the rule appear to be indicative of a larger trend that
has resulted in many potential investment properties remaining in bankruptcy longer,
thereby regulating the flow of assets to market and reducing the likelihood that
bankruptcy sales will result in an extraordinary investment opportunity.
How might existing real estate investments be impacted by the influx of commercial
While a tenant's bankruptcy often portends a reduced income stream from a commercial
property, the bankruptcy code does contain a number of provisions that are calculated
to protect a landlord's interests. Those provisions include administrative claim
priority and expedited payment requirements for post-petition occupation of leased
premises; restrictions on assumption and assignment (although the bankruptcy code does
permit assignment even if the underlying lease prohibits it); and an expedited process
for requiring a debtor tenant to determine whether it will assume or reject a pending
lease [11 U.S.C. §365].
These provisions are very complicated and can be tricky in their application, but
with the help of experienced bankruptcy counsel, the owner of commercial real estate
can effectively limit the losses typically incurred when a commercial tenant files a
Bankruptcies and distressed assets will continue to affect the commercial real
estate market throughout this year and probably beyond. While such investments can
offer value-add opportunities that may pay off handsomely when the market recovers,
investors must have an in-depth understanding of the asset and its market before moving
Bernard D. "Bo" Bollinger is chair of the insolvency and financial solutions
practice group at law firm Buchalter Nemer in Los Angeles. Contact him at firstname.lastname@example.org.