Use real estate leases effectively in Chapter 11 situations.
real estate can be an untapped source of balance-sheet value for bankrupt
companies. Such real estate assets provide a potential catalyst for exiting
bankruptcy successfully or a financial carrot to motivate prospective strategic
or financial buyers.
real estate investors are clamoring for stabilized properties occupied by
creditworthy tenants. The competition for income-producing real estate assets
has caused capitalization rates to nosedive in recent years. Today, properties
in many real estate categories, such as industrial, are priced at cap rates
below the 2007 peak.
article reviews two cases where bankrupt companies enhanced the value of their
owner-occupied real estate. Through new lease agreements that included higher
rents, reimbursement of expenses, and multiyear lease terms, substantial cash
flow streams were created. The properties were then marketed via auctions to
maximize recoveries, and sale proceeds were used to expedite the reorganization
process, satisfy creditors, and/or hasten the successful sale of the go-forward
Giordano’s, the Chicago-based deep dish pizza retail
chain, filed Chapter 11 bankruptcy in 2011 after defaulting on approximately
$45.5 million in loans.
of the filing, the company listed 20 parcels of owned real estate associated
with corporate and franchised restaurants. Of the 20 parcels, 10 were considered
operationally significant to the go-forward business, including a high profile
139,000-square-foot mixed-use property that served as the company’s corporate headquarters and flagship
restaurant location. One of the keys to this situation was to position the
estate to take advantage of a re-capitalized corporate balance sheet to
encourage buyer interest in buildings occupied by a ”reconstituted” Giordano’s.
Real Estate worked with the debtor to restructure the company’s leases to make them more attractive and
marketable, while concurrently crafting a plan to market the properties to the
largest possible real estate investment market. Prior to the lease
restructurings, initial bids for the real estate had yielded offers around $20
million. When the newly leased properties went to auction, 14 qualified bidders
were at the table. After 13 hours of spirited and contentious bidding, the
properties sold for more than $30 million. Proceeds from the real estate sale
along with the sale of the operating business yielded nearly $66 million, which
enabled the estate’s
secured creditor to be paid in full.
degree of interest in acquiring a bankrupt company, either by a strategic buyer
such as a competitor or a financial buyer such as a private equity firm, is
often influenced by real estate. In many cases, the potential acquirer plans to
maintain operations in the buildings, but does not want to be in the real
estate business or simply does not want to use additional capital to buy the
structuring new leases based on go-forward tenancy in the building, a valuable
asset for the estate is created, which enables the debtor or the acquirer to
offer a fully leased building to the investment marketplace.
suburban Chicago, Qualteq was a market leader in manufacturing plastic credit
and gift cards for companies such as American Express, Visa, and MasterCard.
personal financial difficulties forced Qualteq into Chapter 11 in 2013. The
bankruptcy trustee and his financial advisers first stabilized the company,
then sold the business to Brazil-based Valid S.A. through a Bankruptcy Code
Section 363 bankruptcy sale. However, Valid had no interest in purchasing the
four buildings Qualteq occupied.
in tandem with the bankruptcy trustee and advisers, Hilco structured new,
five-year leases on each of the four buildings with Valid as the tenant, based
on the strong balance sheet that was created with Valid’s purchase, enabling Qualteq to continue
operations in their current facilities.
the finalization of the new leases and with no certain commitment from Valid to
remain as a tenant, there was no immediate interest from the real estate
investment community for four potentially vacant industrial buildings. Once the
new leases were finalized, the leased buildings were then put through a sale
process by Hilco, which garnered significant interest from third-party
investors. Stalking horse bidders were obtained for each property, followed by
an auction. Hilco estimated the four buildings, on an empty basis, were valued
at approximately $10.5 to $12.5 million. When the gavel came down, the auction
resulted in total sales of almost $19 million for the four fully occupied
the real estate as a vehicle to enhance value further ensured that the estate
achieved maximum value of the Qualteq business/assets and helped to secure a
successful transaction with Valid. Furthermore, the added value created by
selling buildings occupied by a quality credit tenant resulted in sufficient
proceeds to fully pay all mortgage holders.
a company in Chapter 11 reorganizes and exits from bankruptcy on its own or is
acquired by a strategic or financial buyer, the real estate occupied by the
business can be transformed into a value enhancer. By recasting leases with a
strong tenant and aggressively marketing the properties, a significant amount
of incremental cash can be generated to benefit the bankruptcy estate in a
reorganization and/or a going-concern sale. In bankruptcy, debtors and
creditors should regard companies’ real estate as a value-creation tool, not an illiquid liability.
Schneider is senior vice president, dispositions, for Hilco Real Estate, LLC, a
unit of Hilco Global. Contact him at email@example.com.