Strategic Use of a Single Asset Real Estate (SARE) Chapter 11
A Single Asset Real Estate (SARE) Chapter 11 is a remedy by which certain distressed property owners can stop foreclosure and pursue refinancing or other solutions.
A debtor is generally classified as a SARE when substantially all of its income is generated by a single real estate asset and it does not conduct any other significant business operations beyond owning and managing that property. Common examples of SAREs are apartment complexes, shopping centers and office buildings.
However, the SARE designation comes with significant requirements. One of the most important of these is that the debtor take swift action. Shortly after the court determines that the case qualifies as a SARE, the debtor must either begin making payments to their secured lender or file a plan of reorganization that has a reasonable possibility of being confirmed. These requirements are intended to prevent property owners from using Chapter 11 to simply delay foreclosure without a realistic strategy for resolving their debts.
Because of this time pressure, pre-bankruptcy preparation is critical. Property owners should enter a SARE Chapter 11 case with a clear understanding of their property’s value, income streams, operating expenses and financing. A realistic assessment of the property’s financial performance and needs can help determine whether the best path forward is restructuring, refinancing or an orderly sale.
A confirmable SARE reorganization plan should show how the debtor intends to meet its obligations going forward. Depending on the circumstances, a plan may involve refinancing existing debt, extending loan maturity dates, adjusting payment terms, selling assets or using future rental income to fund payments. The debtor must show that the proposed plan is feasible and that it complies with all the requirements of the Bankruptcy Code.
Lenders typically scrutinize the feasibility of a reorganization plan in SARE cases. In view of this, debtors need to present detailed financial projections, evidence of property values and credible support for any refinancing proposals. The stronger the evidence supporting the plan, the more likely it is that the trustee will find the proposal realistic and confirmable.
Notably, a Chapter 11 petition triggers an automatic stay that can immediately halt collection and foreclosure efforts. This breathing room can give the business time to negotiate with its lenders, market the property, pursue refinancing or develop a plan to address outstanding debt.
SARE cases can preserve valuable real estate assets. For owners threatened with foreclosure, a carefully planned Chapter 11 filing combined with a realistic, well-supported reorganization strategy can ultimately prove successful and stabilize their future.
The Law Offices of Michael Jay Berger in Beverly Hills represents income property owners and real estate investors in complex Chapter 11 bankruptcies throughout Southern California. To learn more about your debt relief options, schedule a free initial consultation by calling 310-271-6223 or contacting us online.
