27 April 2020
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Hotel Lawyer: Increasing Distressed Hotel Loans and Troubled Hotel Assets
This article was published originally in November 2008 on HotelLawBlog.com and then updated in 2010 for our Lenders Handbook for Troubled Hotels. In light of the recent increase in distressed loans provoked by the COVID-19 crisis and resulting economic impact, we thought it might be important to bring the information current through April 2020.
Can a hotel ever be “single asset real estate” for bankruptcy purposes?
What is “SARE” and who cares?
Jim Butler, Bob Kaplan, and Nick De Lancie
Hotel Lawyers: Lender tips on forbearances, loan modifications, recapitalizations, receiverships, workouts, turnarounds, restructurings, and bankruptcies
CMBS lenders and others use SPEs for expedited remedies
Hotels, resorts, marinas, retail mixed-use, and other hospitality-related assets will likely continue to present challenges to lenders seeking expedited relief from bankruptcy stay provisions available to creditors in “single asset real estate” bankruptcy cases.
Since the mid-1990s, lenders on hotels, resorts, and other hospitality properties have generally required their borrowers to transfer the asset being financed into an entity (generally a corporation, limited liability company, or limited partnership) that was both “bankruptcy remote” (a “BRE”) and “special purpose” (also called “single purpose”) (an “SPE”). An SPE is an entity that owns only the asset being mortgaged, is unlikely to become insolvent due to its own activities, and is generally protected from the effects of the insolvency of its affiliates. A BRE is an SPE that has a further, structural layer of protection for the lender provided by provisions, such as the requirement for an independent director or manager who must approve the commencement of any bankruptcy case, that make its bankruptcy case more difficult.
Under the Bankruptcy Code, if a bankruptcy case involves “single asset real estate” (often called “SARE”), the proceedings will tilt greatly in favor of the lender/creditor secured by that SARE. Intuitively, then, an SPE that holds a single real estate asset would seem automatically to hold “single asset real estate” under the Bankruptcy Code. It is not, however, that simple.
This article will examine why this is important to lenders and borrowers, give an overview of the SARE determination, and provide some practical strategies.
The legal significance of SARE status (or not) for lenders
The determination that a borrower/debtor holds “single asset real estate” has important consequences for its bankruptcy case. In a SARE case, the creditor/lender secured by the real estate asset will be entitled to relief from Bankruptcy Code’s automatic stay as a matter of right unless the debtor does one of two things within 90 days (subject to extension) of commencing its case.
Under Bankruptcy Code section 363(d)(3), to avoid relief from the automatic stay being granted to a secured creditor (if it seeks it) with “single asset real estate” collateral, the debtor that holds that collateral must, within that 90 days, either:
- File a plan of reorganization in its case that has a reasonable possibility of being confirmed within a reasonable time; or
- Commence making monthly, interest-only payments to the secured creditor at the then-applicable non-default contract rate of interest on the value of the creditor’s interest in the SARE.
These are often difficult to accomplish unless the real estate asset is really viable and cash is flowing. CONTINUE READING →