In 2005, the Bankruptcy Code amendments known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), dramatically changed treatments of single asset real estate (“SARE”) cases under Chapter 11. Prior to BAPCPA, SARE cases were limited to debtors with less than $4 million in secured debt against the real property. BAPCPA eliminated the cap and potentially extended the SARE definition to a large number of real estate cases. The Bankruptcy Code’s current definition of SARE provides:
The term single asset real estate means real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental. 11 U.S.C. §101 (51B).
A SARE designation dramatically changes the dynamics of a debtor’s Chapter 11 case. A debtor designed a SARE debtor must either file a plan of reorganization with a reasonable chance of being confirmed within the later of (i) 90 days after the order for relief is entered in the case or (ii) 30 days after the date the court determines that the debtor is subject to the provisions of SARE, or must start making monthly payments to the secured creditor at the loan’s non-default interest rate. If a SARE debtor fails to satisfy these requirements, the court is likely to grant a secured creditor’s relief from the automatic stay to commence or continue with a foreclosure of the real property.
Who Falls Under the SARE Designation? In determining if a debtor will fall into the SARE designation, courts have interpreted the meaning of “a single property or project.” If a debtor owns more than one piece of real property, the analysis will likely be simple. So long as multiple properties are not considered a single project, the debtor will not be designated as a SARE. However, multiple real estate holdings within a single project may fall into the designation of a SARE.
If the real estate held is a single property or project, courts analyze whether the real estate is used in the operation of the business or whether it is simply held for income. A SARE designation usually involves where income is passively generated such as from rents or leases. Where business activities are being used to generate revenue for the debtor such as in the case of a hotel or golf course, the debtor falls outside of the SARE designation.
The Automatic Stay and SARE Debtors. The benefits of the automatic stay are limited in SARE cases. In order for the automatic stay to remain in place, Section 362(d)(3) of the Bankruptcy Code requires a SARE debtor, within 90 days after filing bankruptcy, to file a plan that has a reasonable possibility of being confirmed or commence regular payments to the secured creditor at the non-default interest rate. If a debtor fails to do either of these, courts are likely to grant a secured creditor’s relief from the automatic stay to commence or continue with a foreclosure of the real property. A SARE debtor cannot simply rest on the fact that it has equity in its property in order to avoid a motion for relief from the automatic stay, it has to file a plan within 90 days or commence payments.
A SARE designation provides additional challenges to the normal Chapter 11 process. These limitations may make it more likely that lenders will be granted relief from the automatic stay. Nonetheless, with careful planning a debtor can successfully navigate through the requirements of a SARE designation and successfully reorganize. Ronald Page, PLC represents debtors and creditors in complex Chapter 11 cases.
Ronald Page, PLC services the Virginia Capitol area including Richmond, Henrico County, Chesterfield County, Hopewell, Petersburg, Hanover County, Caroline County, Powhatan County, Prince George County, Goochland County, New Kent County, and Amelia County.