Developers: Are You a Single Asset Real Estate Entity?
January 7, 2013 | No Comments
Posted by Donald F. Campbell, Jr.
On March 12, 2007, the Hon. Michael B. Kaplan, U.S.B.J. ruled that the affiliates of real estate developer Kara Homes, Inc. are each a Single Asset Real Estate entity as defined in §101(51B) of the United States Bankruptcy Code, requiring each entity to file a plan of reorganization or make monthly payments to their secured creditors within 30 days of the Court’s decision.
On October 5, 2006, Kara Homes, Inc. filed a petition under Chapter 11 of the Bankruptcy Code and shortly thereafter thirty-two (32) affiliates of Kara Homes (the “Affiliated Debtors”) filed separate Chapter 11 petitions. Each Affiliated Debtor owns a separate real estate development project for the construction of single family homes and condominiums. Each Affiliated Debtor marked on their petition that the respective entity was a “Single Asset Real Estate case” as defined by §101(51B). Normally, a debtor has the exclusive right to file a plan of reorganization within 120 days from the date of filing; however, a single asset real estate entity must file a plan of reorganization within ninety (90) days. Failing that, a debtor must commence payments to their secured creditors or the creditors are entitled to seek relief from the automatic stay, which may then result in the commencement or reinstitution of foreclosure on the single asset ultimately destroying any chance of reorganization. On December 19, 2006, the Affiliated Debtors requested a ruling by the Court that the Affiliated Debtors (contrary to their petitions) do not meet the definition of a single asset real estate entity pursuant to §101(51B) and therefore are entitled to the 120 day exclusivity period. The secured creditors objected resulting in the Court’s March 12, 2007 decision.
Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), the Court in In re Philmont Dev. Co., 181 B.R. 220(Bankr. E.D.Pa. 1995), established a four part test to determine whether a debtor meets the definition of §101(51B). A debtor is a single asset real estate entity if: (1) the single asset is real property constituting a single property or project, other than residential property with fewer than four residential units; (2) the property generates substantially all of the income of the debtor; (3) the debtor is not involved in any substantial business other than the operation of its real property and the activities incidental thereto; and, (4) the debtor’s aggregate non-contingent liquidated secured debt is less than $4,000,000.00. BAPCPA significantly amended §101(51B) by eliminating the $4,000,000.00 floor which otherwise would have excluded debtors like Kara Homes and the Affiliated Debtors. The Affiliated Debtors unsuccessfully argued that they are involved in other areas of business including, but not limited to research and purchase of other property, planning and construction of homes, marketing of homes, etc. The Court however found that all of these activities are incidental to the operation of the single real estate asset.
The amendments to §101(51B) and this Court’s ruling may have a devastating effect on Kara Home’s chances at reorganizing and could ultimately change the way developers, like Kara Homes, structure their business enterprise. Ironically, the long-standing practice of protecting the company as a whole by segmenting projects into separate entities may in fact be the company’s ultimate demise. Like a mutated virus, §101(51B) may cause an incurable infection amongst the struggling single asset species. In order to survive, developers and other single asset entities must restructure their corporate enterprise and avoid §101(51B) like the plague.
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