Joe Cavaluzzi is a regular contributor to
Real Estate New Jersey.
What happens when your project gets mixed up in a bankruptcy? Some of the state’s top bankruptcy and real estate lawyers and bank workout specialists addressed that question during the recent RealShare New Jersey session moderated by George Jacobs, president of Jacobs Enterprises Inc.
The conclusion was that it depends on what the development partners have done to prepare for it in setting up their partnership and what the lenders have done in structuring the financing. In that regard, the Kara Homes bankruptcy was an irresistible sideline to the conversation.
Four panelists with extensive bankruptcy experience each took a position for the purpose of the discussion, with Ken Orchard, a workout specialists from NorthFork Bank, assuming the role of the bank trying to get its money back. “In deals with various partners, we start by underwriting the deal to the weakest link. Banks need to do a better job of focusing upfront on the lending process because time has never improved the situation once a company enters bankruptcy,” said Orchard, one of 14 bank creditors in the room during Kara Homes’ bankruptcy negotiations.
“I focus on the sponsorship,” he said. “Our first preference is to not wind up in court. Are we interested in seeing the developer proceed with the project? Yes, but we’re most interested in getting our money back.”
Attorney David Bruck of Greenbaum, Rowe, Smith & Davis represented the interests of the debtor. He was one of 20 lawyers in the room for Kara’s bankruptcy discussions. Unlike the other 19, who represented creditors in the case, Bruck was sitting at Kara Homes’ table.
Kara Homes had joint venture interests with its partners on individual developments, and all of the partners had an interest in the land-owning entity as well. But the partnership and its borrowing structure had likely not been well thought-out in advance and had not addressed what would happen if the project ran into trouble. That leaves the debtor to assume the contracts with the other partners or reject the contracts. But Bruck said the latter might be an unfavorable choice because the debtor may want to sell the contracts. “There should be someplace in the lending agreement that defines how to pass on the managerial rights of the debtor,” he said. “Without that, the creditors’ committee has the right to take over the project, and the partners may not want that.”
Andrew Sherman, a bankruptcy attorney with Sills Cummins Epstein & Gross, said most partnerships don’t address the possibility of bankruptcy when setting up a deal. Structuring it as an LLC or other type of partnership may work better than a simple partnership agreement. In the RealShare New Jersey discussion, Sherman represented the interests of a partner to a development company that has declared bankruptcy.
“From a lawyer’s perspective, you can avoid bankruptcy by planning for it when the partnership is drawn up,” Sherman said. “Or, when everything starts to fall out of bed, you can start getting into the partnership documents and figure out what’s going to happen when things start to get worse.
“Once you get into bankruptcy court, all of the provisions you put in may not matter because the judge is going to say his goal is to preserve value to those who are secured lenders or those who are the loudest,” Sherman explained. “Usually, the loudest wins.” Richard Hauer, a bankruptcy partner with the real estate accounting and advisory firm Schonbraun McCann Group, assumed the role of mediator for the purpose of the panel discussion. He, too, was concerned with preserving value.
“My role is to try to extract value out of the situation, to bring a level of reasonableness to all of those contracts,” Hauer said. “I’m there to avoid a liquidation because in many situations that’s not going to be in the best interest of my client. It probably is in everybody’s best interests to keep the deal together and not turn management of the project over to an outside entity.”
One thing all of the panelists agreed on is that time is on the side of the borrower. “The debtor views time as an ally,” Bruck said. “People get tired, but the other side of this is that the market is different. So, we hope to get out as quickly as possible. The market was substantially different when Kara got out [settling its bankruptcy in early October of this year] than when it filed for bankruptcy two years ago.”
Deal fatigue sets in over time, according to Orchard. Creditors wear down. Their attention turns to other interests. “The borrower doesn’t get deal fatigue, it’s everybody else,” he said.
RealShare New Jersey, held in the Glenpointe Marriott in Teaneck, was produced by Real Estate Media, which publishes Real Estate New Jersey and GlobeSt.com.