How We Helped David Save His Apartment Building
NOTE: The names have been changed to protect client confidentiality . . . and also to make for a more interesting story.
Like many real estate investors during the bubble, David succumbed to the temptation of easy credit and took on more mortgage debt than he could handle.
He had a nice 15-unit apartment building with more than $100,000 in equity, but he thought he could grow his empire by branching off into commercial buildings.
That was Mistake #1: Commercial landlording is very different from residential. With fifteen units, he could lose one tenant and still have more than enough to pay the mortgage. Not so with small single-tenant commercial. In fact, to a large extent, the landlord is banking on the success of the small business itself. It was easy enough to get a loan. It was not so easy for David to find steady, reliable commercial tenants. He fell behind and soon his commercial property, the mortgage on which he personally guaranteed, was heading to foreclosure.
Mistake #2: Without consulting an attorney, and ever optimistic, he agreed with Goliath Bank, his commercial lender, to what he thought was a forbearance agreement to stop the foreclosure and get a payment plan that would give him some time to catch up. In fact, it was also a cross-collaterization agreement. He put his valuable apartment building up as additional collateral on a commercial building that was severely devalued against its own mortgage. He fell behind again. Goliath Bank, of course, now moved to foreclose on the apartment building -- the only building with real equity.
The wolf was at his door when he came to us. Given that his personal secured debt exceeded the then $1,081,400 limit for Chapter 13, we decided he would have to file a personal Chapter 11 case to stop the foreclosure and reorganize his finances to where his existing cash flow could service the debt.
We gathered all the financial documentation he had to calculate his income and expenses and make an accurate determination of his cash flow. We then hired real estate appraisers to value his apartment building, as well as several single-family rental houses he and his wife held. Based on that cash flow, and the valuations, we would make decisions as to what property he would keep, what he would surrender back to the bank holding its mortgage, and which loans would be restructured in his plan of reorganization.
Early on, we could see this was going to be a contentious and litigated bankruptcy case. Goliath Bank's attorney was present, and asking pointed questions, at the initial creditor's meeting. (This doesn't often happen.) Barely a couple months into the case, while David was still doing the legwork of getting property valuations done, compiling financial data and getting his legal documents analyzed, Goliath Bank moved to "lift the stay," asking the court to remove the apartment building from bankruptcy court protection so it could proceed with foreclosure.
Arguments were made by us that the bank did not have grounds to lift the stay. But we also showed the court that, based on preliminary information, a successful reorganization was likely, and there was a likelihood of a significant pay-out to unsecured creditors. Removing the apartment building from the estate of this debtor, on balance, would do more harm than good to everyone involved in the case. The judge, signaling his intention to deny the bank's motion completely, ordered a brief recess for settlement discussions. Goliath Bank settled for a nominal interim payment on its claim (known as "adequate protection") pending finalization of the case.
This, however, would not be the end of the battle with Goliath Bank. Over the year-long progress of the case, the bank's attorney brought additional motions, including one to "dismiss or convert" the case to a liquidation in Chapter 7, and also threatened to contest David's valuation of the apartment building.
In the end, based on the financial information we developed and shared with all creditors, a plan of reorganization was presented and approved by all "classes" of creditors in the case, making confirmation by the judge almost a mere formality.
David kept his apartment building (and a couple other single-family homes where the rent exceeded the restructured mortgage) on commercial loan terms that prevailed in the market at the time, and which was affordable to him. The secured creditors ended up with a performing loan and a percentage of the unsecured portion of the original debt -- a much better deal than they would have gotten if the apartment building had been foreclosed upon, or sold off in Chapter 7.