Scottsdale Arizona Real Estate Blog

by Andrew Johnson – Oct. 22, 2008 12:00 AM
The Arizona Republic

As residential and commercial real-estate markets falter, developers are increasingly turning to bankruptcy to stave off foreclosure on their troubled properties.

In the past, developers often filed for bankruptcy for the entire company, tying up all properties owned by their companies.

They can file for what is known as a single-asset real-estate bankruptcy.

A property owner or developer sets up separate ownership entities for each project or property it owns, allowing a company to file for bankruptcy on one asset without bringing other assets into the fray.

The changes to the law have drawn more attention as business bankruptcies have risen in Arizona and across the United States.

A business bankruptcy filing typically stops a foreclosure sale from occurring, unless a lender can justify why such a sale should proceed.

There were 691 business filings in Arizona for the 12 months ending June 30, up from 332 for the same time period last year, according to the U.S. Bankruptcy Court.

The court does not break out how many of those filings are single-asset bankruptcies. But local real-estate attorneys say they’ve noticed a major increase in such filings.

Attorney Chad Schexnayder, who focuses on commercial lending and real-estate bankruptcy for Jennings, Haug & Cunningham LLP in Phoenix, said he expects such filings to increase as the economy worsens.

“I definitely think we’ll see more of them in the next 18 months,” he said.

What prompts many of the filings is the threat of foreclosure by a developer’s lender.

Some developers have filed for bankruptcy to hang on to properties that are part of developments they were planning.

In June, Scottsdale-based investment firm International Capital Partners LLC filed for bankruptcy on a 10,000-square-foot office building it bought as part of a mixed-use project it is planning near downtown Scottsdale.

The building was owned by an entity International Capital Partners manages called ICP D600A LLC, which filed to reorganize its debts under Chapter 11 bankruptcy.

The firm’s lender was planning to sell the building at a foreclosure auction July 1.

Earlier this month, Phoenix-based developer Namwest LLC filed for bankruptcy on several single- and multifamily projects it was building or planning to build around the Valley.

Different limited liability companies owned each property. Lenders had scheduled foreclosure sales on some of the properties for November.

Credit crunch

For some developers, bankruptcy is the only way to prevent a bank from taking over their projects.

The credit crunch has made it virtually impossible for developers to obtain take-out financing to pay back commercial mortgages when they mature, so some feel they have no other option, said Thomas Salerno, a bankruptcy attorney in Phoenix with Squire, Sanders & Dempsey LLP.

Salerno represents the developer of Laughlin Ranch, a master-planned housing and golf community in Bullhead City.

The various components of the partially complete project, including a clubhouse, golf course and residential lots, were owned by separate entities.

The developer put several of the entities into bankruptcy last year because of financing troubles.

Stopgap solution?

The strategy can be successful for some developers, but many are prolonging an inevitable loss of the property, attorneys and lenders say.

Changes made to the federal bankruptcy code in 2005 limit the amount of time a single-asset entity, regardless of its size, has to file a reorganization plan to 90 days.

That often isn’t enough time for developers who are facing serious financial troubles, Schexnayder said.

“I think it puts a chill on larger-project single-asset filings except when it’s desperation,” he said.

Douglas Reynolds, chief credit officer with Phoenix-based Western National Bank, said he questions how successful such a move is for a developer that wants to maintain ownership of a property because of turmoil in the financial markets.

“In a downturning environment, I don’t see why someone . . . would spend that kind of money (on a filing) unless they had something in their hand to throw at the table,” he said.

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