SARE, NOT SARE: Single Asset Real Estate in Bankruptcy
Single asset real estate is defined in the Bankruptcy Code as a single property or project that generates substantially all of the debtor’s gross income (§ 101(51B), Bankruptcy Code). If the debtor’s only business is operating the property and the property generates substantially all of the debtor’s income, a SARE typically includes the following types of properties: Shopping centers, Office buildings, Apartment Buildings and Industrial and warehouses. A chapter 11 debtor’s status as a single asset real estate entity matters because § 362(d)(3) imposes an expedited time frame for single asset real estate debtors to file a chapter 11 plan or commence adequate protection payments. In a single asset real estate case, the court must grant relief from the automatic stay unless, within ninety (90) days after the debtor filed its petition, or thirty (30) days after the court determines the debtor’s status, the debtor either: (1) files a reorganization plan with a reasonable possibility of being confirmed within a reasonable time; or (2) makes monthly interest payments to creditors whose claims are secured by the relevant property. See 11 U.S.C. § 362(d)(3).
The debtor must elect to be treated as a SARE by checking the appropriate box on the official Chapter 11 bankruptcy petition (Official Bankruptcy Form B 201). However, be careful! There are consequences which flow from declaring oneself a SARE. For example, timelines start once such an election is made and remember that monthly operating reports will soon become due. See, Andover Covered Bridge, LLC v. Harrington (In re Andover Covered Bridge, LLC), 553 B.R. 162 (B.A.P. 1st Cir. 2016).
If the debtor does not elect to declare itself as a SARE debtor on the petition, a secured creditor may file a motion with the bankruptcy court under section 101(51B) of the Bankruptcy Code to designate the debtor as a SARE debtor. This motion can be filed as a standalone motion or as alternative relief to a larger motion for relief from a stay or to dismiss the case. Because of specific timing restrictions on a SARE debtor to file a plan of reorganization or make interest payments to a lender, secured lenders should file this motion as soon as practicable after the petition date so that the clock can start running on a SARE debtor’s time limits if the lender’s motion is approved.
The definition of SARE in the Bankruptcy Code governs a debtor’s eligibility to qualify as a SARE Chapter 11 case. There are three (3) elements to the definition that must all be met and each are commonly litigated.
- The real property must constitute a single property or a project. The first frequently litigated factor is whether the property owned by the debtor is a “single property or project, other than residential real property with fewer than four (4) residential units.” See 101(51B. While determining whether a debtor operates a single property is generally straight forward, it is less clear whether the debtor’s business is a single project. The generally accepted test for determining whether a property consisting of multiple parcels is a single project focuses on the debtor’s intent or purpose (see In re JJMM Int’l Corp., 467 B.R. 275 (Bankr. E.D. N.Y. 2012)). Courts focus on how the debtor treats its property and hold that the SARE provisions can apply to a debtor with multiple properties where the properties are linked together in some fashion in a common plan or scheme involving their use (see In re McGreals, 201 B.R. 736, 742 (Bankr. E.D. Pa. 1996)). Courts have found multiple parcels of land constituting a single project when:
- The debtor owned several apartment buildings on adjacent parcels. The separate buildings constituted an apartment complex comprised of a single project because the debtor had a common plan or purpose for the property, see In re Vargas Realty Enter. Inc., 2009 WL 2929258, at *4-5 (Bankr. S.D.N.Y. July 23, 2009)).
- Five (5) adjacent undeveloped parcels were considered a single project even though the debtor planned to construct a hotel, golf courses, convention center, spa and related services on the property, because the debtor planned to develop them as one large resort. See In re Webb MTN, LLC, 2008 WL 656271, at *1 (Bankr. E.D. Tenn. Mar. 6, 2008).
- The real property must generate substantially all of the debtor’s gross income.
The requirement that the debtor’s real estate must generate the substantial portion of its gross income is typically satisfied when the debtor’s primary source of income is the sale, rental, or operation of real property. However, “a business would not be a SARE if a reasonable and prudent businessperson would expect to generate substantial revenues from the operation of activities separate and apart from the sale or lease of the underlying real estate.” In re Scotia Pacific Co., LLC, 508 F.3d 214, 222 (5th Cir. 2007).
To make the determination, courts examine the relative income generated by the real property compared with the income generated by other operations related to the real property. Courts specifically look to the material nature of the business activities and whether the revenues the property owner receives are passive in nature, such as the simple collection of rents. See In re Kara Homes, Inc., 363 B.R. 399 (Bankr. D.N.J. 2007).
- The debtor must not be involved in any substantial business other than the operation of the real property.
If the debtor is operating a business that is generating income independent or ancillary to the ownership of the real estate, the other business, if significant, is not considered incidental to the business of operating the real property and therefore the debtor does not qualify as a SARE.
Of the three elements of the SARE definition, this one is most commonly litigated. Courts have analyzed whether certain businesses and operations qualify as a SARE and have determined that the following businesses do not qualify as SARE debtors when they are engaged in other substantial business:
- A hotel is not a SARE debtor when it operates significant other businesses, including a restaurant, bar, and gift shop, and provides room cleaning services and phone services for its guests (see Centofante v. CBJ Dev., Inc. (In re CBJ Dev., Inc.), 202 B.R. 467 (9th Cir. B.A.P. 1996); In re Whispering Pines Estate, Inc., 341 B.R. 134 (Bankr. D. N.H. 2006).
- Golf courses. A golf course is not a SARE debtor when it also offers golf cart rentals, a pool, and concessions (see, In re Larry Goodwin Golf, Inc. d/b/a Uwharrie Gold Club, 219 B.R. 391 (Bankr. M.D.N.C. 1997)) or when it is connected to residential land developments and not simply operating the gold course (see, In re Prairie Hills Golf & Ski Club, Inc., 255 B.R. at 228 (Bankr. D. Neb. 2000); See Commerce Bank & Trust Co. v. Perry Hollow Golf Club, Inc. (In re Perry Hollow Mgmt. Co., Inc.), 2000 BNH 013, at 3; Banc of Am. Commercial Fin. Corp. v. CGE Shattuck, LLC (In re CGE Shattuck, LLC), 1999 BNH 046, at 12-13.
- A marina is not a SARE when, in addition to providing for the mooring of boats, the marina also stores, repairs, and winterizes boats, as well as sells gas concessions (see In re Khemko, Inc., 181 B.R. 47 (Bankr. S.D. Ohio 1995)).
- A timber company owning about 200,000 acres of timberland is not a SARE because it was engaged in the business of harvesting timber and conducted other substantial business aside from the operation of real estate (see, In re Scotia Pacific Co., LLC, 508 F.3d at 224-225).
In a typical real estate structure that contains a parent company, subsidiaries and affiliates with consolidated operations and shared operating accounts, if one of the subsidiaries qualifies as a SARE under the plain language of section 101(51B) of the Bankruptcy Code, the court must designate that entity a SARE and treat it that way during the bankruptcy case even if the other debtor entities are not SAREs.
While section 362(d)(3) of the Bankruptcy Code expedites the plan process and drives the debtor to file a plan sooner than it would in a non-SARE case, the expedited timing requirements in section 363(d)(3) are not triggered until either the:
- Debtor designates itself as a SARE on the petition or by motion.
- Secured creditor files a motion seeking a determination from the bankruptcy court that the debtor is a SARE entity.
Debtors in need of the extra time to file a plan or begin monthly payments should consider the time requirements and alter their strategies accordingly. Because many debtors will want as long as possible to file a plan or begin making monthly payments, a debtor may choose not to classify itself as a SARE debtor on its own and wait for the debtor’s creditors or lenders to make a motion to designate.
Until there is a finding that the debtor is a SARE debtor, the time limits in section 362(d)(3) do not begin or expire (see In re Abdulla, 2009 WL 348365 (Bankr. D. Mass Feb. 6, 2009)). Therefore, if it is unclear to the debtor when completing the petition whether it meets the definition of SARE, it may be more appropriate for the debtor not to designate itself as a SARE. That will also offer more time for the debtor to benefit from the automatic stay while the SARE designation is later litigated with the secured creditor.
Lenders must be aware of a debtor’s strategy to delay designation and protect their rights. When preparing to file for Chapter 11, a SARE debtor should try to conserve cash. The cash preserved before filing can be used to make payments to the secured creditor at the loan’s contract nondefault rate. Alternatively, if a debtor’s property generates revenues or it obtained financing from a third party, it can use those funds to make interest payments to the secured lender.
When a debtor cannot make interest payments because it does not have enough revenue or financing, it can achieve additional time in bankruptcy by filing a plan. The requirement that a SARE debtor file a plan that has a reasonable possibility of being confirmed or risk lifting the automatic stay in favor of the secured lender is a less stringent standard than in other contexts of the Bankruptcy Code (§ 1112(b)(2)(A). The SARE debtor does not need to demonstrate that its plan will actually be confirmed and is not required to present the same level of evidence that is required at a confirmation hearing. It must produce enough evidence at a hearing to lift the automatic stay that there is a reasonable possibility to confirm the plan in a reasonable period of time. See, In re Bonner Mall P’ship, 2 F. 3d 899 (9th Cir. 1993); In re Trigee Found., Inc., 2013 WL 1401889 (Bankr. D.D.C. Apr. 8, 2013)).
