Dare to SARE: Single Asset Real Estate Debtors
The term “single asset real estate” is defined in 11 U.S.C. § 101(51B) as “real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 11 U.S.C. §101 (51B). If a debtor’s estate constitutes a single asset real estate (a “SARE”), the Bankruptcy Code contains certain provisions designed to limit the duration of the case and the economic imposition that may be placed on creditors whose claims are secured by the debtor’s real property. This section was first added to the Bankruptcy Code in 1994 to prevent abuse of the automatic stay. A SARE status for a debtor shortens the time period for the debtor to reorganize. In a typical chapter 11 case, the period for the debtor to file a plan is 120 days. In contrast, a SARE debtor must either file a plan of reorganization with a reasonable chance of being confirmed within the later of (i) 90 days after the order for relief is entered in the case or (ii) 30 days after the date the court determines that the debtor is subject to the provisions of SARE, or must start making monthly payments to the secured creditor at the loan’s non-default interest rate. If the debtor fails to meet one of these conditions, the court shall grant the secured lender relief from the automatic stay so that the lender may exercise its rights and remedies with respect to its collateral.
WHO IS A “SARE”?
To fall within the “SARE” definition, a chapter 11 debtor must satisfy three conditions:
(i)Single Property or “Single Project” (ii) Property/Single Project Generating Substantially All Revenue; and (iii) No Business Other Than the Operation of the Real Property and Activities Incidental Thereto.
Typical SARE debtors include shopping centers, office buildings, and apartment complexes, provided that the debtor’s only business is operating the property and that the property generates substantially all of the debtor’s income. SARE debtors do not include family farmers, residential complexes with less than four units, or operating businesses that have revenues streams independent from the operation of the property. For example, hotels, resorts, restaurants, casinos, hospitals or other types of real estate with independent revenue streams typically do not qualify for SARE status.
STAY RELIEF AND “SARE’S”
SARE debtors are subject to special provisions of the Bankruptcy Code that limit the protections otherwise available to chapter 11 debtors. In particular, 11 U.S.C. § 362(d)(3) provides that:
(3) With respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later –
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that-
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2), be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate
Thus, unless the debtor starts making interest payments, it gets only 90 days to file a reorganization plan (or 30 days later than when the court designates the case a SARE case, whichever is later). A “SARE” designation can greatly curtail a debtor’s reorganization effort and enhances the position of secured creditors. As a result, SARE debtors should be prepared for filing a reorganization plan on a shortened time frame in order to meet the SARE-specific Bankruptcy Code provisions and to successfully reorganize within that framework.