Bankruptcy Issues forLandlords

Realty Financial Partners PresentationSeptember 8, 2009

Neal Hesler, Principal I—I |H W |~iHesler & Associates LLC 1 .1 JLj^JA-JLj•[--•-• ;̂-̂

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The Bankruptcy End Game

The Tenant has only two alternatives- Assume the Lease- Reject the Lease

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The First 60 Days ... the Trade-Off

Assume- Cure all Defaults- Commit to the Lease

for the Future- Provide assurances of

future performance

Reject- Surrender premises- Terminate Lease

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Getting From Here to There

Until the Tenant makes the big decision, itmust live up to the lease obligations...i.e. Paythe RentThis rule applies only to post-bankruptcyobligations

First 60 day issues

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The First 60 Days ... the Trade-Off

Until Day 59- May suspend rent /

performance- Deadline to make the

ultimate decision isDay 60

On day 60- Must become current

(post-bankruptcy) andstay current

- Deadline to makedecision extendedindefinitely

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Relief During the 60 Days

If rent is material, a Motion can be made torequire immediate payment during the 60daysIf tenant is not using the premises, it will havean incentive to reject early

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Bankruptcy Is Not Scary

High prospect of recovering contract rent untillease is rejectedAbility to regain premises quickly, withoutprotracted unlawful detainer proceedings

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If the Lease Is Rejected

Obtain possession / clear the premisesAssert claims for damagesPost-Bankruptcy Claims ("AdministrativeClaims")Rejection Damages

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Bankruptcy Food Chain

Chapter 7 Trustee & His'

AdministrativeExpenses"

Bankruptcy FoodChain

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Chapter 11 Debtor inPossession & Attorneys

Chapter 11Administrative Expenses

_ .Post Bankruptcy Rent

Pre-Bankruptcy PriorityClaims

$4,300 of WagesMost taxes

Pre-Bankruptcy GeneraiUnsecured Claims

Landlord's RejectionDamages

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Administrative Rent

Chapter 7 Trustee will surrender possessionfor waiver of Chapter 7 ClaimChapter 11 Debtor must pay rent to hold ontothe lease

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Rejected Lease - CollectingAdministrative Rent

File MotionFile Request for Payment

File Proof of Claim

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Limitations on Rent Claims

"Actual" DamagesSection 502(b)(7) Cap:

Rent due when bankruptcy began, plusOne year's (fully loaded) rent

A S S O C 1 A T E S , L L C

Proof of Claim

• Must file Proof of Claim• Do it soon (within 30 days of rejection)

• File in estimated amount, offer to amend later• Amount = One Year's Fully Loaded Rent

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Collection Sources

Security DepositsGuaranteesLetters of CreditPP&E

Proof of Claim in Bankruptcy

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Security Deposits

Security Deposit is the Tenant's PropertySubject to Bankruptcy Limitation on Claims(one year's rent)

Technically subject to automatic stay

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Letter of Credit

Probably treated as a third party sourceProbably can apply Letter of Credit in excessof bankruptcy maximumProbably collection from Letter of Credit doesnot reduce Proof of Claim (but note "actualdamages" limitation)

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When Do You Call a Letter of Credit?

• After rejection of the lease, if at all possible• Bankruptcy Automatic Stay does not apply,

but- Contractual limitations- Issues re: excess funds

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What Should a Property Manager Do?

Evaluate Tenant's ability to live without theleaseDetermine Tenant's willingness to pay currentrent

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Locking Down the Outcome

If the Tenant wants to leave, negotiate for:- Date certain for surrender- Disposition of PP&E- Marketing access

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Leasing Issues

Tenant can always sell a below market leaseTenant can always reject an above marketleaseBe wary if you need more than one year'srent as a credit enhancement

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Conclusion

Closing RemarksQ & A

ESLES S O C 1 A T E S , L L C