The debtor owned units in two apartment buildings. Shortly after it filed bankruptcy, its mortgage lender sought a determination that it was a “single asset real estate” debtor under Section 101(51B) of the Bankruptcy Code – which would trigger special provisions regarding relief from the automatic stay under Section 362(d)(3).
The debtor was formed for the purpose of purchasing, improving, and developing real estate in defined geographic areas. The debtor started with 57 units in two separate apartment buildings, which it improved and then offered for sale as condominium units. The two properties were not adjacent, but were within 500 feet of each other.
“Single asset real estate” (SARE) is generally defined as (1) real property that constitutes a single property or project, (2) which generates substantially all of the debtor’s income, and (3) on which the only substantial business of the debtor is the business of operating the real estate, including incidental activities.
In this case, the debtor conceded that the properties generated substantially all of its income and that it did not conduct other business. With respect to the first factor, since the properties were not adjacent, it did not own a “single property.” So, the question turned on whether the properties owned by the debtor were a “single project.”
As summarized by the court (citations omitted):
In order for two or more separate properties to constitute a “single project” within the meaning of 11 USC §101(51B), courts have generally determined that the multiple parcels of real estate must be purchased, developed, or sold pursuant to a “common plan or scheme,” linked together by “common usage” or in pursuit of a “common purpose.” The mere fact of common ownership, or even a common border, will not suffice.
The court noted that many courts find that multiple parcels are a single project based on representations to governmental authorities. In particular, it identified several cases in which a debtor presented property as a single project in applications and plans submitted to planning or zoning authorities. It also noted cases where courts have determined that contiguous parcels are a single project.
In this case, the court identified a number of facts going each way.
- Facts favoring a finding that this was a single asset real estate case included: one bank account for operations of both buildings, no employees, debts listed in its bankruptcy schedules were applicable to all units and not attributable to any specific units, there was only one contract for services such as internet, garbage pickup, and electricity, and there was only one real estate management contract for all units. The court also thought that it was relevant that all of the units were pledged as collateral for the lender’s loan.
- Facts supporting the conclusion that this was not a single asset real estate case included: the properties were purchased at separate times, converted into condominiums at different times, attracted different clientele and were operated differently. With respect to the last point, the court emphasized that the units in one building were part of an independent condominium association which controlled the common areas, while at the other building the debtor managed both the common areas and its own units. This fact appeared to be particularly significant to the court, since it mentioned this point several times.
After laying out a laundry list of facts on each side, the court concluded that the facts were “largely in equilibrium,” which meant that the lender lost since it failed to demonstrate by a preponderance of the evidence that there was a single project.
This issue is important because in a single asset real estate case a creditor secured by a lien on the real estate is entitled to relief from the stay unless within (i) 90 days after commencement of the bankruptcy or (ii) 30 days after the court determines that there is a single asset real estate case (whichever is later) the debtor either (1) files a plan of reorganization with a “reasonable possibility” of being confirmed, or (2) starts making monthly payments in an amount equal to the non-default interest rate on the value of the creditor’s interest in the real estate.
Looking at this case it is difficult to discern any pattern. While many cases will be clear (e.g., a single property with a single building and no substantial other business), in others it will be very difficult for the parties to reliably predict how a court will react.
Vicki R. Harding, Esq.