Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/475894
16 March | April | 2015 Commercial Investment Real Estate IN V E STMENT A N A LY S I S airrazab/Thinkstock o Owner-occupied real estate can be an untapped source of balance- sheet value for bankrupt companies. Such real estate assets provide a potential catalyst for exiting bankruptcy successfully or a fi nancial carrot to motivate prospective strategic or fi nancial buyers. Use real estate leases effectively in Chapter 11 situations. by Joel H. Schneider Creating Value such as a competitor or a f nancial buyer such as a private equity f rm, is of en inf u- enced by real estate. In many cases, the potential acquirer plans to maintain opera- tions in the buildings, but does not want to be in the real estate business or simply does not want to use additional capital to buy the buildings. Currently, real estate investors are clam- oring for stabilized properties occupied by creditworthy tenants. T e competition for income-producing real estate assets has caused capitalization rates to nosedive in recent years. Today, properties in many real estate categories, such as industrial, are priced at cap rates below the 2007 peak. T is article reviews two cases where bank- rupt companies enhanced the value of their owner-occupied real estate. T rough new lease agreements that included higher rents, reimbursement of expenses, and multiyear lease terms, substantial cash f ow streams were created. T e properties were then mar- keted via auctions to maximize recoveries, and sale proceeds were used to expedite the reorganization process, satisfy creditors, and/or hasten the successful sale of the go- forward enterprise. A Reorganization Giordano's, the Chicago-based deep dish pizza retail chain, f led Chapter 11 bank- ruptcy in 2011 af er defaulting on approxi- mately $45.5 million in loans. As part of the f ling, the company listed 20 parcels of owned real estate associated with corporate and franchised restaurants. Of the 20 parcels, 10 were considered operation- ally signif cant to the go-forward business, including a high prof le 139,000-square-foot mixed-use property that served as the com- pany's corporate headquarters and f agship restaurant location. One of the keys to this situation was to position the Giordano's real estate to take advantage of a re-capitalized corporate balance sheet to encourage buyer interest in buildings occupied by a "reconsti- tuted" Giordano's. Hilco Real Estate worked with the debtor to restructure the company's leases to make them more attractive and marketable, while concurrently craf ing a plan to market the properties to the largest possible real estate investment market. Prior to the lease restruc- turings, initial bids for the real estate had yielded of ers around $20 million. When the newly leased properties went to auction, 14 qualif ed bidders were at the table. Af er 13 hours of spirited and contentious bid- ding, the properties sold for more than $30 million. Proceeds from the real estate sale along with the sale of the operating business yielded nearly $66 million, which enabled the estate's secured creditor to be paid in full. A Sale Scenario T e degree of interest in acquiring a bank- rupt company, either by a strategic buyer Bankrupt companies can enhance the value of their owner-occupied real estate. by Joel H. Schneider