Reprinted with permission by author: Joel
H. Schneider, Senior Vice President, Hilco Real Estate, LLC
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 financial carrot to
motivate prospective strategic or financial buyers.
Currently, real estate investors are clamoring for
stabilized properties occupied by creditworthy tenants. The 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.
This article reviews two cases where bankrupt companies
enhanced the value of their owner-occupied real estate. Through new lease
agreements that included higher rents, reimbursement of expenses, and multiyear
lease terms, substantial cash flow streams were created. The properties were
then marketed 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, filed Chapter 11 bankruptcy in 2011 after defaulting on approximately
$45.5 million in loans.
As part of the filing, the company listed 20 parcels of
owned real estate associated with corporate and franchised restaurants. Of the
20 parcels, 10 were considered operationally significant to the go-forward
business, including a high profile 139,000-square-foot mixed-use property that
served as the company’s corporate headquarters and flagship 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 ”reconstituted” Giordano’s.
Hilco Real Estate worked with the debtor to restructure
the company’s leases to make them more attractive and marketable, while
concurrently crafting a plan to market the properties to the largest possible
real estate investment market. Prior to the lease restructurings, initial bids
for the real estate had yielded offers around $20 million. When the newly
leased properties went to auction, 14 qualified bidders were at the table.
After 13 hours of spirited and contentious bidding, 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
The degree of interest in acquiring a bankrupt company,
either by a strategic buyer such as a competitor or a financial buyer such as a
private equity firm, is often influenced by real estate. In many cases, the
potential acquirer plans to maintain operations 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.
By structuring new leases based on go-forward tenancy in
the building, a valuable asset for the estate is created, which enables the
debtor or the acquirer to offer a fully leased building to the investment
marketplace.
Based in suburban Chicago, Qualteq was a market leader in
manufacturing plastic credit and gift cards for companies such as American
Express, Visa, and MasterCard. The owner’s personal financial difficulties
forced Qualteq into Chapter 11 in 2013. The bankruptcy trustee and his
financial advisers first stabilized the company, then sold the business to
Brazil-based Valid S.A. through a Bankruptcy Code Section 363 bankruptcy sale.
However, Valid had no interest in purchasing the four buildings Qualteq
occupied.
Working in tandem with the bankruptcy trustee and
advisers, Hilco structured new, five-year leases on each of the four buildings
with Valid as the tenant, based on the strong balance sheet that was created
with Valid’s purchase, enabling Qualteq to continue operations in their current
facilities.
Prior to the finalization of the new leases and with no
certain commitment from Valid to remain as a tenant, there was no immediate
interest from the real estate investment community for four potentially vacant
industrial buildings. Once the new leases were finalized, the leased buildings
were then put through a sale process by Hilco, which garnered significant
interest from third-party investors. Stalking horse bidders were obtained for
each property, followed by an auction. Hilco estimated the four buildings, on
an empty basis, were valued at approximately $10.5 to $12.5 million. When the
gavel came down, the auction resulted in total sales of almost $19 million for
the four fully occupied buildings.
Utilizing the real estate as a vehicle to enhance value
further ensured that the estate achieved maximum value of the Qualteq business/assets
and helped to secure a successful transaction with Valid. Furthermore, the
added value created by selling buildings occupied by a quality credit tenant
resulted in sufficient proceeds to fully pay all mortgage holders.
Whether a company in Chapter 11 reorganizes and exits
from bankruptcy on its own or is acquired by a strategic or financial buyer,
the real estate occupied by the business can be transformed into a value
enhancer. By recasting leases with a strong tenant and aggressively marketing the
properties, a significant amount of incremental cash can be generated to
benefit the bankruptcy estate in a reorganization and/or a going-concern sale.
In bankruptcy, debtors and creditors should regard companies’ real estate as a
value-creation tool, not an illiquid liability.
Joel H. Schneider is senior vice president, dispositions, for
Hilco Real Estate, LLC, a unit of Hilco Global. You can contact Joel at jschneider@hilcoglobal.com.
Hilco Real Estate (www.hilcorealestate.com) advises and executes strategies
to help both healthy and distressed clients maximize the value of their real
estate assets. Their extensive property valuation knowledge, lease
renegotiation experience and innovative sales strategies are leveraged by
substantial access to capital, a vast network of tenants/landlords and
motivated buyers/sellers. Services include real estate lease repositioning and
advisory solutions; extensive real estate disposition services through an
expert brokerage team as well as high-performance accelerated property auctions-live,
online, sealed bid; a sale/leaseback advisory practice with unique deal
structuring; and, real estate investments including acquisition deals for
vacant, value-add, or stable income-producing properties as well as joint
venture transactions. Hilco Real Estate is part of Northbrook, Illinois based Hilco
Global (www.hilcoglobal.com), a world-wide leading authority on
maximizing the value of business assets by delivering valuation, monetization
and advisory solutions to an international marketplace. Hilco Global operates
more than twenty specialized business units offering services that include
asset valuation and appraisal, retail and industrial inventory acquisition and
disposition, real estate and strategic capital equity investments.
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