Archives for March 2015

Use real estate leases effectively in Chapter 11 situations.
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.
By: Joel H. Schneider (Commercial Investment Real Estate)
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The Rio Rancho Governing Body has taken a stand in support of the effort to complete Paseo del Volcan, albeit on a split vote.
Governing body members voted 4-2 in favor of a resolution supporting construction of the road from Interstate 40 to Unser Boulevard. Currently, the only existing piece of PdV is in Rio Rancho.
Councilors Chuck Wilkins and Mark Scott cast the dissenting votes.
The resolution commits no money to the project.
Mayor Gregg Hull, who sponsored the measure, said the road would open tens of thousands of acres for development, attract jobs, improve traffic flow and provide another route to the area. City Manager Keith Riesberg said he knew of major employers looking at large tracts of land in the PdV corridor in the past two years.
Rio Rancho Regional Chamber of Commerce President and CEO Debbi Moore said the road was important for future generations of residents.
“This is crucial to who we will become,” she said.
Rio Rancho resident Carol Dooley spoke against the resolution, saying Southern Boulevard, Western Hills Drive and Idalia Road are falling apart, the city needs to widen Unser Boulevard and drainage is a problem.
“We need to take care of the roads that we have,” she said. “The future will take care of itself.”
Wilkins said PdV would be good for the city when it was built, but there were more immediate needs.
The city’s comprehensive plan advised developing land between existing subdivisions instead of beyond them, he said. Public services and infrastructure are spread thin because of scattered development.
Even with federal money, Wilkins continued, the city would have to provide matching funds for PdV, meaning more taxes.
“I am thinking about my children,” he said. “I am thinking about the debt I’m going to put on them.”
Scott said if Hull amended the resolution to specify the city wouldn’t strive for the completion of PdV within the next few years, the governing body would probably unanimously support the idea.
Hull said the immediacy was in Rio Rancho needing to take part in talks with other entities that want the road completed.
“That is immediate because the discussion is going on with or without us,” he said.
Councilor Lonnie Clayton said the resolution just concurred that, in the future, PdV would benefit everyone concerned.
“I think if we don’t look to the future, our job here as city councilors becomes just pretty silly,” he said.
By: Argen Duncan (Albuquerque Journal)
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SANTA FE – A New Mexico right to work bill that has reignited old economic arguments and fanned partisan flames was shot down Tuesday in a Senate committee, leaving its path to final approval blocked with less than two weeks left in the 60-day legislative session.
The proposed change in state labor laws was derailed on a 5-3 party-line vote in the Senate Public Affairs Committee, after majority Democrats thwarted a GOP attempt last week to have the House-approved legislation sent to the full Senate for a vote.
Labor union leaders lauded the vote but said they will be on the lookout for attempts to revive the measure before the Legislature adjourns March 21.
“We know it’s not over,” said Charles Goodmacher, the director of government relations for the National Education Association-New Mexico, a teachers union. “There are opportunities the proponents of the legislation may seize upon.”
Sen. Mimi Stewart, D-Albuquerque, argues against a right-to-work bill before the Senate Public Affairs Committee on Tuesday. (Eddie Moore/Albuquerque Journal)
Meanwhile, Rep. Dennis Roch, R-Logan, the right to work bill’s sponsor, described the vote as marking a “sad day” for New Mexico workers.
“It’s extremely disappointing that the Democrat-controlled Senate would choose obstruction over a common-sense compromise that would raise the minimum wage and give our workers the freedom to choose whether they financially contribute to a union,” Roch said in a statement.
During Tuesday’s hearing, backers of the right to work bill said it would give employees more freedom of choice and could jump-start the state’s economy.
Roch said many out-of-state companies do not even consider New Mexico as a possible place to do business because of its lack of a right to work law, saying, “We don’t want to miss that economic opportunity again.”
The proposed New Mexico law would mean nonunion employees – in both the private and public sectors – would not have to pay union fees as a condition of employment. Though union membership cannot be required under federal law, such fees can be mandated under contracts in unionized workplaces.
Critics of the right to work legislation, House Bill 75, described it as a politically driven measure that would lower the wages of New Mexico workers.
“Thank goodness for unions. They have kept us from working too long and not having health benefits,” said Sen. Mimi Stewart, D-Albuquerque. “It’s not the right answer for New Mexico – it will help ruin our economy.”
The Tuesday vote came after the committee heard several hours of testimony on the bill Sunday but did not vote on it. Labor unions had packed the Roundhouse for that hearing, bringing busloads of members and supporters to Santa Fe from Las Cruces and Albuquerque.
Twenty-five states now have right to work laws in place, after Wisconsin Gov. Scott Walker signed a similar bill into law on Monday.
The right to work measure has emerged as one of the most high-profile issues in this year’s 60-day legislative session, driven in large part by House Republicans having a majority in the chamber for the first time in 60 years.
The legislation had been approved 37-30 in the House on Feb. 25 on a nearly party-line vote. Even before the House approved the bill, Democratic leaders had vowed to derail it in the Senate, where Democrats hold a 25-17 advantage over Republicans.
Meanwhile, Gov. Susana Martinez has indicated she supports the legislation and would likely sign it into law if it made it to her desk.
But the Tuesday vote to table the bill – and a similar Senate right-to-work measure – means it’s unlikely Martinez will have that chance.
In a Tuesday night statement, the Republican governor said the tabling vote was an example of the “failed leadership” of Senate Democrats.
“Unfortunately, some partisans are more interested in putting politics before people than giving the entire Senate an opportunity to vote on legislation designed to advance policies that the overwhelming majority of New Mexicans support,” Martinez said.
In a recent Journal Poll, 60 percent of New Mexico voters surveyed said workers should not be required to pay union fees as a condition of employment. Twenty-six percent said such fees should be required, while the remaining 14 percent were undecided or would not say.
Few senators on either side of the issue asked questions Tuesday, with most offering their views on the legislation’s impact.
“It inserts the government and the police power of the state into private negotiations between employers and employees,” said Sen. Jacob Candelaria, D-Albuquerque.
“I think this is a step in the right direction,” countered Sen. Ron Griggs, R-Alamogordo.
In New Mexico, there were about 43,000 union members in 2014, or about 5.7 percent of the state’s total workforce, both in private and public service, according to the U.S. Bureau of Labor Statistics.
By: Dan Boyd (Albuquerque Journal)
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Hundreds of union members and supporters file into the state Capitol in Santa Fe on Sunday to attend a hearing on high-profile right-to-work legislation.

SANTA FE – Debate over a New Mexico right-to-work bill took center stage at the Roundhouse on Sunday, with hundreds of opponents of the proposed change in state labor laws packing the Capitol for the first Senate hearing on the measure.

The Senate Public Affairs Committee did not vote Sunday on the right-to-work bill, but heard roughly three hours of testimony – from both backers and critics – on the House-approved measure and several similar pieces of legislation. A vote is expected to happen Tuesday.

The tone was at times sharp, with one union member warning committee members to “choose wisely” on how they vote with 2016 elections looming and a Republican state senator telling the crowd he is not a “stooge” for out-of-state backers of right-to-work laws.

Supporters of enacting a right-to-work law focused on two primary points – the current requirement that some nonunion workers have to pay union fees or risk losing their jobs and the state of New Mexico’s economy.

“Whether we like it or not, we have to be able to sell our economy here in New Mexico,” said Senate Minority Leader Stuart Ingle, R-Portales.

But opponents described the proposal as outdated and ineffective.

“The real problem with the legislation … is it is a bad business strategy,” said Alan Webber, a Santa Fe entrepreneur who sought the 2014 Democratic nomination for governor.

The proposed law would mean nonunion employees – in both the private and public sectors – would not have to pay union fees as a condition of employment. Though union membership cannot be required under federal law, such fees can be mandated under contracts in unionized workplaces.

Currently, 24 states have right-to-work laws in place. Wisconsin could soon become the 25th state after legislators there endorsed similar legislation last week.

 

As in other states, New Mexico labor unions have fought against the proposed right-to-work legislation. Labor leaders organized buses to take hundreds of members and backers from Albuquerque and Las Cruces to Santa Fe for Sunday’s hearing.

The huge crowd filled Capitol hallways and many people had to sit in other committee rooms to listen to the testimony via a live audio feed.

“This ‘right-to-work’ bill has never been about helping New Mexico’s middle class,” said Mary Ann Montoya, a member of the United Food and Commercial Workers union, who said the measure was more geared toward increasing corporate profits.

But leaders of several business and commercial real estate groups said passing the right-to-work bill could mean more job creation statewide.

Rep. Dennis Roch, R-Logan, the sponsor of the right-to-work bill that was approved on a 37-30 vote in the House on Feb. 25, said his primary motivation in carrying the legislation is to provide protections for workers who do not want to join or pay fees to unions.

“This is an important issue for workers who feel they are being forced to contribute a portion of their paycheck against their will,” Roch said Sunday.

At least one state worker, Tom Gray, an employee with the state Environment Department, testified union leaders tried to intimidate him into opposing the legislation, though labor leaders rejected the charge.

The right-to-work measure pending in the Senate Affairs Committee also includes a minimum wage increase, from $7.50 to $8 per hour with a six-month training period.

The bill has been broadly supported by Republican legislators, but just one Democrat – Rep. Dona Irwin of Deming – voted for it in the House. Meanwhile, top-ranking Democratic senators have vowed to fight the measure and could have the votes necessary to derail it in the Senate Public Affairs Committee, which features five Democrats and three Republicans.

Gov. Susana Martinez has indicated she supports the legislation and would likely sign it into law if it makes it to her desk.

In New Mexico, there were about 43,000 union members in 2014, or about 5.7 percent of the state’s total workforce, private and public service, according to the U.S. Bureau of Labor statistics. That union membership rate was down from 2013 and below the national average of 11.1 percent.

By: Dan Boyd (Albuquerque Journal)

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