Will Pandemic Lead to More SARE Filings?

If a debtor fails to mark a case as SARE, a creditor can file a motion to that effect.

Whether there will be a deluge of SARE cases in real estate hotbeds like South Florida depends on whom you ask.

Only the "most desperate" of cases where borrowers need to buy more time to restructure their debt will be filed as SAREs, which means they won't dominate the workarounds for real estate debt, says Luis Salazar, partner at Salazar Law in Coral Gables, FL.

Aleida Martinez Molina, partner at Weiss Serota Helfman Cole & Bierman in Coral Gables, also expects SAREs will be a last resort for debtors and creditors who can't find another way to agree on new loan terms.

"This would be one of the final options if they can't do it directly with their creditors," says Martinez Molina, who chairs the firm's insolvency and creditors' rights practice group. "The reason why I don't think these are imminent is I would expect there is still the opportunity to negotiate directly with creditors, and creditors are being realistic, and I see a lot of out-of-court workouts taking place. Folks are negotiating, and everyone is being for the most part realistic, settling out of court."

But Pack expects many single-asset owners to opt for SAREs.

"They are going to be correlated directly to the bankruptcy tsunami that everyone is expecting with individual bankruptcies," he says. "Right now there [are] 40 million Americans that are unemployed, but individual bankruptcy filings are actually down, and that's because landlords can't evict, there's unemployment benefits still flowing, the government stimulus packages still are coming."

When the eviction moratorium lifts and foreclosures are permitted again, "there's going to be an uptick in bankruptcies," he says. "I believe the single-asset real estate cases and the real estate cases are going to increase as well. There's going to probably be a massive influx of SARE cases."

Salazar hasn't seen an uptick in SAREs with government relief funds still flowing and foreclosures suspended.

Who Benefits?

The SARE provision was added to the Bankruptcy Code to help lenders get paid back faster if they and their borrowers are struggling to come up with an out-of-court solution, Salazar says.

The option is "meant to shorten and restrict the amount of time a debtor has in a bankruptcy so banks and lenders are not delayed and can realize on their collateral faster," he says.

The coronavirus pandemic just might turn the tables and make SAREs a win for both creditors and borrowers, Pack says.

It's a beneficial filing for lenders because of the compressed timeline for the borrower to come up with a plan. But as the year progresses, it also could be a good option for borrowers faced with foreclosure.

"At minimum, they have 90 days to figure it out with the benefit of an automatic stay put in place," Pack says. "What I wouldn't be surprised to see is for borrowers to utilize single-asset real estate filings to give themselves 90 days to see what their options are in the face of imminent foreclosure."

Ins and Outs

SAREs work well for owners with multiple creditors by giving them an opportunity to single-handedly rewrite loan terms.

If an impaired class of creditors such as unsecured creditors or some of the secured creditors consent to a borrower's loan repayment plan under a SARE filing, the plan can be imposed on the first-priority mortgage lender as long as it's getting the present value of what they would be getting otherwise under the loan terms, Pack says.

In that way, SAREs allow for a "cram up" of sorts as the loan term rewrite plan is "crammed up the throat" of the first-priority lender, he notes. "Through cram up, a borrower has the ability to rewrite the terms of the mortgage even if the lender disapproves."

Even though SAREs are restricted to owners of a single property, it doesn't mean big and midsize real estate owners can't take advantage of the provision based on their ownership structure.

Hundreds of real estate assets are owned by limited liability companies holding a single property, a vehicle used by both small and major real estate companies.

"The LLC is the borrower, property owner and the one filing under SARE," Pack says. "It's a very useful avenue that becomes ubiquitous in times of distress and when there's very quick market downturns. It's a very good avenue for borrowers to potentially seek to rewrite the terms of their mortgage. Lenders should be armed and ready for their borrowers to start these types of proceedings, and in the end of the day it may just be worth it to avoid them and do an out-of-court workout before it gets to that point."

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Lidia Dinkova covers South Florida real estate for the Daily Business Review, an ALM sibling of Commercial Leasing Law & Strategy. She can be reached at [email protected] or on Twitter @LidiaDinkova.