Page 26 - September 7-20, 2022 Law & Accounting Our Real Estate Group Serving the Commercial Real Estate Community Leasing Real Estate Development Real Estate Acquisition Environmental Private Equity Commercial Lending, Workouts and Foreclosure Real Estate and Commercial Litigation Construction Contracts and Litigation Corporate 1700 Lincoln Street, Suite 4300 | Denver, Colorado 80203 Phone 303-298-1122 | Fax 303-296-9101 Our clients rely on our experienced team of lawyers to guide them through all of their legal needs, from significant business decisions to the most complex global deals and litigation. Our breadth and depth of practice enable us to handle the most complex matters and solve our clients' problems seamlessly. R ising interest rates, increased consumer staple prices, flat wages and general talk of an impending recession have the prospect of rising bankrupt- cy rates on the minds of many, including real estate profession- als. Per the current unofficial sta- tistics from the District of Colo- rado Bankruptcy Court, year-to- date bankruptcy filings in Chap- ter 7 and Chapter 11 cases, which generally capture non-farm busi- ness bankruptcy cases that span liquidations to reorganizations, are fairly stable. In 2021, Colo- rado saw 8,512 Chapter 7 cases and 62 Chapter 11 cases filed. In 2022, as of Aug. 28, Colorado has seen 2,431 Chapter 7 cases and 39 Chapter 11 cases filed. However, four of the 39 Chapter 11 cases were filed inAugust alone. To say there is a causal link between that increase and the June interest rate hike is speculative; still, tighten- ing credit and dwindling reserves of dry powder may play into the spike, whichmay foreshadow the future. Further, recent news reports state that lenders are set- ting aside cash to cover troubled loans. So, what are the signs to watch for, and what changes and opportunities in the real estate market are on the horizon? n Brace for stricter due dili- gence. As interest rates increase and the tide of rising property values recedes, equity cushions level off. Lenders know that control- ling costs and risk are essen- tial when relying on favorable loan to value for either quickly flipping a dis- tressed loan or as a cush- ion for any losses are no longer an option. The Great Recession improved practices in hiring more objective appraisers and more thorough investigation into applicants’ finances, which transcends to the present. But we can expect to see lenders requir- ing, among other things, more diligence surrounding down pay- ments, lien waivers and bond- ing, among other pre-closing and construction loan management practices. n Beware the notices. Notices of bankruptcy and intent to file lien statements, complaints, sum- monses and subpoenas – they can all appear, at first blush, to be routine forms. But the truth is, whether these arrive via first-class mail, registered mail or a process server, they are real legal process- es that require the diligent atten- tion of a professional. Aside from any legal proceedings, mechan- ics liens and breach of contract lawsuits are frequently the first signs of troubled real estate proj- ects. These can provide warn- ing signs for real estate brokers and specialists about the risks of insolvency. However, disgruntled vendors and subcontractors are not necessarily the first sirens of distress. This author anecdotally can attest that several mechan- ics liens matters have crossed his desk in recent months, on other- wise apparently well-funded and run projects. These may indicate a larger trend across the industry that has yet to reveal itself statisti- cally. n The uninvited guests. Here is the setup. A broker advises a commercial tenant on a lease of space in a mixed-use building. The building’s property manage- ment recently turned over – no big deal. The parties are perform- ing a relatively light investigation because they do these deals all of the time and the high-level terms have been resolved in principle since the first meeting months ago. There are rumblings of the word “trustee” or “receiver,” or something along those lines, but never mind that. Another month passes, the lease is fully executed, and another month passes when suddenly, the tenant learns of a foreclosure sale of the building set for tomorrow. Foreclosure sales, very generally under Colorado statute 38-38-501(1), extinguish subordinated leases, includ- ing this one, leaving the tenant, who put capital into the project already, left to vacate or rene- gotiate a new lease with a new and unknown building owner in the next fewmonths. What could have happened? Odds are the building was an asset either in a receivership or bankruptcy, subject to either various statutes and receiver- ship orders or the Bankruptcy Code and various bankruptcy court orders. The vast majority of the time, what this means is that while the tenant thought it could do a deal directly with the building’s property manager and execute an effective lease, other parties who were not involved were necessary participants. This may include no less than a receiver or trustee (and possibly a priority secured creditor) and either a state court or a bankrupt- cy court, all approving the lease under terms specifically crafted to the circumstances. These were necessary parties to the transac- tion to ensure it was both effec- tive in accordance with various receivership or bankruptcy laws and orders and could survive future actions in the bankruptcy and foreclosure. The presence of a receiver, trustee or debtor-in-pos- session should not automatically preclude proceeding through a deal, in part because advanta- geous transactions are possible. But leasing, brokering and other real estate professionals should be aware there are additional, non- routine steps necessary to be sure the business arrangement is con- summated in an enforceable way. n The opportunities. This nat- urally segues into a positive con- sideration, that being the out-of- the-ordinary opportunities that arise in a recessionary climate for those real estate investors who planned for the hard times. For example, presuming all necessary due diligence is arranged and the appropriate legal process is fol- lowed, an opportunistic inves- tor may spot a favorable asset in bankruptcy and purchase the same, free and clear of all liens and encumbrances, at a fortu- nate price. Paralleling that to a Colorado state receivership case, investors can contact receivers and obtain stipulations, court orders and ultimately closed transactions, for leases and pur- chases of distressed assets from receivership cases, at the right price. “Different” – whether used to describe the economic climate or the real estate market gener- ally – does not necessarily mean “negative,” and these ensuing different times present an added layer of considerations for savvy real estate professionals. s Opportunities despite bankruptcy and tightening credit Lucas L. Schneider Partner, Stinson LLP