Although an operating hotel may not be “single asset real estate,” a district court in California held that an uncompleted hotel generating no income is “single asset real estate” under Sections 101(51B) and 362(d)(3).
The corporate debtor was building a 178-room hotel designed to have a bar, restaurant and laundry services. With construction running over budget, the construction lender stopped making advances. The debtor was generating no income.
Construction had been idle for about two years when the lender initiated foreclosure proceedings, prompting the debtor to file a chapter 11 petition.
The debtor did not designate itself as single asset real estate, which would have resulted in rapid-fire termination of the automatic stay under Section 362(d)(3) absent speedy movement toward plan confirmation.
The lender filed a motion to declare the debtor to be the owner of single asset real estate.
The bankruptcy court disagreed, holding that the property was not single asset real estate. The lender appealed and won in a June 8 opinion by District Judge Fernando L. Aenlle-Rocha of Los Angeles.
Section 101(51)(B) defines single asset real estate to mean:
real property constituting a single property or project, other than residential real property with fewer than 4 residential units, which generates
substantially all of the gross income of a debtor who is not a family farmer and on which no substantial business is being conducted by
a debtor other than the business of operating the real property and activities incidental thereto.
According to Judge Aenlle-Rocha, the bankruptcy judge had taken the view that real estate producing no income does not fit within the plain meaning of the definition. He said that the bankruptcy court’s opinion was in the minority.
The definition in Section 101(51)(B), Judge Aenlle-Rocha said, was “ambiguous,” as shown by courts’ disagreements over the status of non-income-producing property as single asset real estate.
To conclude that the debtor owned single asset real estate, Judge Aenlle-Rocha was persuaded by In re Oceanside Mission Assocs., 192 B.R. 232 (Bankr. S.D. Cal. 1996). He cited Oceanside for saying that excluding raw land from the definition “does not appear to serve the purpose of the statutory scheme.” Id. at 235.
Judge Aenlle-Rocha adopted the majority view and held that “the statutory definition of ‘single asset real estate’ includes property which generates no income.”
Next, Judge Aenlle-Rocha focused on the portion of the definition asking whether any substantial portion of the business was something other than the business of operating single asset real estate.
On that question, the debtor relied on caselaw holding that hotels are not single asset real estate if they have related income-producing operations such as bars and restaurants. The debtor wanted Judge Aenlle-Rocha to focus on its intention of operating the bar and restaurant once construction was complete.
Judge Aenlle-Rocha rejected the argument, instead saying that “the Court must look to current facts, not to those existing in the past, nor to Debtor’s aborted plans for the future.”
Judge Aenlle-Rocha reversed, holding that “the Hotel falls within the definition of ‘single asset real estate’ under 11 U.S.C. § 101(51B).”
Although an operating hotel may not be “single asset real estate,” a district court in California held that an uncompleted hotel generating no income is “single asset real estate” under Sections 101(51B) and 362(d)(3).
The corporate debtor was building a 178-room hotel designed to have a bar, restaurant and laundry services. With construction running over budget, the construction lender stopped making advances. The debtor was generating no income.
Construction had been idle for about two years when the lender initiated foreclosure proceedings, prompting the debtor to file a chapter 11 petition.
The debtor did not designate itself as single asset real estate, which would have resulted in rapid-fire termination of the automatic stay under Section 362(d)(3) absent speedy movement toward plan confirmation.
The lender filed a motion to declare the debtor to be the owner of single asset real estate.
The bankruptcy court disagreed, holding that the property was not single asset real estate. The lender appealed and won in a June 8 opinion by District Judge Fernando L. Aenlle-Rocha of Los Angeles.