In In re Meruelo Maddox Properties, Inc., -- F.3d ---, No. 10-56128 (9th Cir. Jan. 27, 2012), the United States Court of Appeals for the Ninth Circuit recently rejected the “whole enterprise” exception to the application of the single asset real estate provisions in the Bankruptcy Code. As a result, an entity that constitutes a “single asset real estate” debtor will be subject to the special provisions applicable to single asset real estate bankruptcies even if the entity is part of a larger, integrated corporate family that owns and develops multiple real estate projects. This is significant because it is very common for real estate developers to form separate corporate entities to own each separate real estate project with management and development of each project being conducted by yet another corporate entity. Under the Meruelo decision, each project-level entity will now be subject to Bankruptcy Code provisions applicable to single asset real estate cases. As a result, secured lenders will have increased leverage.
What is single asset real estate?
The Bankruptcy Code defines “single asset real estate” as property that meets the following three elements: (i) it is “real property constituting a single property or project, other than residential real property with fewer than 4 residential units;” (ii) it “generates substantially all of the gross income of a debtor who is not a family farmer;” and (iii) that “no substantial business is being conducted by a debtor other than the business of operating the real property and activities incidental.” 11 U.S.C. § 101(51B)...
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