VEGAS INC Magazine - Latest Las Vegas business news, features and commentaries about gaming, tourism, real estate and more
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VEGAS INC COVER STORY they do agree, the business might not be able to afford the proposed lower mort- gage payments. "You then either have to dismiss the bankruptcy case and move on and have the owner give up the property, or you have an infusion of cash to where the landlord can afford the mortgage," Creighton said. Another complication the attorneys have recently seen is borrowers who don't know who owns their debt after it has been securitized, or pooled with other loans and sold to investors, often at a steep discount. Some of it impossible, but it makes it more diffi- cult." Larson rattled off a long list of compli- cations when dealing with debt investors, which he calls "vulture funds," since they typically buy distressed debt at a discount in the hopes of making a profit. Many of them bought loans from the Federal Deposit Insurance Corp. (FDIC), which obtained them when local banks such as Silver State Bank and Community Bank of Nevada failed. the investors aren't enthu- siastic about seeing the debt they own crammed down in bankruptcy court. They don't want to hold a mortgage note with a reduced value. "In the past 12 to 18 months, we've had a lot of private compa- nies and hedge funds buying these debts Randy Creighton and they're not in the ments the borrower has offered. business of being a bank," Creighton said. "They're not business of in the loaning money. When you're proposing a seven-year repayment plan for the building, they're not interested in holding that note for seven years. They want an exit plan sooner than that. It doesn't make "That's often times why you can't settle without authority of the court, which is why bankruptcy is sometimes so good, because you can't get these two entities to talk to one another," Larson said. "They don't want to tell their investors they'll have to take a haircut. Often times, even if it's a good deal, they don't know how to dis- perse the haircut because no one wants their investors to take it." "If it's a vulture fund that took over an FDIC loan from a Silver State bank situ- ation, they're going to be limited in what they want to do, ," Larson said. "The way the system's geared, they make money go- ing after some of these assets. Sometimes to collect the (mortgage) insurance on a particular asset, they have to try to fore- close or get a judgment." In other cases, multiple funds have in- vested in a defaulted loan and can't agree with one another on concessions or settle- Creighton said that part of the problem for small businesses that default on loans is determining who owns the loan and what the new owner paid for it. "Are we talking to Bank of America?" Creighton asked. "Are we talking to the true investor? Is the FDIC involved? Is se- curitization involved? You're not talking apples and oranges. You're talking an or- ange and a steak." Worse, Larson said he regularly deals with competing factions at law firms that represents debt holders. "They get their bonuses and their sala- ries based on what they bring in and what they make," he said. "If the litigation de- partment is suing the debtor before it gets to bankruptcy, and I'm trying to resolve this debt, the litigation department may not be talking to the bankruptcy depart- ment. Or if I'm talking to the bankruptcy department, it might not be talking to the litigation department." "Usually I'm talking to the bankruptcy department and saying 'Let's work this out because it's a lot cheaper for everyone involved,' and the litigation department is not talking to the bankruptcy department and they'll file something (like a lawsuit) that forces me to file bankruptcy," Larson said. The bottom line: Debt restructuring can be complicated, so it pays off to plan ahead with sound legal and financial ad- vice. BY THE NUMBERS 18,220 30,637 26,239 310 1,015 95 By Steve Green senior staff writer B non-eventful usinesses and organizations that have gone through Chapter 11 bankruptcy in Nevada have experienced everything from reorganizations to bitter legal creditors. Hooters Consider a few recent cases: • Debt holders are taking over the hotel-casino after owners filed for bankruptcy last year to block a threatened foreclosure by creditors. Hooters' owners used the bankruptcy process to buy time to look for investors to buy the property or bail them out. In the end no investors materialized. • The nonprofit Nevada Cancer Institute had a much smoother ride, gaining confirmation of its reorganization plan just five months after filing for Chapter 11 in December. The NCI sold its clinical operations to UC San Diego, leased space | 2 JULY 2012 | fights with disgruntled Murren in its Engelstad Research Building to the Desert Research Institute, slashed its debt from about $100 million to $13 million and emerged with a new name: The Nevada Cancer Institute Foundation. And while board member Heather said "there was reluctance among past donors to make contributions" after the reorganization, concerns were overcome as the NCI, with court permission, established an escrow account and raised more than $7.9 million in charitable donations. "The debtor's from Chapter 11, and the fact successful emergence that bolster it will continue to advance its important philanthropic mission, will fundraising efforts," Murren said. Looking ahead, Nevada's bankruptcy landscape could change dramatically depending on what the Nevada Supreme Court does with "AB 273." The Nevada Legislature's new law limits 15 deficiency judgments in commercial real estate foreclosures so that judgments are based on what a debt owner paid for debt as opposed to its face value. some For example, a debt investor may have paid $1 million for a $5 million defaulted loan. If the property backing the loan is foreclosed on for $700,000, the deficiency is either $300,000 or $4.3 million, depending on whether AB 273 is upheld. The banking industry wants the law struck down, saying it's unconstitutional. Industry members argue that distressed debt investors should be able to go after defaulting borrowers for the full amount of their deficiency. Commercial real estate developers and guarantors fear that if AB 273 is struck down, they'll be liable for the full deficiencies. At issue are hundreds, and perhaps thousands, of loans in Nevada. "That could be a huge issue," bankruptcy attorney Zach Larson said. Number of bankruptcies in Nevada in 2005 Number of bankruptcies in Nevada in 2010 Number of bankruptcies in Nevada in 2011 Number of business bankruptcies in Nevada in 2005 Number of business bankruptcies in Nevada in 2010 Number of Chapter 11 filings during the first three months of 2012 SUPREME COURT TO DECIDE KEY BANKRUPTCY PROVISIONS "Depending on how it goes, it could lead to a huge increase in volume for bankruptcy attorneys. If it's overturned, you're going to see a ton of business people file (for bankruptcy)." The possible expiration at the year of the end of the federal Mortgage Debt Relief Act of 2007 could also boost business for local bankruptcy attorneys. The law excludes from taxable income debt that was erased as part of a mortgage restructuring and debt forgiven in a foreclosure. It applies to a person's principal residence and excludes up to $2 million of forgiven debt from 2007 to 2012. Nevada's congressional delegation has been arguing for an extension of the law. If it isn't extended, homeowners involved in mortgage restructurings, short sales or foreclosures could be hit with hefty tax bills. 20120702_VI01_F.indd 15 6/28/12 3:09:56 PM