Real estate companies too go bankrupt, though it not as common as investment banks. In this post we will be discussing a few major reasons for the bankruptcy of real estate companies, and look at few real life examples.
Large institutional real estate companies generally maintain a huge portfolio of income generating properties. Acquisitions of these properties are generally financed by large amount of debt and other debt instruments.
Most of these real estate assets are generally financed such that each asset is individually burdened with its own debt; real estate companies create special purpose vehicles (SPVs) for this purpose. Sometimes, due to various market factors, the income from property may drop to such a level that it is not enough to service debt obligation. It is very common that such market condition will also result in the reduction of capital value and reduced liquidity.
There can be other situation where the cost of holding the asset and the operating cost, exceed the income from the asset for extended period of time.
Look at the extra-ordinary case of General Growth Properties. General Growth Properties (GGP), one of the largest mall operators in the United States, filed for bankruptcy in 2009, in one of the biggest commercial real estate collapses in history. At the time of filing bankruptcy General Growth faced $25 billion in debt, largely in the form of short-term mortgages. The company was severely wounded by the trouble in the financial markets, which wreaked havoc on its ability to refinance the debts.
The entire company filed for protection, and all of its assets were dragged into a bankruptcy. The GGP case created a dangerous legal precedent for real estate lenders and demonstrates that in the realm of bankruptcy, anything is possible. Check more details here.
Another excellent case study is the example of Maguire Properties, which paid too much for a portfolio of office properties and borrowed too much against them. They were forced to surrender properties back to the lenders; the company however did not file for bankruptcy.
Maguire paid $2.88 billion in 2007 for 24 office properties and 11 development sites. The purchase, from Blackstone Group, encompassed all of the real estate in downtown Los Angeles and Orange County that Blackstone acquired in its acquisition of billionaire Sam Zell’s Equity Office Properties Trust. Check more detail here.
Innkeepers USA Trust, a real estate investment trust that owned more than 70 midmarket hotels, filed for bankruptcy in 2010. Innkeepers was laboring under more than $1 billion in debt, and had been trying to rework its debt taken on in a 2007 buyout. You can see more details here.
Are you aware of any interesting case of real estate company bankruptcy? Use the comment section below to share.