A Real Estate Investment Trust (REIT) is defined as a corporation, trust, or association that acts as an investment agent in real estate and real estate mortgages. In the recent economic crisis and recession, many REITs encountered problems; as a rule they are highly leveraged and are likely to be affected by everything from stringent credit and mortgage requirements to downturns in commercial real estate. Adverse economic conditions can affect the ability of an REIT to meet its financial obligations.
Should an REIT file for bankruptcy, whether as a Chapter 7 liquidation or a Chapter 11 reorganization, creditors may find another group waiting to be paid: REIT shareholders who hope to recoup at least some of their investment. Creditors may well wonder who takes priority in an REIT bankruptcy.
In Chapter 7 liquidation all assets are sold and generally speaking, secured creditors, unsecured creditors, and shareholders all end up receiving little or none of what is owed to them.
In a Chapter 11 bankruptcy however, an REIT can take advantage of debtor-in-possession (DIP) financing, which facilitates the REIT’s ability to continue doing business. Secured creditors may also negotiate equity positions in the REIT in lieu of repayment or in exchange for DIP financing. The laws governing Chapter 11 require that every “class”, or type of creditor, be addressed. Prioritization begins with those holding secured debt, followed by creditors with unsecured debt. The claims of equity and bond shareholders of the REIT are the last to be considered.
Any bankruptcy situation can lead to financial disappointment. Yet even in the difficult instance of REIT bankruptcy, creditors may experience more favorable outcomes than the original investors.
Working with an experienced, knowledgeable Arizona creditor’s attorney can help tremendously when evaluating a bankruptcy filing. If you would like more information about REITs and bankruptcy, creditors’ rights, or if you need assistance from an attorney, contact Windtberg & Zdancewicz to schedule an initial consultation.
The attorneys at Windtberg & Zdancewicz, PLC, provide clients with experienced legal representation in all collection matters. We are experienced in creditor’s rights including garnishments, charging orders, attachment, property execution, trustee’s sales, foreclosures, judgments, judgment collection, domestication of foreign judgments, and creditor’s issues in bankruptcy cases. If you need assistance with your collection matters, please contact us at (480) 584-5660.