The Situation
A Chapter 11 debtor in the Central District of California owned two industrial warehouse properties totaling approximately 210,000 square feet in the Inland Empire submarket. The properties were the debtor's primary assets and the subject of its reorganization plan. Pre-petition, the portfolio carried a single cross-collateralized loan of approximately $8.8 million at a regional bank. During the Chapter 11 proceeding, the debtor had lost its largest tenant (approximately 40% of total revenue) and was operating the portfolio at roughly 67% occupancy. In-place NOI on the stabilized portion was approximately $620,000 annually.
The Challenge
The plan of reorganization required the debtor to retire the existing pre-petition bank debt at confirmation. The bank, which had been a reluctant participant in the Chapter 11, was not willing to extend the existing loan on any terms -- confirmation was the exit event for the bank. Three complications made conventional permanent financing impossible at confirmation: (1) occupancy was below the 85% minimum required by most permanent lenders, (2) the borrower had a Chapter 11 filing in its credit history, and (3) the existing in-place NOI could not service a permanent loan large enough to retire the bank debt at full payoff. The plan proponent -- a creditor committee working with the debtor's restructuring advisor -- needed a bridge solution that could close simultaneously with plan confirmation.
Our Approach
Commercial Lending Solutions was engaged by the restructuring advisor six weeks before the confirmation hearing. We targeted specialty bridge lenders and exit-financing debt funds who specifically underwrite Chapter 11 confirmation transactions -- a defined market niche where speed, court process familiarity, and willingness to underwrite to stabilized (rather than in-place) value are the critical factors. We obtained four term sheets within 14 days. The selected lender was a national debt fund with a dedicated restructuring lending team. Loan structure: $9.8 million bridge loan (approximately 58% of as-is appraised value, or approximately 49% of as-stabilized value), 24-month term with one 12-month extension option, interest only, non-recourse. The $9.8 million in proceeds was structured to: retire the existing bank debt in full ($8.8 million), fund a $640,000 lease-up reserve to cover tenant improvement allowances and leasing commissions for two target tenants already in LOI, and cover closing costs. We prepared the business judgment rule memo for the debtor's counsel documenting the competitive process -- four lenders contacted, three responded with terms, one selected based on rate, certainty of close, and prior Chapter 11 transaction experience. This documentation was filed with the court as part of the financing motion under 11 U.S.C. Section 364.
The Outcome
The financing motion was approved by the bankruptcy court. The bridge loan closed simultaneously with plan confirmation. The bank debt was retired in full. The reorganized debtor emerged from Chapter 11 with clear title to both properties, a 24-month bridge loan in place, and a lease-up reserve to fund re-tenanting. Within 14 months of confirmation, the portfolio reached 91% occupancy. The debtor refinanced into a permanent CMBS conduit loan at approximately $11.2 million -- retiring the bridge loan, paying off remaining creditor obligations under the plan, and leaving the reorganized company with positive equity in both properties.
Key Takeaway for bankruptcy attorneys
Bankruptcy attorneys who reach plan confirmation without a committed exit financing source create unnecessary risk of plan failure. Engaging a commercial mortgage broker with Chapter 11 transaction experience six to eight weeks before the confirmation hearing creates the time needed to run a competitive process, document the business judgment rule standard, and close concurrently with confirmation.
A note on figures: All dollar amounts, rates, timelines, and specific details in this case study are illustrative and based on hypothetical scenarios representative of the types of transactions Commercial Lending Solutions arranges. They are not descriptions of any specific client, property, or transaction.