As one continuation of my blog about the Great Recession, I’d like to share with you what I know and learned about Chapter 11 bankruptcy. It was the best of times; it was the worst of times. No, it was really just the worst of times.
In 2007, the owner and equity partner for our development business sold their entire real estate portfolio to Morgan Stanley. The core business was nice office buildings throughout Texas and cities in the Southwest. The timing was perfect for the seller, and the creator of that business is a legitimate billionaire as a result. Morgan Stanley was buying up real estate as fast as they could to have a place to put all the money that was flowing in from clients that wanted to be in real estate.
They couldn’t buy fast enough. Even the smartest guys in the industry were caught up the frenzy, same as our retail buyers who showed up at the lotteries. They were making the purchases with huge short-term loans from global banks so they could lock up the assets before the equity was even in. Late in 2007 things started getting a little shaky, but not full on disaster, yet. The in 2008 we watched everything fall apart.
I was laying a lot of people off. We were making sales for the lowest price per foot we’d ever done on a new condo building. We were desperately trying to pay back construction debt with sales wherever we could. Buyers were suing to get out of their contracts to close on units. California law makes it easy to walk from a deal if you can prove the developer did something wrong and that’s the path people were taking.
Sometime in 2009, it became obvious that Morgan Stanley would not be funding our business any longer. We were on our own to cut costs and generate revenue however possible, and they were going to default on the $4 billion loan they used to acquire the business that owned ours. The mighty Morgan Stanley was on the ropes themselves. It was just unimaginable to watch these institutions that once seemed only second to the Federal Government in terms of wealth and power just dry up and crumble away.
Remember seeing this guy on the news every day? Treasury Secretary Paulson
I was the Corporate Controller of the business at the time and not involved in every decision at the top. Some time in the fall of 2019 I started to hear that a bankruptcy was being considered. I knew nothing about it at the time but was going to learn quickly.
As I’ve mentioned before we were in the first third of a long-term development project that had taken many thousands of hours and endless expertise and hundreds of millions to dollars to lay the groundwork for so we couldn’t just walk away.
There was much cross-collateralization of debt at the time (this topic is worthy of another blog) and we had a plan to protect the “good” long-term assets in exchange for giving up some of the heavily-indebted ready for sale inventory, including a 5-star luxury hotel that had been 10 years in the making.
The plan was to file a Chapter 11 bankruptcy. Chapter 11 is a plan to stay in business. It means all the parties with current or future money owed must vote for a deal that affirms they would rather take something less and agree there is benefit to your business surviving. Chapter 7 means liquidation, the business is over, and the creditors divvy up the proceeds of the sale of assets.
I will blog again about being in the middle of Chapter 11 and how it ended up. If you like my blog, please follow in the sidebar to the right. Also, please connect with me on Twitter or LinkedIn.
Ed Morgan Real Estate Fundamentals 