Introduction

On October 17, 2011, commercial real estate developer Security National Properties Funding III, LLC ("Security National"), and certain affiliates filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  Based in Eureka, California, Security National owns and operates 33 commercial properties in fifteen states across the U.S.  The company's holdings include commercial office space, retail locations, a mobile home park and industrial-use property.  See Declaration of Security National's CFO (the "Declaration"), filed with the Bankruptcy Court in conjunction with its bankruptcy petitions.  As is often the case,  this post will look at the debtor-company's finances and operations, why the company filed for bankruptcy and what it hopes to achieve while in bankruptcy.

Security National's Finances and Operations

Security National owns properties throughout the United States with specific holdings in Alabama, Alaska, Illinois, Kansas, Maine, Michigan, Minnesota, Mississippi, Montana, Nebraska, New York, North Carolina, South Carolina, Texas and Wyoming.  The company acquired most of its properties between 1993 and 2006.  Security National describes its business strategy as acquiring underperforming properties and then implementing a "stabilization of these properties through aggressive leasing and cost-cutting measures."  Decl. at *3. 

In 2009, Security National's lenders conducted an appraisal of the company's properties.  According to the lender's appraisal, the company's real estate portfolio was valued at $176 million.  Since receiving this appraisal, Security National points out that it has improved occupancy rates and income on its properties.  Decl. at *3.

In 2006, Security National entered into a credit agreement with its lenders that contained a $200 million revolving credit facility.  Going in to bankruptcy, approximately $160 million is outstanding under the loan.  In return for the loan, the lenders assert mortgages or deeds of trust on various real property assets.  Decl. at 4-5.  Under the loan agreement, rents are collected through a lockbox which Security National uses to fund operations and make interest payments. Id. at 5.  The company estimates its prepetition, unsecured trade debt at approximately $4 million.  Id.

Events Leading to Bankruptcy

Security National does not attribute its bankruptcy filing to the downturn in the real estate market.  According to the company, they have been able to weather the decline in commercial real estate, as evidenced by the fact that the company continues to generate cash and lease properties.  Instead, Security National blames its bankruptcy on "the unpredictability of the financial markets ..."  Decl. at *5.  Security National contends that the uncertainty in the financial markets has resulted in (i) an unwillingness by its lenders' to extend credit terms; (ii) potential buyers being unable to secure financing; and, (iii) the decision by its lenders to sell the note underlying the prepetition credit agreement.  Decl. at *5-6.  If the lenders sell the loan, Security National fears the sale will disrupt cash flows associated with its properties and have a negative effect on the overall value of its portfolio.  Decl. at *9-10. 

Objectives in Bankruptcy

It was the concern over the potential sale of their loan that forced Security National to file bankruptcy.  The company hopes that through bankruptcy it can restructure its debt obligations while at the same time maintain the value of its assets.  To do this, Security National intends to file a plan of reorganization that will extend the term of its existing debt, yet provide for payment in full of its debt obligations. Decl. at *10. 

The Security National bankruptcy proceeding is before the Honorable Kevin Gross, Chief Judge of the Delaware Bankruptcy Court.  Security National is represented by the law firm Morris, Nichols, Arsht & Tunnell. 

For those readers who are generally unfamiliar with the bankruptcy process, below are some of my prior posts that address common issues that arise in Delaware bankruptcy proceedings: 

Ten Things Every Commercial Landlord Should Know About a Tenant in Bankruptcy;

What to Expect in a Section 341 Meeting of Creditors;

A Closer Look at Chapter 11 Bankruptcy Auctions; and,

Subject Matter Jurisdiction of the Bankruptcy Court.