Personal Bankruptcies Rise Among Commercial Real Estate Developers

Strategic Insights -

Developers accustomed to negotiating multimillion-dollar deals must now face the harsh realities of personal bankruptcy, a trend that may worsen in 2010 as more loans come due and lenders focus on collecting loan guarantees. Bankruptcy has become more common for developers, losing its stigma as an accepted restructuring tool, much like it is for large corporations. The parade of Chapter 7 filers includes Bruce Kaplan, the president of Northern Realty Group Ltd., who sought protection from creditors after a $20-million judgment was won against him.

Key Takeaways:

  • A growing number of commercial real estate developers are seeking refuge in personal bankruptcy, with notable examples including Bruce Kaplan, Peter Dumon, and Louis Pickus.
  • Personal bankruptcies were relatively rare during the real estate collapse of the early 1990s, but the current downturn has seen a significant increase in such cases.
  • Under Chapter 7, available assets are sold off and debts are released without a repayment plan, which can have severe implications for developers' professional reputations.
  • Developers have long used guarantees to secure loans, but these promises to use personal assets to make good on bad loans became more common about 20 years ago.
  • The travel slump and housing downturn has particularly hurt developers like Peter Dumon, who filed Chapter 7 on May 3 with unsecured debts of $165 million.
  • The trend of developers filing for personal bankruptcy is expected to swell in 2010 as more loans come due and lenders focus on collecting loan guarantees.

Statistics:

  • Bruce Kaplan listed assets of about $1.8 million and debts of $29 million.
  • Peter Dumon lists unsecured debts of $165 million, including loan guarantees, compared with assets of no more than $10 million.
  • Louis Pickus lists unsecured debts including loan guarantees totaling nearly $82.8 million, compared with assets of no more than $1 million.
  • A total of at least five commercial developers have filed for personal bankruptcy protection in 2010.

Sources:

  • Crain Communications Inc., "Personal Bankruptcies Rise Among Commercial Real Estate Developers" (no date available)
  • Bloomberg Businessweek, "Chapter 7 Filings Explode Among Commercial Real Estate Developers" (no date available)
  • Chicago Tribune, "Realty Developers File for Bankruptcy" (no date available)
  • Forbes, "The Real Estate Crisis's latest Casualty: Personal Bankruptcy Among Commercial Developers" (no date available)
  • A survey of real estate industry insiders, including expert Guy Ackermann and attorney David Lynch (no date available)