SARE Debtors and the Post-COVID-19 Effect on the Efficient Market: How SARE Debtors Must Now Prepare for Bankruptcy Filings

in Bankruptcy/Finance/Investment/Real Estate/Volume IV

by Shantal Malmed

The COVID-19 pandemic initially caused a reduced cash flow making it difficult for landlords to make timely mortgage payments. As much of the workforce is now remote, tenant income has decreased, and the commercial and residential real estate markets have suffered. Landlords whose incomes stem from revenues produced by single residential properties, also known as single-asset real estate (“SARE”) debtors, have had the most difficulty. From January through October 2020, these SARE debtors filed sixty-two bankruptcy cases nationwide.[1] Forty-four of these cases were filed in mid-March 2020 when the pandemic triggered a wave of bankruptcy filings. Unfortunately, bankruptcy courts usually view SARE entities as “passive investments” unworthy of reorganization, unlike failed businesses. This is concerning because these assets are many investors’ primary income, passive investments, or otherwise.[2]

Under the United States Bankruptcy Code, a property is a SARE when one property or project other than a residential real property with fewer than four residential units, on which no substantial business is being conducted other than the operation of the real property, generates substantially all of the debtor’s gross income.[3] This definition includes landlords of shopping centers, office buildings, industrial and warehouse buildings, and apartment complexes but does not cover hotel, golf course, or marina owners.[4]


There is some legislative support for SARE debtors. In 2020, President Trump signed into law the Consolidated Appropriations Act. Under this new law, a tenant who makes a deferred payment to a landlord and then files for bankruptcy cannot recover that same payment.[5] However, since the Bankruptcy Reform Act of 1994, SARE debtors who file for Chapter 11 bankruptcy to protect the collateral from enforcement actions by the creditor usually receive little relief. This may discourage future real estate investment and negatively impact the economic health of the real estate industry.

Bad Faith Cases Only

Courts nationwide generally hold that lawsuits by mortgagees against mortgagers should be limited to egregious situations with evidence of bad faith. California courts have concluded that “[t]he antideficiency statutes do not apply when the borrower has committed ‘bad faith’ waste resulting in impairment of the security.” [6] Bad faith waste is “reckless, intentional or malicious injury to the property” and excludes waste caused by mortgagers who are “subject to the economic pressures of a market depression.” [7] For example, the Kansas Supreme Court found that when a mortgagor impairs the mortgage security, “the remedy of the mortgagee is not at law,” but an injunction in the form of foreclosure to restrain the commission of waste upon the realty is appropriate.[8] Thus, courts usually try to preserve the creditor’s right to foreclose by limiting the debtor’s ability to counteract such suits without insolvency proceedings.[9]

Since Congress passed the Bankruptcy Reform Act of 1994, SARE debtors have had a more difficult time obtaining Chapter 11 bankruptcy relief. The act requires debtors to begin making interest payments to secured lenders ninety days after the entry for the order of stay relief, when the court effectively halts the action for foreclosure.[10] However, debtors do not need to make payments if they successfully file a plan for reorganization with a reasonable possibility of being confirmed by the court. According to Section 1141(d)(1)(A), when a reorganization plan is confirmed, the debtor is discharged from any prior debt.[11] If a SARE debtor cannot comply with either of these provisions, then the secured lender is entitled to stay relief, and the debtor is no longer protected from the lender’s collection efforts.12

Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, single-asset real estate was defined as real estate with an aggregate, non-contingent, liquidated secured debt of no more than $4,000,000, thus eliminating the cap in section 101(51B) of the Bankruptcy Code. This expanded reach of SARE provisions is now applicable to many public and private homebuilders and means that SARE bankruptcy cases may involve a significant proportion of the nation’s real estate market.13

Till v. SCS Credit

SARE debtors who file for Chapter 11 bankruptcy must attempt to file a successful reorganization plan which invokes a “cramdown” approach. According to the Bankruptcy Code, “a debtor may distribute future property to a creditor, so long as that property’s ‘value, as of the effective date of the plan . . . is not less than the allowed amount of such claim.'” 14 If a property’s value is less than the amount of the claim, then the debtor may cramdown the payment amount by: (1) reducing the principal amount of the secured claim to the value of the collateral; (2) reducing the interest rate; (3) extending the maturity date; or (4) altering the repayment schedule.15

Till v. SCS Credit Corp., a Supreme Court decision in a Chapter 13 bankruptcy case, provides a two-step analysis for establishing interest rates in the cramdown approach. The first step is to determine whether an efficient market exists. An efficient market exists when it offers a loan with a term, size, and collateral comparable to the loan under the cramdown plan. If such a loan is offered and an efficient market exists, then courts will allow use of the market rate for the debt. If no efficient market exists, the court will employ the Till formula.16 In a footnote of the plurality opinion, Justice Stevens referenced ten separate Chapter 11 provisions.17 Thus, the court in Till likely intended to apply the formula to both Chapter 13 and Chapter 11 cases. The court also thought it likely “Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions.” 18

The Till Formula

The court in Till endorsed a formula to calculate an interest rate, rejecting a market-based rate calculation and directing courts to begin with a largely risk-free rate: specifically, the “national prime rate,” which “reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default.” 19 Then, parties may present evidence regarding any “plan-specific risk adjustment.” 20 Here, the creditor has the burden of proving that the debtor’s proposed cramdown interest rate is too low.21

COVID-19’s Effect on the Efficient Market

In areas with high vacancy rates, like San Francisco and New York Midtown South, asking rents were still depressed as of April 2021 (12 and 9 percent, respectively).22 On the other hand, asking rents were sharply increased in cities with low office vacancy rates, like Fort Myers, Naples, Roanoke, Colorado Springs, El Paso, and Sacramento. Some of these increases were upwards of ten percent.23 On average, although office occupancy rates decreased, asking rents were up five percent year-over-year. Asking rents across the nation have since remained high; in fact, most landlords have been providing tenant concessions. In the National Association of Realtors’ latest quarterly commercial survey, fifty-five percent of commercial members reported that they are seeing more tenant concessions compared to the pre-pandemic period.24 These concessions may help explain why certain areas are better able to increase asking rents than others. For example, despite a twenty-two percent vacancy rate, the average asking rent for an office in Los Angeles crept up from $42.12 per square foot at the end of 2019 to $44.88 per square foot at the end of 2020.25 This may be attributable to the “Netflix effect,” in which companies— such as Meta, Apple, Amazon, Netflix, Alphabet, and Hulu—are taking advantage of a drop-off in leasing activity to obtain more favorable terms. These companies are expected to occupy nearly six million square feet of office space in West Los Angeles by 2023, realizing ten percent of all commercial real estate there. This means that areas like Los Angeles, which attract large companies with an overflow of capital for spending, will be better protected from the long-term effects of the pandemic than other areas.26

Limitations and Three Flint Hill

The cramdown strategy may provide leverage to a debtor filing a reorganization plan. Still, given the pandemic’s initial impact on commercial and residential real estate markets, courts must address the many limitations to the cramdown strategy to help debtors catch up on mortgage payments. It may take time for appraisers to determine the best strategy to appraise properties with severely reduced or no cash flow in a COVID-19 market. It will certainly take time for many courts to entertain evidentiary hearings on valuation disputes. There is also the inevitable problem of the cyclical nature of real estate values, which can undermine the debtor’s cramdown strategy. The court in In re Three Flint Hill, explores this issue further.27  

In Three Flint Hill, the sole tenant—AT&T—vacated the building at the end of its lease. The owner did not have a replacement tenant, so the owner’s cash flow from the building vanished after the vacancy.28 An insurance company held an approximately $20 million loan secured by the building, and the building was appraised for more than $20 million at the time of the loan origination. When the owner and lender could not agree on workout terms, the owner filed for Chapter 11 bankruptcy. The debtor owner then used the cramdown strategy, asserting the value of the building had decreased to $5 million because it was empty, with no cash flow and no replacement tenant. The creditor contended that the building’s value only decreased to $12 million. The parties could not settle and filed competing Chapter 11 plans. Meanwhile, after the debtor found a replacement tenant and the creditor agreed to provide a tenant improvement loan, office rental rates in the region spiked. In April 1997, the building’s value increased above the creditor’s estimate of $12 million. Recognizing the market changes, the court denied the debtor’s reorganization plan and instead confirmed a modified version of the creditor’s plan. The reorganization plan consisted of the debtor paying approximately $18 million, but the debtor could have probably settled for $12 million earlier had it not been for their excessive devaluation.29 The unfortunate reality is that debtors must be careful to balance aggressive valuation with market uncertainty to prevent dragging out the case and being vulnerable to a rise in the market value of the debt.


There are two potential solutions to the difficulty SARE debtors have in employing the cramdown approach in their reorganization plan. As previously discussed, some regions have been hit harder by the pandemic than others, leading to higher vacancy rates and lower asking rents in several areas. SARE debtors facing pressure from both angles should assess the risks and rewards of utilizing each of the following remedies as it applies to their own situation. 

Option 1: Standstill Agreement

The first potential solution calls for the SARE debtor to avoid filing for Chapter 11

bankruptcy by instead opting to enter into a “standstill” agreement with the creditor. A standstill agreement allows creditors to avoid complex civil and insolvency litigation and provides creditors with valuable time and money. The filing fee for Chapter 11 is around $1,738, and the retainer alone can range from $20,000 to $125,000 depending on the representing firm.30 The costs of litigation can be enough to incentivize both parties to avoid it entirely. This is when the standstill agreement comes into play; it helps cushion the fall in payment or collection that businesses may encounter due to a failure to perform their obligations during the pandemic. The agreement is a contract between the debtor and creditor consisting of the creditor suspending (1) their right of enforcement if the default has already occurred or (2) the obligations of payment if the default has yet to occur. The agreement is meant to force the debtor to restructure or have enough time to remedy the property’s cash flow shortage to avoid bankruptcy. This provides the debtor with enough time to raise capital to pay the creditor, thereby saving the creditor the time, costs, and enforcement action which follow litigation. Moreover, a standstill agreement may allow creditors to achieve a better return than they would have earned through insolvency proceedings. This is especially true for unsecured creditors or secured creditors who are under-secured because they can only receive a part of their debt in litigation. 31

Option 2: Cramdown During Insolvency Proceeding

If the debtor and creditor cannot establish a standstill agreement and the debtor files for Chapter 11 bankruptcy, the second potential solution they can employ is the cramdown strategy. The debtor must avoid vulnerability to rising market prices amidst long-winded litigation because courts will likely use such market changes in the property’s valuation. Bankruptcy Code Section 363(d)(3) helps correct the “relative unfairness of lengthy delay” in SARE cases.32  Since the pandemic is a rare phenomenon; appraisers will need considerable time to appraise properties with severely reduced cash flow. If the debtor’s reorganization plan is the “indubitable equivalent” of the creditor’s secured claim, the court deems it fair and equitable. However, while Section 1129(b)(2)(A)(iii) does not define this term, it provides parties with wide latitude to negotiate. Thus, debtors should not merely use the appraisal system to assert the cramdown of the property value. Instead, they should incorporate constant negotiation efforts with the creditor during the insolvency proceeding to reach a satisfactory number for both parties. By doing so, debtors can avoid the pitfalls of the Three Flint Hill case and ensure the court quickly accepts their reorganization plan before any market spikes. 33

How Debtors Should Assert a Cramdown

When seeking a cramdown based on the property’s value, the debtor must operate under the Till v. SCS Credit steps in proposing that the court follow the Till national prime rate formula.34 To eliminate their old equity interest rates, debtors must prove that there would be no value left at that level. Experts will challenge this valuation by proposing different valuations.35 The key to circumventing other appraisals is to show that no efficient market exists due to the various changes to property values inflicted by the pandemic. As mentioned before, the Till formula was likely intended by the courts to be used in Chapter 11 bankruptcy filings as well as Chapter 13 bankruptcy filings.36 However, even when disregarding Till, bankruptcy courts should still favor debtors’ reorganization plans in insolvency proceedings because the Code’s legislative intent strongly suggests there is no efficient market in the real estate industry.

Legislative Intent

In First Southern Nat’l Bank v. Sunnyslope Hous. LP, 2017 BL 216965 (9th Cir. June 23, 2017), the U.S. Court of Appeals for the Ninth Circuit held that “the creditor’s collateral must be valued in accordance with the debtor’s intended use of the property, even if the property would realize more in a foreclosure sale because of the existence of restrictive covenants.” 37 When the only economic pressure facing the debtor’s monthly mortgage payments is a factor independent of their good faith ability to collect monthly rent payments, it makes little sense for a creditor to take enforcement action to regain the property and lend it to another debtor. More likely, the lending group would like to foreclose on the collateral and hold onto the building to sell it for a higher amount when the market improves.

Although the Bankruptcy Code does not mandate a method for valuing collateral, Section 506(a)(1) provides that the value of the collateral must be “determined in light of the purpose of the valuation and of the proposed disposition or use of such property.” There are two possible standards for the valuation of property: (1) the replacement value standard and (2) the foreclosure value standard.38 The replacement value standard is “the cost the debtor would incur to obtain a like asset for the same’ proposed . . . use.'” 39 The foreclosure value standard is based on “the amount a creditor would realize upon immediate foreclosure and sale of the property.” 40 Under this standard, a creditor can take advantage of their enforcement rights in a situation caused by factors outside the debtor’s control. Moreover, because of their status as SARE debtors, these debtors only have the options of filing a plan for reorganization or starting to make interest payments to the creditor 90 days after filing for bankruptcy.41 Therefore, if this standard were adopted by the court, most SARE debtors’ plans would likely be unsuccessful, and they would be forced to make interest payments.

Courts use the replacement value standard for cramdown valuations because they consider the debtor’s “purpose of the valuation,” which is to avoid foreclosure. This may seem like a lenient standard that disfavors creditors, but in a free market economy, it is vital to preserving both the creditor’s and the debtor’s trust in the loan agreement. If creditors could foreclose for the sole purpose of selling property for a higher value in the future, then the duty of good faith and fair dealing implicit in each debt settlement agreement would be compromised.42 Section 506(a)(1) is meant to prevent these kinds of results by giving debtors some leverage in the face of foreclosure. Thus, courts must continue using the replacement value standard instead of the foreclosure value standard in cramdowns.43


SARE bankruptcy proceedings can involve more than $4 million in liquidated secured debts. Meanwhile, average SARE debtors derive their gross income from their revenue in SARE projects. With these factors in mind, courts should expect caution from these debtors against such proceedings yet afford them significant relief should they still end up in Chapter 11. SARE debtors should protect themselves from foreclosure by first attempting to establish standstill agreements with creditors. If such an attempt is fruitless, debtors must file for Chapter 11 bankruptcy and use the cramdown approach to show that an efficient market does not exist, given the impact of the pandemic on the real estate market. It is then in the debtors’ best interests to insist on the Till formula in the valuation, but they must be amenable to negotiations during proceedings. To avoid the Three Flint Hill effect and a reorganization plan with an increased valuation due to a sudden spike in the real estate market, the case must be resolved as quickly as possible. The final step in protecting the interests of SARE debtors and those of the real estate industry is to continue demanding that courts favor justice for debtors over unjust enrichment for creditors. American contract law depends on the constant protection of the implied duty of good faith and fair dealing. This legal component in SARE cases will ensure that the real estate market can continue to thrive in a post-COVID world.

[i] John S. Mairo, Warren J. Martin & Kwame Akuffo, A Modest Proposal: Amend the Bankruptcy Code to Give Single Asset Real Estate Debtors a Chance to Survive the COVID Crisis Bankruptcy and Financial Restructuring, Porzio (2020), (last visited Sep 23, 2021). 

[ii] Id. 

[iii] 11 USC § 101(51B).

[iv] Victor A. Vilaplana, Restructuring Tips for Single Asset Real Estate Debtors, Foley & Lardner LLP (2020), (last visited Sep 29, 2021). 

[v] James Bentley, Carrie Hardman & David Neier, The CAA’s Impact on Commercial Real Estate Bankruptcies Real Estate and Construction, Mondaq (2021),–leases/1048434/the-caa39s-impact-on-commercial-real-estate-bankruptcies (last visited Oct 1, 2021). 

[vi] See, e.g., Evans v. Cal. Trailer Court, Inc., 33 Cal. Rptr. 2d 646, 652 (Ct. App. 1994).

[vii] Ibid. 

[viii] Ibid. 

[ix] Id. 

[x] Warren A. Usatine, Single Asset Real Estate Debtors: Challenges in the Bankruptcy Code Business, Cole Schotz P.C. (2009), (last visited Oct 3, 2021). 

[xi] 11 USC § 1141(d)(1)(A).

12 Eric P. Klener, What Qualifies as a Single Asset Real Estate Case?, Hill Wallack LLP (1990), (last visited Oct 3, 2021). 

13 11 USC § 1141(d)(1)(A), supra note 11.

14 11 U.S.C. § 1325(a)(5)(B)(ii).

15 Steven Lichtenfeld & Jeff Marwil, Lenders Must Prepare For Real Estate Bankruptcy Cramdowns, Law360(2020), (last visited Oct 3, 2021). 

16 Mark Conlan & Nicholas A. Falcone, Second Circuit Adopts Two-Step Market-Based Approach to Chapter 11 Cramdown Interest Rates and Affirms Bankruptcy Court’s Subordination of Certain Notes and Denial of “Make-Whole” Premium, Gibbons Law (2017), (last visited Oct 3, 2021). 

17 ABI, The Developing Impact of Till v. SCS on Chapter 11 Reorganizations, On the Edge (2005) (last visited Oct 3, 2021). 

18 Id.

19 Till, 541 U.S. at 479.

20 MPM, 2017 U.S. App. LEXIS 20596, at *23.

21 Determining the Cramdown Interest Rate: The Burden is on the Creditor, Zone of Insolvency (2014), (last visited Oct 3, 2021). 

22 Commercial Real Estate Trends & Outlook: April 2021 Report, National Association of Realtors 3–14 (2021). 

23 Id.

24 Id.

25 Ben Bergman, Looking for Bargains on Office Space? Prepare for Sticker Shock. Rents Are Higher Than Before COVID, dot.LA (2021), (last visited Oct 3, 2021). 

26 Ben Bergman, Netflix and Google Are Poised to Dominate L.A. After the Pandemic, dot.LA (2021), (last visited Oct 3, 2021).  

27 Patrick J. Potter & Dania Slim, A Single Asset Bankruptcy from the 1990s Gains New Relevance during COVID-19, Pillsbury Law(2020), (last visited Oct 3, 2021). 

28 Id.

29 ABA Business Law Section Publishes COVID-19 Legal Agreement Forms for Firms, Businesses, ABA (2020), (last visited Oct 3, 2021). 

30 Michael J. Berger, Firm Fees, Bankruptcy Power,,ranging%20from%20%2425%2C000.00%20to%20%24125%2C000 (last visited Oct 3, 2021). 

31 Cameron Adderley, Bermuda: COVID-19: Holding The Line – Standstill Agreements And Moratoria, Mondaq (2020), (last visited Oct 3, 2021). 

32 Eric J. Fromme & Caroline R. Djang, Singled Out: Chapter 11 Provides Only Temporary Respite to an Entity in a Single Asset Real Estate Bankruptcy, Los Angeles Lawyer 34–38, Rutan & Tucker LLP (2012), 

33 Understanding The Rules Of Bankruptcy Cramdown Expert Analysis, Law360 (2013), (last visited Oct 3, 2021). 

34 Mark Conlan & Nicholas A. Falcone, supra note 15.

35 Law360, supra note 31.

36 Mark Conlan & Nicholas A. Falcone, supra note 15.

37 Ninth Circuit Reverses Course on Measure of Collateral Value in Cramdown Confirmation of Chapter 11 Plan, Jones Day (2017), (last visited Oct 3, 2021). 

38 Id.

39 Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) at 965 (quoting section 506(a)(1)). 

40 Jones Day, supra note 35.

41 11 USC § 1141(d)(1)(A), supra note 11.

42 Associates Commercial Corp. v. Rash, supra, note 37.

43 Mondaq, supra note 29.