Bankruptcy of Apartment Buildings

Apartment buildings, or more accurately, the bankruptcy of the joint venture or other entity that owns the building presents a particular problem because commercial building bankruptcies are normally single asset bankruptcies. Single asset bankruptcies are treated differently in Chapter 11 than other businesses. They are more difficult. Because of this, the speed of the bankruptcy is important, so posturing early on can be most helpful.

If the apartment building is already built, the primary reason for financial failure is inevitably too few tenants. When the building fails to cash flow for a significant period of time it becomes an albatross that grows heavier as the repair deficit on the building slowly grows. This creates a downward spiral where disrepair creates lack of tenants and the lack of tenants in turn resultes in further disrepair.

It is essential that the owners consult counsel early on to obtain advice regarding tax issues, because at one point it is easy to end up with a building that has significantly more debt than tax basis. If the building cannot be rescued, then foreclosure becomes a possibility. A foreclosure can produce a tax impact that will create a tax debt that will not be dischargeable in bankruptcy for another three years. This is called a phantom gain.

A phantom gain can be avoided if caught early enough - before the foreclosure - and excuted with the greatest care.

Charles Chesnutt