The Legal and Social Implications of Insolvent Cross-Border Real Estate Developers: Reviewing the U.S. and Canadian Commercial Real Estate Markets
Canuel, Edward T., Vanderbilt Journal of Transnational Law
This article analyzes the phenomena associated with cyclical real estate markets, discussing the theoretical and market influences which motivate developers during this cycle. Fluctuating commercial real estate markets necessitate a focus on market upswings and downswings, and consideration of the roles and motivations of a wide array of actors, ranging from industry analysts and developers to lenders. Legal considerations, particularly during real estate downturns, or busts, include a variety of issues, particularly if the commercial real estate developers in question conducted business internationally. This Article details the theoretical and economic conditions found during real estate market cycles, with special emphasis on cross-border real estate developers. Relevant legal considerations faced by such developers confronting insolvency are also considered. Finally, the Article notes possible measures which may mitigate the many pitfalls confronting the insolvent developer.
TABLE OF CONTENTS I. INTRODUCTION II. ANALYZING REAL ESTATE MARKETS, THE DOWNFALL OF DEVELOPERS, AND THE "TYPICAL" REAL ESTATE ENTREPRENEUR A. Real Estate Markets: Noting Upswings and Downturns B. Cross-Border Real Estate Developers C. Real Estate Entrepreneurs: Idiosyncratic Factors III. CROSS-BORDER REAL ESTATE DEVELOPMENT AND INSOLVENCIES: LEGAL CONCEPTS AND STRATEGIES A. Statutes and Protocols in Canada and the United States B. Legal Strategies 1. Substantive Consolidation: Real Estate 2. Debtor-in-Possession Financing 3. Extending the Stay of Proceedings 4. "Executory" Real Estate Contracts--Termination of Interests 5. Cram Down Provisions IV. REVIEWING OPTIONS: CLIMBING OUT OF THE WELL
Real estate development forms a crucial aspect of the closely-linked economies of Canada and the United States. (1) During the late twentieth century, real estate markets suffered a variety of market rises and crashes. For example, in the U.S. real estate market bust of 1990, a resulting financial drain gripped the United States: The bankruptcy of thousands of savings and loan institutions carried a debt of $600 billion, and the government-owned Resolution Trust Corporation held 40,000 foreclosed properties. (2) The Canadian markets during the most recent real estate bust were also in turmoil; the drop in market value of the shares of the five largest Canadian developers in the first quarter of 1991 amounted to $1,935 million (CDN). (3)
Business cycles in the real estate development market are characterized by certain identifiable phases: stagnation, recovery, credit-based expansion, speculative fever, and crash. (4) Each phase elicits different behavioral responses from the business community, as "booms" lead to crises and depressions. (5) During the market downslide, credit becomes scarce as banks and entrepreneurs seek liquidity, although very few borrowers exist to replace the lost loans. (6) The developers' responses have direct effects on the real estate markets, particularly evident in periods of dramatic over-building. (7) Real estate development has been characterized as a series of stages, building upon initial real estate market recovery and ending with a crash, leading to economic stagnation. (8)
Recently, the tide of real estate market investment has again surged. Large-scale developers in major North American metropolitan centers such as Miami (9) have developed substantial real estate projects. Lenders, once hesitant to finance mid-size or small-market real estate ventures, have become aggressive; (10) financiers are again looking at the leverage ratios of certain clients with guarded optimism. (11) As the development market cautiously grows, concerns are raised as to what will occur when (or if) the market drops. …