A good workout professional also knows how to help the Bank make loans that are properly structured. Many of the “sad” stories we have recently experienced were the result of a huge decrease in property values, but several arose out of mistakes made in underwriting and structuring loans. Well-run institutions are taking care to be mindful of past mistakes as they venture back into the lending arena.
In this post, my partner, Ben Young, points out a common misconception about golf courses. Over the years, we’ve seen countless golf course deals fail. Lenders often forget to take personal property security interests in inventory, equipment and clubhouse furniture, forget to tie down the water rights, ignore leased land and parking arrangements and do not take care to properly secure rights to the liquor license. As Ben points out, some lenders erroneously rely on ongoing accounts receivable, even if the golf course files Chapter 11.
A golf course may look like a solid piece of collateral. After all, golfers will pay good money to play and the green fees and driving range fees golfers pay to play the course will generate a revenue stream. This revenue stream can be pledged to a lender and used to support loans to the owner of the course. Lenders love to finance a business that generates a steady revenue stream, making a golf course look like an attractive form of collateral.
But what happens if the owner of the course files a bankruptcy case? In that event, the lender will want to control the borrower’s cash flow. Does the lender’s lien extend to the green fees and driving range fees paid by golfers after the course’s owner files a bankruptcy case?
A recent decision of the Bankruptcy Appellate Panel for the Ninth Circuit holds that the lender’s lien does not encumber post-petition green fees and driving range fees. In re Premier Golf Properties, LP, 477 B.R. 767 (B.A.P. 9th Cir. 2012). The result is that the lender immediately lost its security interest in the most important revenue stream generated by its borrower.
In Premier Golf, the Debtor owned two 18-hole golf courses and a driving range and its revenues were generated by the green fees and driving range fees. Bank made a loan to the Debtor secured by a blanket security interest in all of the Debtor’s real property and personal property. The Bank’s loan documents granted it a security interest in all accounts and contract rights. The loan documents specifically included in the Bank’s collateral all green fees and driving range fees and all rents, issues, revenues and profits arising from any rental, license, concession or other grant of a right of possession, use or occupancy of the real property or from any agreement affecting the use, enjoyment or occupancy of the real property.
The Debtor filed a chapter 11 case and immediately argued that the Bank’s security interest did not extend to any post-petition green fees and driving range fees. Under Bankruptcy Code § 552, whether the post-petition green fees and driving range fees were subject to the Bank’s pre-petition security interest turned upon whether these fees were the proceeds of the Bank’s collateral or were rents for the collateral. The Debtor argued that the post-petition green fees and driving range fees were not proceeds of the Bank’s collateral, were not rents for the use of the Bank’s collateral and therefore were no longer the Bank’s collateral.
The BAP agreed. The Court determined that the green fees and driving range fees were not rents because those fees derived primarily from the services performed by the golf course owner, not from the real property. These services included repositioning holes, planting, seeding, mowing, watering, fertilizing and maintaining the course. The Court concluded that “Unlike hotel cases where the revenue from room rental derives primarily from the usage of real property as shelter or occupancy, a golf course derives its revenue primarily from the usage of real property as entertainment.” Premier Golf Properties, 477 B.R. at 774. Similarly, because the fees were generated by the services performed by the course’s owner, the fees were not proceeds of the Bank’s collateral.
The BAP’s decision appears to be correct. In legal terms, rent is an amount paid for the possession and occupancy of real property. A golfer is not in possession of the course and the fees paid to play the course therefore can in no way be considered “rent”. Similarly, the fee is primarily for the services provided by the course and thus is not “proceeds” of the lender’s collateral either.
The obvious consequence is that a lender cannot rely on holding a security interest in green fees and driving range fees to protect it in a bankruptcy case. Because these fees are a primary source of a golf course’s revenues and cash flow, a lender’s inability to obtain a bankruptcy-proof security interest will make it much more difficult for course owner’s to obtain financing.
The decision may have broader implications as well. Premier Golf held that cash collected on the Bank’s collateral was not subject to the lender’s security interest because that cash was generated from the debtor’s performance of services and was not merely the passive conversion of the Bank’s collateral into cash. As a result, a lender to any business that incorporates a strong services component in its revenue generation will want to consider the potential impact of Bankruptcy Code section 552 in the event of the borrower’s bankruptcy filing.
After the last few years, I am beginning to wonder whether golf courses are the drive-in theatres of our time, another place to bank land awaiting development. Golf course loans are challenging, from both a legal and a lending perspective, but properly underwritten and structured, golf course credits can be an income-producing credits for a Bank’s portfolio. JMBM’s specialty practices in representing both special assets and hospitality allow us to work carefully with lenders before closing a golf course deal, as well as addressing troubled golf course loans that might be restructured.
This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.
Ben Young is partner at Jeffer Mangels Butler & Mitchell LLP and represents parties in insolvency matters. He has extensive experience in workouts, restructurings, bankruptcies, and assignments for the benefit of creditors. His clients include lenders, financial institutions, secured and unsecured creditors, distressed investment funds, businesses, receivers, special servicers, and creditors’ committees. Contact him at BYoung@jmbm.com or 415.984.9626.
Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.
Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.
Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.
JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.
NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]
JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.