Fairfield's Bankruptcy Points to Bigger Issues
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Fairfield Residential, one of the largest owners and builders of apartments in the country, declared Chapter 11 yesterday. The Wall Street Journal reported that the San Diego-based firm, which ranked at No. 13 on Multifamily Executive's 2009 list of Top 50 apartment owners, listed assets of $958 million and liabilities of $834.9 million as of the end of September, according to the Journal. The company said that it was upside down on many of its loans, violating covenants with Well Fargo and Capmark Financial.
Fairfield may not be the biggest loser here, though. The Journal reported that the California State Teacher's Retirement System (CALSTRS) and a subsidiary of Mitsubishi Corp. were large investors in Fairfield, which told the Journal that, while CALSTRS' investments could be wiped out by the bankruptcy, it would continue its joint venture partnerships with the firm.
On its Web site, Fairfield said that its lenders groups had agreed to the framework of a new plan and laid out a template for how the company could look in the future:
"As part of the filing, Fairfield and its significant lender groups have agreed to the framework of a consensual Plan of Reorganization that will enable continuity of Fairfield's property management, asset management, construction services and general partner functions for the benefit of its creditors and other stakeholders. The Plan maintains Fairfield's existing infrastructure in a new operating company, which will include key personnel, and which will allow the Company to facilitate debt and equity solutions, provide additional stability to its joint ventures and manage its properties. Certain Fairfield assets not assigned to the new operating company will be assigned to a liquidating trust that will serve to maximize creditor recoveries. Under the Plan, the new operating company may obtain new capital, and Fairfield has secured interest from a number of parties to provide this financing.
Fairfield expects that Chapter 11 protection will enable the Company to conduct its business operations in the ordinary course. Through the proposed Plan of Reorganization, Fairfield expects to emerge from this process and maximize value for all of our stakeholders by creating a stronger go-forward operating platform and continuing to be an active player in the multifamily sector."
The Journal reported that "Fairfield will need more creditor support to get its reorganization plan approved by a bankruptcy judge."
The questions that arise from this news are not limited to Fairfield and whether it will get support from its creditors. So far, with their "extend and pretend" policies, banks have allowed their borrowers, many of whom are upside down in loans, to keep kicking the can down the road and continue operating properties that are under water, despite hemorrhaging money as renters move out and landlords offer steep concessions to keep remaining residents.
Now, after the Fairfield Chapter 11 declaration, will banks begin to take a tougher stance with their borrowers? If they do, this won't be the last multifamily Chapter 11 filing we see in the coming months.