In this article for the Frankfurter Allgemeine Zeitung, our partner Prof. Dr Gerrit Hölzle sheds light on the current real estate crisis and shows how project developers and real estate companies can avert impending insolvency with the help of the StaRUG.
A perfect storm is shaking the real estate industry. Numerous project developers have filed for insolvency. This is due to the sharp rise in inflation last year, which drove up financing costs and construction costs. In addition, demand for office and commercial space is falling due to the increasing number of people working from home. Long approval procedures and excessive bureaucracy are exacerbating the situation, meaning that original project calculations are no longer working out. Overall, prices for commercial real estate fell by more than 17 per cent between the second quarter of 2022 and the first quarter of 2024. At the G20 finance ministers' meeting in February, Bundesbank President Joachim Nagel said that the commercial real estate crisis “must be monitored very closely”.
As a result, institutional financiers are holding back more, which acts as a fire accelerator. The market is flooded with projects in a short space of time, making it all the more difficult to find buyers. The question therefore arises as to whether the threat of insolvency can be averted by freezing the project until market conditions improve and a revitalisation appears promising. The motto: ‘Survive until 25’ - or longer.
A northern German project developer recently proved that this is possible by teaming up with the institutional financier behind it for five major projects to develop former industrial sites in Cologne and Hamburg. The key is the German Corporate Stabilisation and Restructuring Act (StaRUG), which came into force in 2021 and aims to prevent insolvencies, especially for companies whose business model has been temporarily impaired or has ceased to exist. The projects were each organised in a separate project company and financed centrally via a project holding company. In each case, the financing was secured by a mortgage on the property to be developed. Under the prevailing market conditions, the projects could not be realised economically. The financing was at risk of falling due, operating costs could no longer be serviced and arrears to service providers could foreseeably no longer be settled. In agreement with the financier, restructuring proceedings in accordance with StaRUG were initiated for each of the five project companies before the competent local court in Bremen.
The core of such proceedings is the submission of a restructuring plan, the content of which is subject to few legal restrictions and can, in principle, contain any agreement permitted under civil and company law. The special feature is that this is voted on by groups of creditors involved in the proceedings, each with similar economic interests, and - to put it very simply - the approval of the majority of the groups involved is sufficient, whereby a group has agreed as soon as at least 75 per cent of the volume of claims represented in it has agreed.
This means that opposing creditors can be minoritised within a group or isolated in a separate group of participants if there is an objectively justified differentiation, thus bringing about majority decisions that are then binding for all creditors, including the outvoted creditors. In this way, creditors who are in conflict with the agreement can be outvoted and reorganisations can be effectively implemented in the interests of all creditors.
In the specific cases, project development was still in its infancy. In the current market environment, the sale of the properties would not even begin to generate sufficient proceeds to repay the financing and outstanding liabilities. The restructuring plans therefore envisaged putting the projects into a deep sleep: All liabilities, secured or otherwise, would be deferred for a period of several years.
The financier bears the structural costs incurred during the deferral period, such as for securing the property or public charges, which are additionally secured by the existing first-ranking (‘super senior’) property liens. At the same time, the financier provides a defined partial amount from the future realisation proceeds in the ranking behind the structural costs in order to enable a partial payment to the unsecured creditors as well, so that interest can be paid on this. A partial amount that would not have been realisable for the unsecured creditors in the event of immediate realisation.
There are virtually no limits to the imagination when it comes to structuring the restructuring plan in detail. Depending on the circumstances of the individual case, the German legal system therefore provides restructuring instruments that make it possible to weather a storm even under difficult conditions.
Here you can find the online article (in German): Die Zahl der insolventen Projekte steigt (faz.net)
