General Growth's bankruptcy shakes the foundations of the commercial real estate market, and the financing documents that hold it up. The bankruptcy plot touches on a wide range of issues, from the sacredness of corporate entities to director independence to the prevalence of Delaware entities. The GGP plot, thus far, ends at a place that is a happy one for developers and a cautionary one for lenders. Before getting into the specifics, it's worth noting the overall impact: commercial real estate and its financing structures will never be quite the same.
As background, complex entity structuring pervades the commercial real estate market, from large mall owners such as Simon Property Group and General Growth to more regional investor-developer types, such as Tishman Speyer and the Bonaventure Group. Motivating this are both structuring factors and financing drivers.
From a structuring perspective, commercial real estate holding companies typically have asset organizational charts as complex as an ultra-modern family tree, with different sets of parents, abundant offspring, and multiple sets of grandparents. This structure originates in the need for 3 things: investment facilitation; capital structure layering; and liability reduction. A note as to the latter: liability-shy real estate developers work to mitigate environmental, financial and other legal liability via LLC formations intended to protect the mother-ship or personal family financials from each property's unique set of risks.
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