October 5, 2023 – The Court hearing the Hartman SPE, LLC cases issued orders approving the private sales of two of the Debtor’s real properties, namely: (i) the $12.85mn sale of Fondren Road Plaza to Fondren Complex LLC [an entity associated with Salim Dossani, Docket No. 130] and (ii) the $13.5mn sale of One Mason Plaza to Mason Complex, LLC [an entity also associated with Salim Dossani, Docket No. 131].
On September 13th, the Debtor filed a motion requesting Court authority for sale procedures (the “Sales Procedures”) in respect of what it estimates is $85.0mn worth of property in its $400.0mn portfolio [Docket No. 10, with a complete list of the Debtors' properties attached at Exhibit A]. Those sales procedures were approved on October 4th [Docket No. 128].
The motion covered seven properties (including the two noted above) subject to sales that look "likely to close quickly upon approval of sale procedures," with those Properties likely to close "quickly" including (but not limited to): Regency Square ($3.24 million), One Mason Plaza ($13.5 million), Mission Centre ($12.65), Fondren Road Plaza ($12.85 million), Northeast Square ($5.4 million), Promenade North ($18.1 million), and Walzem ($15 million).
On September 13, 2023, Hartman SPE, LLC (“Hartman SPE” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtor, a Houston, Texas-based real estate investment trust (REIT) with a 35-property portfolio, squarely placed blame for its predicament on minority shareholder Allen R. Hartman noting: "The Debtor commenced this Chapter 11 Case on an accelerated timeline to address improper and abusive actions taken by Allen R. Hartman and Hartman vREIT XXI, Inc., a 2.47% minority member of the Debtor (the 'Hartman Minority Member')….The Hartman Minority Member has placed a wrongful cloud on title and hindered the Debtor’s ability to sell its real estate portfolio to pay down and refinance its senior secured debt that will mature on October 9, 2023."
Absent that interference, the Debtor argues, it would be able to proceed with efforts "transitioning its portfolio from office, industrial, and retail space into self-storage…"
Key Terms of One Mason PSA
- Seller: Hartman SPE, LLC
- Purchaser: Mason Complex, LLC
- Assets: One Mason Plaza — 811, 829 & 873 South Mason Road, Katy, Texas
- Purchase Price: Immediately available funds, payable at closing Thirteen Million Five Hundred Thousand and No/100 Dollars ($13,500,000.00) (the “Sales Price”).
- Deposit: $130k
- Closing: The closing of the proposed transaction shall occur within five (5) days of entry of a Court order approving this Motion.
Key Terms of Fondren PSA
- Seller: Hartman SPE, LLC
- Purchaser: Fondren Complex LLC
- Assets: Fondren Road Plaza – 7030 Bissonnet Street, Houston, Texas
- Purchase Price: Immediately available funds, payable at closing Twelve Million Eight Hundred Fifty Thousand and No/100 Dollars ($12, 850,000.00) (the “Sales Price”).
- Deposit: $130k
- Closing: The closing of the proposed transaction shall occur within five (5) days of entry of a Court order approving this Motion.
The Sale Procedures Motion
The motion [Docket No. 10] states, “[t]he Debtor holds title to 35 parcels of commercial real estate (the ‘Properties’) that include office, retail, and industrial properties, with an estimated portfolio value of over $400 million. Prepetition, the Debtor began the process of transitioning its portfolio from office, industrial, and retail space into self-storage and sold four propertiesFN4 to facilitate the transition, using the proceeds to pay down its Prepetition Loan. These efforts, which the Debtor wishes to continue during the Chapter 11 Case, have resulted in significant pay down of its secured debt.
Due to the diversity of the Properties, ranging from industrial sites to high-end office space throughout Houston, Dallas/Ft. Worth, and San Antonio, the Debtor has determined, in the exercise of its business judgment, that marketing the Properties on a standalone basis will maximize the value of each Property to the estate and its creditors. The Debtor believes it unlikely that a single buyer would have an interest in all Properties and that marketing the Properties as a single portfolio would result in a smaller pool of interested parties and a lower overall price.
In this regard, on the Petition Date, the Debtor was party to agreements with various commercial real estate agencies (each a ‘Broker Agreement’ entered into with a ‘Broker’) covering 30 Properties. The Debtor specifically chose each Broker based on the underlying nature and location of the property and the Broker’s particular expertise. The Broker Agreements are market-based contracts and with well-known companies that have conducted fulsome marketing efforts in accordance with industry standards.FN6 The Debtor believes that retaining Brokers based on the specific needs of each Property, versus a single broker to sell all, will result in not only more expeditious sales, but the highest and best offer for each Property.
As a result, of the 30 Properties subject to Broker Agreements, 12 were under contract on the Petition Date and 6 appear to be close to coming under contract. A complete list of the Properties with their corresponding status is attached as Exhibit A. Under a Broker Agreement, the marketing process normally commences with the Debtor sending a packet of diligence materials for the Broker to analyze, including information on the property, its use, occupancy, cash flow, and similar matters. The Broker then prepares a confidential offering memorandum, lists the Property on a national website, and distributes flyers and other information to an extensive list of contacts. Interested parties may then sign a confidentiality agreement to receive a copy of the offering memorandum and access to the virtual data room, with tours being available upon request.
A brief description of the marketing process for several of the Properties that are likely to close quickly upon approval of sale procedures is below. In each case, the proposed purchase price is supported by the Debtor’s internal assessment and broker opinions as to value.
- The Debtor signed a Broker Agreement with CBRE on October 7, 2022 regarding its Regency Square Property. CBRE contacted 76,685 parties, of which 31 expressed interest, 20 signed confidentiality agreements and were granted access to a virtual data room, and three requested tours. These efforts resulted in 7 offers, and the property is currently under contract with a purchase price of $3,238,932.70.
- The Debtor signed a Broker Agreement with Marcus & Millichap on September 23, 2022 regarding its One Mason Property and on April 17, 2023 regarding its Mission Centre and Fondren Road Plaza Properties. The Debtor received at least 7 offers among the 3 properties before selecting the highest and best offers, each of which included a non-refundable earnest money deposit. These properties are currently under contract with the same counterparty for a purchase price of $13.5 million, $12.65 million, and $12.85 million, respectively.
- The Debtor signed a Broker Agreement with Marcus & Millichap on May 15, 2023 regarding its Northeast Square Property. The Debtor received at least two offers before placing this property under contract for a price of $5.4 million.
- The Debtor did not place its Promenade North Property with a broker, but instead received a significant number of indications of interest from brokers and potential buyers when it began placing other Properties on the market. The Debtor received at least 3 offers to purchase this property, which is currently under contract for $18.1 million.
- The Debtor did not place its Walzem Property with a broker, but instead began receiving indications of interests when it placed other Properties for sale. The Debtor received two offers before placing the Walzem Property under contract with the owner of an adjacent property for a purchase price of $15 million.
Absent a stream-lined and efficient procedure, the Debtor may lose potential purchasers, either through attrition caused by delay or because sales may not close in time to meet a buyer’s financing contingencies. This is particularly so with respect to sale contracts pending on the Petition Date. Accordingly, the Debtor files this Motion seeking to establish an efficient sale and assumption/assignment procedure that will mitigate these concerns, while simultaneously providing adequate notice to parties-in-interest, including creditors, potential competing purchasers, parties potentially holding an interest in the Properties, and counter-parties to executory contracts (the ‘Contracts’) and unexpired real property leases (the ‘Leases’) that will be assumed and assigned as part of the sale.
Accordingly, the Debtor requests interim authority to utilize the Sale and Assumption and Assignment Procedures to sell up to $85 million in Property, pending entry of a final order approving the proposed procedures in full.”
FN4: The properties are Prestonwood Park Shopping Center, Haute Harwin Fashion Center, Spring Velley Business Center, and Mitchelldale Business Park.
FN6: The Debtor has filed a separate motion seeking to assume the Broker Agreements to ensure that each Broker is paid upon closing of the relevant sale.
In a press release (8-K here) announcing the filing, Silver Star Properties REIT, Inc., the Debtor's ultimate parent, advised that: “Silver Star Properties REIT, Inc. ('Silver Star' or the 'Company') is a self-managed real estate investment trust that is currently repositioning in an orderly manner into the self storage asset class. Hartman SPE, LLC (the 'SPE'), an indirect subsidiary, which owns legacy office, retail and industrial properties today announced that (i) with the SPE's sale of its Prestonwood property netting $25 million and (ii) to improve its ability to sell its remaining legacy assets, the SPE has filed a voluntary petition under Chapter 11 of the Bankruptcy Code (the 'Filing').
The Filing will allow the SPE to conduct an orderly sale of its assets to pay its undisputed creditors in full, complete the refinance of its maturing senior indebtedness and maximize capital available for Silver Star's redeployment into the self storage asset class. Further, this Filing will allow the SPE to complete property sales without external interference by a dissident minority holder, which sales will be instrumental as the SPE looks to close on the refinancing of its SASB Loan….
The Filing comes after failed efforts amicably to resolve intercompany ownership matters, a process that has been ongoing since December 2022, involving negotiations between the Company and Hartman vREIT XXI, Inc. which is under the control of Allen Hartman. The Company has diligently pursued mediation and sought legal remedies in response to Allen Hartman's efforts to secure more favorable terms through the use of controversial legal tactics. The Company believes that the Filing represents a viable and constructive avenue to obtain the necessary relief to prove its ownership of the SPE's properties, thereby safeguarding and enhancing shareholder value."
Gerald Haddock, Executive Chairman of the Executive Committee of Silver Star, commented further, "We are pleased with our progress toward our goals of moving the Company into self storage. Having successfully engaged Steve Treadwell, a seasoned executive in self storage, as our CEO, the Company will be well positioned with his expertise to direct the entire enterprise with a coordinated branding strategy of acquiring institutional quality self storage properties, allowing us to more readily fulfill our commitment to list on an established national exchange for trading. The bankruptcy filing for our SPE is part of our moving forward strategy as we expect to emerge quickly and with removal of our dissident's interference. That will allow the Company to resume its new growth strategy and make distributions to its shareholders much quicker, all of which have been hindered by the dissident's interference."
Goals of the Chapter 11 Filings
According to the Wheeler Declaration (defined below), "Seeing no means to remove the improper cloud on title in advance of loan maturity, the Debtor filed for Chapter 11 to quickly sell a portion of its portfolio sufficient to permit it to refinance its secured lender with new, third-party exit financing, pay all undisputed creditors in full and continue it prepetition efforts to transition its portfolio from retail, office and industrial space to self-storage properties."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Wheeler Declaration”), David Wheeler, the President of Hartman SPE Management, LLC (“SPE Manager”), the Debtor’s sole manager, detailed the events leading to Hartman SPE’s Chapter 11 filing. The Wheeler Declaration provides: “The Debtor commenced this Chapter 11 Case on an accelerated timeline to address improper and abusive actions taken by Allen R. Hartman and Hartman vREIT XXI, Inc., a 2.47% minority member of the Debtor (the 'Hartman Minority Member').
Hartman Minority Member has placed a wrongful cloud on title and hindered the Debtor’s ability to sell its real estate portfolio to pay down and refinance its senior secured debt that will mature on October 9, 2023. These actions include filing a lawsuit in Texas state court alleging that its minority interest in the Debtor gives it an undivided ownership interest in the Debtor’s real estate, a position clearly contrary to law. The Hartman Minority Member has gone so far as to file lis pendens against several of the Properties.
The Debtor is at serious risk of losing buyers and, when buyers are willing to close, they are requiring substantial price adjustments. For example, the Debtor was recently required to reduce the purchase price of its Prestonwood property, which was subject to a lis pendens, by $125,000 and place $2.7 million into escrow. This escrow was in addition to a $1 million escrow the buyer had to provide to secure funding. Another buyer recently demanded a $1.85 million downward price adjustment due to the cloud on title and fear of being pulled into the State Court Lawsuit. The Debtor simply cannot afford to let this continue, prompting this case.
The Hartman Minority Member’s actions have not only alarmed title companies and potential purchasers, they have caused the Debtor to incur substantial attorneys’ fees to defend against allegations of an undivided ownership in the Properties. These actions are particularly troubling since the State Court Lawsuit bears no apparent connection to ownership of the Properties. The Debtor has filed motions to address the cloud on title, but the State Court has not ruled… The Majority Member, the SPE Manager, and the SPE Manager’s two independent managers have each consented to the Debtor filing for Chapter 11 relief in order to clear the cloud on title created by the Hartman Minority Member’s actions.”
On October 1, 2018, the Debtor closed on a term loan agreement with Goldman Sachs Mortgage, as lender, in the principal amount of $259 million (the “Prepetition Loan”). KeyBank acts as servicer and special servicer for the debt and U.S. Bank National Association acts as certificate administrator, custodian and trustee.
On October 19, 2022, the Debtor received notice of an Event of Default (as defined under the Loan Agreement) from KeyBank, as Master Servicer for U.S. Bank National Association solely in its capacity as Trustee for the benefit of the Holders of the GS Mortgage Securities Trust 2018-HART, Commercial Mortgage Pass-Through Certificates, Series 2018-HART and the RR Interest Owner. The default arose from the Debtor’s alleged noncompliance with the Loan Agreement’s insurance requirements relating to a single property, which has since been sold.
The Prepetition Loan has a current outstanding balance of approximately $217 million.
In addition to the Prepetition Loan, certain of the Properties are subject to mechanic and materialman liens, which are currently under review (the “M&M Liens”). The Debtor contemplates that all valid M&M Liens will be paid as the relevant Properties are sold or pass through the bankruptcy with respect to unsold Properties.
As of the Petition Date, the Debtor estimates that its unsecured debt is approximately $14.5 million, with approximately $7.5 million owed to trade creditors and approximately $7 million in contingent, disputed debt potentially owing to Summer Energy, LLC resulting from a Final Judgment entered in the District Court of Harris County, 295th Judicial District, on March 24, 2022, which is subject to a pending appeal.
The Debtor's petition notes that Hartman XX Limited Partnership owns 97.53% of the Debtor's shares, and Hartman vREIT XXI, Inc. owns 2.47%
About the Debtor
According to the Debtor, "Debtor Hartman SPE, LLC is a Delaware special purpose entity formed on July 19, 2018. It holds title to 35 parcels of commercial real estate (the 'Properties') that include office, retail and industrial properties, with an estimated portfolio value of over $400 million. The Properties are managed by Silver Star Property Management, Inc. (the 'Property Manager') pursuant to a Real Estate Property Management Agreement (the 'Management Agreement'). The majority of the Debtor’s back-office and vendor-procurement services, including management and employees, are provided by Property Manager through the Management Agreement."
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The post Hartman SPE, LLC – Kicking Off Portfolio Clearance Sale, Court Approves Private Sale of Two Real Properties Worth $26.35mn to Salim Dossani; Approves Sales Procedures for Additional “Quick Sale” Properties appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.