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Commercial Real Estate in Bankruptcy: Broker and Trustee Guide

Commercial real estate in a bankruptcy estate presents challenges that residential property does not. Tenant leases, environmental liability, income capitalization valuation, and the intersection of real estate law with §365 assumption and rejection make commercial bankruptcy sales significantly more complex than a residential §363 sale. OLH’s commercial bankruptcy specialists have experience with office, retail, industrial, and mixed-use assets across all 50 states.

Section 365: Lease Assumption and Rejection

11 U.S.C. §365 governs what happens to unexpired leases in bankruptcy. For a commercial property with tenants: (1) Lease assumption: the trustee assumes the lease, curing any arrears, and assigns it to the buyer at closing. The buyer takes the property with the tenant in place. (2) Lease rejection: the trustee rejects the lease, treating it as a prepetition breach. The tenant becomes an unsecured creditor for damages and may be required to vacate. The property is marketed as vacant. The choice between assumption and rejection significantly affects the property’s market value and buyer pool. A stabilized property with performing tenants commands a cap-rate-based valuation. A vacant building sells at a deeper discount but to a larger buyer pool. OLH advises trustees on the assumption/rejection tradeoff as part of the valuation process.

Valuation of Income-Producing Commercial Property

Commercial property is valued differently from residential. The income capitalization approach: Net Operating Income (NOI) — gross rental income minus operating expenses — divided by the market capitalization rate = value. OLH’s commercial bankruptcy valuation: (1) Broker’s Opinion of Value (BOV): market-based analysis using comparable sales and income approach. Appropriate for most commercial bankruptcy valuation needs. (2) MAI Appraisal: licensed commercial appraisal required for large assets, contested valuations, or when the court specifically requires it. OLH coordinates MAI appraisals in all 50 states. Environmental considerations: commercial property with environmental contamination may have negative value after remediation cost estimates. OLH coordinates Phase I environmental assessments as needed.

Commercial Bankruptcy Sale Process

Commercial real estate sales in bankruptcy follow the same §363 framework as residential sales but with additional complexity: (1) Longer marketing period: commercial buyers conduct more extensive due diligence. 60–180 day marketing periods are common for complex commercial assets. (2) Stalking horse process: commercial §363 sales frequently use a stalking horse bidder to establish a floor price before competitive bidding. See: Stalking Horse Bidder Guide. (3) Bid procedures motion: commercial sales typically require a standalone bid procedures motion before the sale approval motion. OLH supports the trustee’s attorney in developing the bid procedure framework. (4) Environmental and liability disclosure: as-is condition disclosures in commercial bankruptcy sales must address known environmental conditions.

Immediate: Hub — Appoint a Broker — Out-of-State Property — Broker Checklist — Emergency Appointment
Process: Ch.7 Trustee — §327 Application — §363 Sale — Attorney Guide — Rule 2014 — BPO & Appraisal
By Chapter: Chapter 11 — Stalking Horse — Chapter 13 — Trustee Roster
Situations: Debtor Guide — Co-Owned — Vacant Property — Maximize Proceeds — Buyer Guide — Abandonment — License FAQ
Property Types: Commercial — Multi-Family — Rental Property — Vacant Land — Luxury — Hotel/Hospitality — All 50 States

Frequently Asked Questions

How does Section 365 affect commercial property in a bankruptcy sale?

§365 gives the trustee the right to assume (keep) or reject (terminate) tenant leases. Assumed leases are assigned to the buyer at closing — the buyer takes the property with tenants. Rejected leases give tenants unsecured damage claims and may require vacating. The assumption/rejection choice significantly affects market value and the buyer pool.

How is commercial real estate valued in a bankruptcy?

Income-producing commercial property is primarily valued by the income capitalization approach: NOI divided by market cap rate. OLH provides Broker Opinions of Value (BOV) for commercial bankruptcy assets and coordinates licensed MAI appraisals for large or contested properties.

Do commercial bankruptcy sales use the stalking horse process?

Yes. Commercial §363 sales frequently use a stalking horse bidder to establish a floor price before competitive court-supervised bidding. The stalking horse receives a break-up fee (2–3%) if outbid. See Stalking Horse Bidder Guide for full details.