Thu 04/14/2022 19:08 PM
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Edgemere Bankruptcy Analysis:

Relevant Documents:
Voluntary Petition
30 Largest Unsecured Creditors
First Day Declaration
DIP Financing Motion
Adversary Complaint
Press Release


 




















Summary
Edgemere is a Dallas-based continuing care retirement community
Attributes the filing to the “pressures” of declining occupancy, which spurred covenant breaches and triggered events of default under the debtors’ bonds and “over market” ground lease
Negotiating a consensual restructuring through an RSA and plan of reorganization with Edgemere’s sole member, Lifespace Communities, successor bond trustee UMB Bank
Filed an adversary complaint against its landlord, Intercity Investment Properties, alleging significant damages from certain of the landlord’s “bad acts”


Northwest Senior Housing Corp., dba Edgemere, a Dallas-based continuing care retirement community, filed for chapter 11 protection today in the Bankruptcy Court for the Northern District of Texas, along with affiliate Senior Quality Lifestyles Corp.

“Common in the senior living industry and in particular among CCRCs,” Edgemere says it has been challenged by the Covid-19 pandemic. Occupancy rates in all levels of living have declined, and the community faces financial challenges that threaten Edgemere’s ability to honor its long-term debt obligations and maintain its operational stability. In addition to the strain caused by reductions in occupancy rates over the past two years, the above-market ground lease and its termination date “not only challenge Edgemere financially but also threaten the viability of the Community that over 400 Residents call home,” according to the first day declaration of Nick Harshfield, director, vice chair and treasurer of Edgemere.

Consequently, the debtors are engaging in extensive arm’s-length negotiations with (a) Lifespace Communities Inc., the current nonprofit sole corporate member of the debtors, and (b) UMB Bank NA as successor master trustee and successor bond trustee, with the goal of achieving a global, consensual restructuring through a restructuring support agreement and plan of reorganization. The debtors’ financial condition, combined with the automatic stay and other protections provided under the Bankruptcy Code, affords them with the opportunity to continue arm’s-length discussions with key stakeholders to develop an exit strategy that preserves residents’ quality of life while maximizing the value of the debtors’ estates.

The debtors say that the parties are progressing toward reaching an agreement on the restructuring of the debtors’ secured debt, which includes “a significant contribution” from Lifespace. Additionally, the debtors have secured a commitment for DIP financing in the form of a $10.1 million term loan facility that would provide for $2 million in funding on an interim basis, along with the use of cash collateral with the consent of the bond trustee on an interim basis.

“Unfortunately,” the debtors’ extensive attempts to negotiate a long-term solution with Intercity Investment Properties Inc., Edgemere’s landlord, have failed “due to the Landlord’s bad faith and attempts to terminate the Ground Lease,” according to the first day declaration.

The first day hearing has been scheduled for Monday, April 18, at 2:30 p.m. ET.

The company reports $100 million to $500 million in both assets and liabilities. The company’s prepetition capital structure includes:

The Series 2015 and Series 2017 retirement facility revenue bonds are secured by first mortgage liens on substantially all of Edgemere’s property, a pledge of gross revenue and a debt service reserve fund, according to offering documents from issuer Tarrant County Cultural Education Facilities Finance Corp.

The first day declaration states that as of April 13, Edgemere had contingent entrance fee liabilities to current residents totaling $122.8 million and an additional $25.5 million in untriggered entrance fee refund liabilities to former residents. The former residents’ refunds will become due after Edgemere receives a new entrance fee from a new resident in the vacated unit, pursuant to the terms of the resident contracts.

Lifespace is Edgemere’s sole member. Lifespace is an Iowa nonprofit corporation authorized to do business in Texas and other states. Lifespace, directly or through affiliates, owns and operates 14 other communities in seven states.

The debtors are represented by Polsinelli in Dallas and New York as counsel and are also working with FTI Consulting. Kurtzman Carson Consultants is the claims and noticing agent. The case has been assigned to Judge Michelle V. Larson (case No. 22-30659).

Events Leading to Bankruptcy

The debtors say that they have incurred “significant costs” as a direct result of the Covid-19 pandemic that put “substantial pressure” on them, drove occupancy down and “drained cash” as revenue declined and refunds paid exceeded entrance fees collected. The debtors say that sales leads have “plummeted due to negative publicity.” The debtors cite additional strains on the business arising from “dramatically” higher labor costs, additional costs for personal protective equipment and increased competition, noting that there are nine CCRCs within 10 miles of Edgemere.

According to the debtors, the “pressures” of declining occupancy caused Edgemere to breach certain covenants, triggering events of default under the debtors’ bonds and Edgmere’s ground lease with landlord Intercity Investment Properties Inc. The debtors assert that the ground lease has “proven to be extremely problematic” and precipitated the filing of the chapter 11 cases.

The debtors say they have engaged in “extensive attempts” to negotiate a long-term solution to the ground lease but “have failed due to the Landlord’s bad faith and attempts to terminate the Ground Lease.” The debtors have simultaneously filed an adversary complaint against the landlord alleging significant damages resulting from certain of the landlord’s “bad acts.” The adversary complaint is discussed further below.

The debtors explain that although the ground lease was executed with the intent to operate the CCRC, the ground lease contains “unconventional terms” that “are unsuitable for this purpose” and have “proven extremely problematic” for Edgemere and its constituents. The debtors say the lease term, which is scheduled to expire in 2054, does not provide for “meaningful extensions” of the term, even though “CCRCs need to be able to assure residents that their tenancies will not be disturbed,” according to the debtors. The debtors also say that the ground lease gives the landlord the right to assume the residency agreements and operate the facility as a CCRC in violation of Texas law, “purports” to give the landlord the right to terminate residency agreements and provides for annual rent increases of up to 5% per annum, “subjecting Edgemere to the risk of rent increases that could outpace increases in revenue.”

In December 2021, the debtors, bond trustee UMB Bank, the landlord and Lifespace entered into a forbearance pursuant to which Edgemere paid the landlord the September 2021 rent and reimbursed substantial professional fee expenses. In the first day declaration, the debtors say the initial forbearance terminated on Dec. 31, 2021, “due to inaction by the Landlord” and that on Jan. 14, 2022, counsel for the landlord informed Edgemere that it “would not consider a forbearance extension, would not sell the real property, and would not negotiate the terms of the Ground Lease.”

On March 7, the debtors, the bond trustee and Lifespace executed a second forbearance agreement. Also on March 7, the landlord executed a “Ground Lessor’s Landlord Estoppel” for the benefit of Edgemere and the bond trustee, which, according to the debtors, certified that as of March 7, Edgemere had cured the monetary events of default under the ground lease and that “Landlord was unaware of any other defaults under the Lease.”

Background

Edgemere was formed in 1998 as a Texas nonprofit to construct, own and operate a “best-in-class” senior living community situated on a 16.25-acre site in Dallas. Since 2001, Edgemere has operated a “life care” CCRC, which offers its senior residents a continuum of care in a campus-style setting, as well as healthcare and support services to its target market of seniors. Unlike other CCRC models, a life care model provides that the residents receive care and services offered by the community throughout their lifetime at the same monthly service fee, regardless of their level of care needs. Although there may be periodic increases to the monthly service fees, those increases are relatively minor and apply to all residents.

Edgemere has 504 total available units and offers “ornate Mediterranean inspired architectural and design flourishes on lush grounds.” The total available units include 304 independent living residences in one-, two- and three-bedroom configurations, 68 one-bedroom assisted living suites, 45 one-bedroom memory care units and 87 skilled nursing units. As of Monday, April 11, 76.3% of independent living units were occupied, 63.2% of assisted living units were occupied, 53.3% of memory care/support units were occupied, and 62.1% of skilled nursing units were occupied.

Edgemere was developed as a high-end community by Greystone, a full-service senior living community developer and manager, and in late 2017 and early 2018 management switched from Greystone to Seniority Inc., a California-based CCRC operator. After the execution of the affiliation agreement between Lifespace and SQLC in May 2019, Lifespace became the sole member and manager of Edgemere and two other CCRCs in Texas. Under an August 2019 management services agreement, Lifespace serves as the exclusive manager of Edgemere’s day-to-day operations. Under the agreement, Edgemere pays Lifespace an annual fee of about 8% of monthly revenue. Lifespace is voluntarily deferring this fee, according to the declaration.

The debtors’ list of 30 largest unsecured creditors consists solely of resident entrance refund claims running from $728,676 to $1.3 million.

The debtors’ corporate organizational chart is below:

The case representatives are as follows:


 

















































































Representatives
Role Name Firm Location
Debtors' Counsel Jeremy R. Johnson Polsinelli New York
Brenna A. Dolphin
Trinitee G. Green Dallas
Debtors' Financial
Advisor
Chad J. Shandler FTI New York
Counsel to UMB Bank Daniel Bleck Mintz Levin
Cohn Ferris
Glovsky
and Popeo
Boston
Co-Counsel to Lifespace
Communities
David D. Grossklaus Dorsey &
Whitney
Des Moines, Iowa
Co-Counsel to Lifespace
Communities
Eric E. Walker Perkins Coie Chicago
Co-Counsel to Intercity
Investment Properties
Michael S. Held Jackson
Walker
Dallas
Jennifer F. Wertz
J. Machir Stull
Co-Counsel to Intercity
Investment Properties
Eileen M. Sethna Levenfeld
Pearlstein
Chicago
Harold D. Israel
Elizabeth B. Vandesteeg
Debtors' Claims Agent Robert Jordan KCC El Segundo, Calif.




Adversary Proceeding

As previewed above, in tandem with Edgemere’s chapter 11 filing today, the debtors filed a seven-count adversary proceeding against Intercity Investment Properties Inc. and Kong Capital LLC. Intercity is a real estate investment company and the purported owner of the property leased to Edgemere. Kong is a real estate private equity firm that acted as Intercity’s agent. The complaint alleges that the defendants attempted to “destroy Edgemere’s business” through a several-month-long campaign of “unprecedented and unlawful activities,” motivated by the “singular purpose” of trying to manufacture a reason for Intercity to terminate its 52-year ground lease with Edgemere.

The complaint alleges the following counts: (i) breach of contract, (ii) promissory fraud, (iii) tortious interference with existing contractual business relations, (iv) tortious interference with prospective contractual and business relations, (v) civil conspiracy (vi) equitable subordination and (vii) reformation of lease.

Edgemere argues that the defendants intended to “wrest control” of the community and its residents and convert it into a senior living rental facility. To accomplish this, says Edgemere, the defendants refused to participate in negotiations with Edgemere, then refused to adhere to the terms of the forbearance agreements and nondisclosure agreements the parties ultimately executed. Further, notwithstanding the NDAs, the defendants communicated Edgemere’s financial distress and confidential information to the press, making statements with intent to destabilize the community and dissuade prospective residents from joining the community. The complaint describes numerous examples of these disclosures.

The complaint states that Intercity demanded three “comprehensive inspections” of Edgemere, during which it evaluated how to prepare the community for its alternative use and searched for undisclosed defaults under the lease. The first inspection was in November 2021, then again in January 2022, after Intercity reneged on its commitment and refused to extend the forbearance agreement. The complaint contends that during the January inspection, Kong accompanied Intercity and “grilled” executives and staff regarding Edgemere’s financial situation.

The third request came in March after the debtors cured all defaults and rent payments, at which time Intercity provided Edgemere with an estoppel certificate. Edgemere says Intercity demanded four days on site and insisted Edgemere sign a certification that Intercity had not committed any defaults under the lease, which the debtors refused. This refusal was used as a pretense to issue a notice of default, says Edgemere, and Intercity asserted that the failure to sign the certificate would permit Intercity to exercise rights to take over the property in 30 days, or as of April 16. The complaint explains, “This letter forced Edgemere to commence these Chapter 11 Cases before the purported April 16 deadline.”

According to the complaint, the defendants’ actions have been successful in their attempts to harm Edgemere’s business, noting that the debtors have not closed any new residency agreements since the first news article was published. These intentional actions to harm the business have also diminished entrance fee revenue that is needed to fulfill obligations under the residency agreements and to service bond debt. The complaint notes that Intercity also obtained $650,000 in cash and nearly $3.9 million overall while providing no consideration or benefit to Edgemere in return.

The complaint insists that the defendants’ efforts would put the well-being of the over 400 CCRC residents in danger. Further, the defendants’ actions would also result in the loss of significant entrance fee deposits from residents, along with the loss of the residents’ homes and healthcare services upon which they rely. Edgemere contends that defendants’ unlawful conduct has significantly damaged its business and the community, and the complaint seeks “significant compensatory and exemplary (including punitive) damages as well as equitable relief to ensure Edgemere’s continued operations without Defendants’ interference.”

The action asserts the following counts:

  • Count 1 (Breach of contract (NDA) - against Intercity)

  • Count 2 (Promissory fraud - against Intercity)

    • The complaint argues that Intercity never intended to comply with the terms of the forbearance agreement or the NDA, and its disavowal was in furtherance of its scheme to take the community away from Edgemere and convert it to a rental community. The debtors say that Intercity’s fraud and misrepresentations have substantially damaged and continue to damage Edgemere and its business in an amount to be determined at trial. Further, the complaint seeks exemplary damages against Intercity because its conduct was both malicious and fraudulent, justifying damages in amount sufficient to punish Intercity.



  • Count 3 (Tortious interference with existing contractual and business relations - against defendants Intercity and Kong)

    • The debtors insist that the defendants’ disclosures of information to the residents and media created fear and concern among the residents about the future viability of the community and whether they would receive a return of their entrance fees. The complaint says that because the return of any entrance fees is contingent in part upon a resident’s unit being occupied by a new resident, the chilling effect of defendants’ misconduct on prospective sales to new residents has a direct and profoundly negative impact on the residents and their families. As a result, Edgemere has been forced to adjust (that is, lower) its financial projections provided to the trustee in connection with the proposed postpetition financing and any restructuring and/or refinancing of the bonds, the complaint says, adding that the defendants’ misconduct therefore also interferes with Edgemere’s contractual relations with the bondholders.

    • The complaint seeks damages arising from the tortious interference with Edgemere’s existing contracts, as well as exemplary damages against Intercity in an amount sufficient to punish Intercity and Kong.



  • Count 4 (Tortious interference with prospective contractual and business relations - against defendants Intercity and Kong)

    • The complaint seeks damages and exemplary damages for the reasons previously stated, including in Count 4.



  • Count 5 (Civil conspiracy - against Intercity and Kong)

    • Both defendants collaboratively engaged in a scheme to wrest control of the community from Edgemere and convert it into an alternative use to realize a higher value. These actions contributed to the debtors’ need to seek bankruptcy protection. The complaint seeks damages and exemplary damages against Intercity.



  • Count 6 (Equitable subordination - against Intercity)

    • The debtors assert that on the basis of Intercity’s misconduct and resulting substantial damage to Edgemere and its other creditors, all existing and future claims of Intercity under the lease should be equitably subordinated to all other allowed claims in Edgemere’s bankruptcy case, including the residents’ claims and the bondholders’ claims.



  • Count 7 (Reformation of lease against Intercity)

    • The complaint explains that as drafted, section 8.2 of the lease can be read to permit Intercity upon any breach thereunder to repossess the community and then either seek to assume the residents’ residency agreements despite the fact that Intercity is not a licensed CCRC operator, or seek to expel or remove the residents despite their residency agreements and the substantial entrance fees they paid to ensure their continued residency and care at the community. This provision was the result of mutual mistake and should therefore be reformed to eliminate provisions giving Intercity the right to assume residency agreements.




DIP Financing / Cash Collateral Motion

The debtors request up to $10.1 million of DIP financing from UMB Bank in the form of a term loan facility that would provide for $2 million in funding on an interim basis, along with the use of cash collateral with the consent of the bond trustee on an interim basis. “The Debtors’ ability to immediately access and use Cash Collateral and obtain post-petition financing is critical to the success of the Chapter 11 Cases and to the well-being of the Residents who depend on the Debtors for personal services and healthcare,” the debtors say in the DIP motion. “In short, the ultimate success of the Chapter 11 Cases hinges, in large part, upon the Debtors’ ability to use Cash Collateral and obtain post-petition financing through the DIP Facility,” adds the motion.

The DIP financing bears interest at 10%, with an additional 2% for the default interest rate, and includes a 2% commitment fee. The loan would mature on the earliest of Dec. 31, 2022, the closing date of any sale of all or substantially all of the debtors’ assets and other customary events.

The interim funding would be used to maintain operations at the community and cover the costs of the administration of the chapter 11 cases. The subsequent $8.1 million draw, upon entry of the final order, would be used for working capital and general corporate purposes, bankruptcy-related costs and expenses and the payment of administrative expenses.

The DIP financing contains certain conditions precedent to funding of the initial DIP loan, including that funding is conditioned on the satisfaction of (i) entry of an interim DIP order, (ii) evidence of insurance reasonably satisfactory to the DIP lender and (iii) execution of the DIP loan documents.The DIP provides the DIP lender and trustee with consent rights over the landlord adversary proceeding, explicitly deeming a resolution of the action in a manner not consented to by the DIP lender to be an event of default.

To secure the DIP financing, the debtors propose to grant liens that would prime and remain senior to the trustee’s prepetition liens and would otherwise constitute a first priority lien in all DIP collateral, subject only to the carve-out and any permitted liens. The description of the DIP collateral does not include any language regarding avoidance actions or their proceeds.

Adequate protection for UMB as bond trustee includes replacement liens in all of the DIP collateral, a “supplemental lien on, and security interest in, all of the assets of the Debtors of any kind or nature whatsoever within the meaning of section 541 of the Bankruptcy Code,” superpriority claims and financial reporting.

In addition, the debtors propose a waiver of the estates’ right to seek to surcharge its collateral pursuant to Bankruptcy Code section 506(c) and the “equities of the case” exception under section 552(b).

The carve-out for professional fees is $300,000.

The proposed budget for the use of the DIP facility is HERE.

The DIP financing is subject to the following milestones:

  • Final DIP order: Entered by May 17;

  • Plan and DS draft deadline: Provided to the DIP lender and trustee by June 28;

  • Plan and DS: Filed by July 13;

  • DS and solicitation procedures approval: By Aug. 29;

  • Plan solicitation commencement: By Sept. 5;

  • Plan confirmation: By Oct. 13; and

  • Emergence: By Nov. 14.


The UCC lien investigation budget is $25,000.

Other Motions

The debtors also filed various standard first day motions, including the following:


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