RE Palm Springs II, LLC, asks the U.S. Bankruptcy Court for the District of Texas to authorize the bidding procedures in connection with the sale of its under-construction, four-story, 150-room full-service hotel located at 400 North Palm Canyon Drive, Palm Springs, California, and related assets, to McWhinney Real Estate Services, Inc., subject to higher and better offers.
On Oct. 31, 2017, the Borrower entered into a Construction Loan Agreement with Hall Palm Springs, LLC (“HPS”), for the extension of secured, construction and permanent financing up to $54.75 million. HPS received a senior lien Deed of Trust as security for its loan. Around the same time the Borrower also engaged SR Construction, Inc. (“Prior General Contractor”) to take over construction of the Hotel.
Ultimately, the Borrower terminated the Prior General Contractor in late 2019 based upon alleged defaults. Thereafter, several lawsuits were filed by the Prior General Contractor and subcontractors against the Borrower and other parties. As a result, the Hotel remains only partially completed.
The Hotel was appraised as of Jan. 3, 2020 with an as-is value of $72 million and an as-completed value of $97 million, but those valuations were pre-COVID. The current value is unknown but will be determined through the sales process.
HPS holds a first and senior lien against the Hotel in the approximate amount of $36 million. The Prior General Contractor asserts a junior lien in the approximate amount of $14,151,168 which includes claims of subcontractors which subcontractors have also filed junior liens totaling approximately $7,486,873.
After considering available options within the context of the current economic environment, the status of construction, and reorganization, the Debtor determined in its business judgment to conduct a competitive bid-and-sale process for the orderly sale of the Hotel, being all or substantially all of the Debtor’s assets.
After extensive and arms-length negotiations, the Debtor negotiated a certain Asset Purchase Agreement (“McWhinney SPA”) to sell the Hotel to McWhinney pursuant to the terms and conditions set forth therein. The terms and conditions identified in the McWhinney SPA are subject to higher and better bids via the bidding process.
As an inducement for McWhinney to serve as the “Stalkinghorse Bidder” in the Court-approved sale process; however, the Debtor has agreed to certain bid procedures and protections, including a break-up fee. Under the Motion, the Debtor asks approval of the sale procedures, sale, and bid protections.
As part of the McWhinney SPA, McWhinney has deposited a refundable $500,000 good-faith deposit and agreed to act as the Stalking Horse Bidder and incur the expenses associated with such a role, subject to the inclusion of the Overbid Protections in the Bid Procedures. The sale will be free and clear of all liens, claims, encumbrances, and interests, including specifically those identified on List of Secured Lienholders.
With the Stalking Horse Bidder and a minimum purchase price now in place, the Debtor believes that it is a proper exercise of its business judgment to implement the competitive bidding process outlined in the Bid Procedures and promptly effectuate a Sale, either to the Stalking Horse Bidder or to another Qualified Bidder(s) who submits a higher or better Qualified Bid(s) for the Hotel.
By the Motion, the Debtor ask approval of: (a) the competitive bid process and procedures; (b) McWhinney as the Stalking-Horse Bidder and its entitlement to a break-up fee assuming entry of the Bid Procedures Order, approval of the Bid Procedures and performance by McWhinney in connection with the McWhinney SPA; and (c) the sale of the Hotel to the highest or best offer(s).
The salient terms of the Bidding Procedures are:
a. Bid Deadline: Sept. 25, 2020 at 6:00 p.m. (CT)
b. Initial Bid: An unqualified and binding bid in an amount of total consideration that exceeds the consideration offered by the Stalking Horse Bidder, plus $1.2 million, which is sufficient to cover the Break-Up Fee and expenses.
c. Deposit: $2.5 million
d. Auction: If the Debtor receives at least one Qualified Bid (other than that of the Stalking Horse Bidder) on or prior to the Bid Deadline, the Debtor will commence the Final Bidding Process to solicit the highest or otherwise best offer of each Qualified Bidder. The Stalking Horse Bidder will be entitled to credit bid the Break-Up Fee during the Final Bidding Process.
e. Sale Hearing: Oct. 7, 2020
f. Sale Objection Deadline: Oct. 5, 2020 at 4:00 p.m. (CT)
g. Break-Up Fee: 2% of the cash purchase price
The Debtor asks that the Court authorizes its assumption and assignment of executory contracts or unexpired leases to the Buyer. It asks that the Court orders that, no later than two days prior to the Sale Hearing, any objection to the Cure Amount must be filed with the Court. The assumption and assignment of the Assigned Contracts will be cured prior to the proposed closing.
The proposed Sale transaction is fair and appropriate and will maximize the realizable value of the Hotel for the stakeholders of the Estate. Accordingly, the Debtor seeks the Court’s approval of a proposed Sale transaction and related Bid Procedures so that it could solicit competing offers for the Hotel.
Subject to the Court’s approval, the Debtor has also engaged Hodges Ward Elliott, LLC (“HWE”), a nationally recognized hospitality broker, as its real estate broker, as set forth in another contemporaneous pleading, the Application to Employ Hodges Ward Elliott, LLC as Real Estate Broker. The Debtor intends for HWE to market the Hotel, manage the data room for due diligence, and report to the CRO regarding the sales process, among other services. The Debtor intends for the CRO to manage the proposed sale process. Together the CRO and HWE will conduct a thorough marketing process of the Hotel.
Finally, the Debtor asks that the Court eliminates the 14-day stays imposed by Bankruptcy Rules 6004 and 6006.
A copy of the Bidding Procedures is available at https://tinyurl.com/yxtwpuyr from PacerMonitor.com free of charge.
About RE Palm Springs II
RE Palm Springs II is the owner of fee simple title to an under construction four-story, 150-room full-service hotel in Palm Springs, CA.
RE Palm Springs II, LLC, based in Denver, CO, filed a Chapter 11 petition (Bankr. N.D. Tex. Case No. 20-31972) on July 22, 2020.
In its petition, the Debtor was estimated to have $10 million to $50 million in assets and around $57,309,877 in liabilities. The petition was signed by Thomas M. Kim, chief restructuring officer.
CAVAZOS HENDRICKS POIROT, PC, serves as bankruptcy counsel to the