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August 12, 2022 – Landlord Intercity Investment Properties, Inc. (the “Landlord”) filed a motion to dismiss the Debtors’ Chapter 11 cases [Docket No. 541] arguing that the Debtors' Plan, premised in part on the Debtors' ability to use Chapter 11 to modify (as opposes to assume or reject in its entirety) their lease with the Landlord, "cannot be achieved as a matter of law…[and as such]…the Chapter 11 Cases should be dismissed immediately.”
The Landlord argues that Debtors' "flawed premise that the Lease…can be modified by the Plan" amounts to "a campaign of deception before this Court and the Edgemere’s residents by obscuring the facts and creating unrealistic expectations for both…that the Debtors and their Sponsor (Lifespace Communities, Inc. (‘Lifespace’)) are promoting a fantasy" and that the "grim reality is that the Debtors are hemorrhaging cash, squandering resources and lack sufficient funds to operate in chapter 11 under their current DIP Loan until the entry of a final order in the Adversary Proceeding."
Continuing as to the Debtors' expectation that they will be able to modify the lease (ie extend its term and lower the rent) using Chapter 11, the Landlord argues: "It is black letter bankruptcy law, engraved in stone, that a debtor cannot pick and choose which elements of an unexpired lease to assume or reject. It must assume or reject the lease in its entirety [and]…The Lease cannot be modified by the Plan. In fact, the Bankruptcy Code unequivocally requires that the Lease be assumed (or rejected) as is in its entirety. Once the projections attached as Exhibit 4 to the Disclosure Statement (the ‘Projections’) are modified to reflect this reality, it becomes instantly clear that the Plan is not feasible."
On April 14, 2022, Northwest Senior Housing Corporation, doing business as Edgemere, and one affiliated Debtor (“Northwest Senior Housing” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Texas, lead case number 22-30659. At filing, the Debtors, who operate a luxury senior living retirement community, noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn.
On the Petition date, the Debtors also filed a complaint (Northwest Senior Housing Corporation v. Intercity Investment Properties, Inc. et al, Adv. No. 22-03040 (MLV)), with the Debtors alleging in that Adversary Proceeding that Landlord/Defendants Intercity Investment Properties "have engaged in unprecedented and unlawful activities attempting to destroy Edgemere’s business."
The Debtors filed the initial versions of their Chapter 11 Plan of Reorganization and Disclosure Statement on August 3rd [Docket Nos. 508 and 509, respectively].
On August 11th, the Debtors filed a motion requesting a lengthy extension of the their exclusive Plan filing period noting that more time would be needed to allow for an adversary proceeding with the Landlord ("inextricably tied to the Plan") which is not expected to begin until December 12th.
The dismissal motion [Docket No. 541] states, “The Debtors continue to engage in a campaign of deception before this Court and the Edgemere’s residents by obscuring the facts and creating unrealistic expectations for both. The Debtors’ recently filed Plan and Disclosure Statement are predicated on a Successful Outcome that is untethered to legal (or economic) realities, making it apparent that the Debtors and their Sponsor (Lifespace Communities, Inc. (‘Lifespace’)) are promoting a fantasy. Because there is no chance of a Successful Outcome as a matter of law, the Plan is unconfirmable and the Chapter 11 Cases must be dismissed immediately.
While like any good story, there are figments of truth, but the Plan reads more like a Disney fairy tale—describing a fictional world in which the Debtors wish to live, rather than the real world in which the Debtors operate. The Plan gives residents of the Edgemere a false sense of security that their deposits are ‘safe,’ based upon the flawed premise that the Lease (as defined herein) can be modified by the Plan. It cannot. The Lease cannot be modified by the Plan. In fact, the Bankruptcy Code unequivocally requires that the Lease be assumed (or rejected) as is in its entirety. Once the projections attached as Exhibit 4 to the Disclosure Statement (the ‘Projections’) are modified to reflect this reality, it becomes instantly clear that the Plan is not feasible. Moreover, neither the obligation to pay postpetition rent nor the obligation to pay the post Effective Date obligations to the counterparty of an assumed lease can be equitably subordinated.
Dismissal is also appropriate when, as here, the ability to consider confirmation of the Plan is entirely speculative. The Debtor’s Successful Outcome disregards (a) the pending motion to dismiss the Adversary Proceeding; (b) to the extent not dismissed in its entirety, the possibility that the Court does not have jurisdiction to enter a final order in such proceeding; and (c) the probability of appeal in the unlikely event of an adverse ruling against the Landlord. With respect to the last point, a confirmation hearing may not take place for years, rendering it nearly impossible to satisfy the feasibility standards of § 1129(a)(11) of the Bankruptcy Code.
Landlord further notes that the Debtors propose to pay their unsecured creditors nothing while at the same time allowing Lifespace, its de facto equity holder, to both retain its equity interest and get paid approximately $20,000,000.00 in Deferred Sponsor Fees through the proposed assumption of the Management Agreement, a clear end around the absolute priority rule.
The grim reality is that the Debtors are hemorrhaging cash, squandering resources and lack sufficient funds to operate in chapter 11 under their current DIP Loan until the entry of a final order in the Adversary Proceeding. Despite this reality, the Debtors continue spending inordinate amounts of time, money, and judicial resources prosecuting frivolous litigation claims against the Landlord and pushing a fallacious narrative regarding their prospects for reorganizing. This charade must end now. Given that the Successful Outcome cannot be achieved as a matter of law, the Chapter 11 Cases should be dismissed immediately”.
On April 14, 2022, the Debtor filed a complaint against Intercity Investment Properties, Inc., and Kong Capital, LLC. The Complaint explains: “Since 1999, Edgemere has owned and operated a continuing care retirement community (the ‘Community’ known as a ‘CCRC’) in the Dallas metropolitan area.
Over the course of the last several months, Defendants have engaged in unprecedented and unlawful activities attempting to destroy Edgemere’s business. Despite being under a non-disclosure agreement with Edgemere, and in possession of Edgemere’s confidential information, Defendants directly contacted the press, Edgemere’s residents and Texas regulators without notice to Edgemere, all for the singular purpose of trying to manufacture an improper basis to terminate Intercity’s 52-year ground lease with Edgemere and wrongfully retake the property on which the Community sits – all so that they can repurpose it to make a windfall profit.
Defendants’ combined efforts would not only destroy Edgemere’s business, but also directly endanger the well-being of the more than 400 senior citizens that depend on Edgemere to provide both a safe place to live and certain health care services. Defendants’ actions would result in the loss of the significant entrance fee deposits paid by residents to become part of the Community, the loss of their homes, and the loss of the health care services upon which they rely. Defendants’ unlawful conduct has significantly damaged Edgemere’s business and the Community, and Edgemere is entitled to significant compensatory and exemplary (including punitive) damages as well as equitable relief to ensure Edgemere’s continued operations without Defendants’ interference.”
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Harshfield Declaration”), Nick Harshfield, the Debtors’ Director, Vice Chair and Treasurer, detailed the events leading to Northwest Senior Housing’s Chapter 11 filing. The Harshfield Declaration provides: “Turnover at all levels of the Edgemere organization has taken place over the last five years. Edgemere has had three different managers, five different executive directors, three reorganizations of its sales and marketing team, new department heads for dining, nursing, plant operations and resident services, as well as turnover in dining and nursing staff. In addition, in 2017, Edgemere’s former Executive Director moved to a different CCRC as its plans to open were being developed and implemented and many employees followed him there as his new CCRC prepared to open; in July 2021, he returned to Edgemere in the Executive Director role.
The COVID-19 pandemic that began in the first quarter of 2020, severely disrupted most industries in our nation, and the senior living industry has been hit especially hard. The Residents that the Debtors care for are the population at the greatest risk of this virus, and the Debtors are committed to the health and safety of all their Residents and staff. The Debtors incurred significant costs as a direct result of the COVID-19 pandemic, including but not limited to those necessary to retain qualified staff. Expenses have increased due to dramatically higher labor costs and costs for additional personal protective equipment. Labor pressures not only persist but appear to be worsening.
There are nine CCRCs within ten miles of Edgemere. One existing CCRC is planning to expand in 2022. Two other high-end CCRCs opened within five miles of Edgemere – Ventana by Buckner opened in 2019, one and a half miles from Edgemere, and Legacy Senior Communities opened in August 2020, about four miles from Edgemere.
Compared to its competitors, Edgemere offers a higher-end-experience with larger units and beautiful grounds, and, accordingly, is priced higher than its competitors. Edgemere’s entrance fees range between $345,000 for the smallest one-bedroom unit to $1,454,000 for the largest three-bedroom unit. The average CCRC entrance fee in the Dallas market was $435,254. Edgemere’s monthly service fees start at approximately $4,000 per month, where other CCRC’s service fees typically fall between $2,000 and $3,000 per month in the Dallas market.
COVID-19 Pandemic and Declining Occupancy Rates
The global COVID-19 Pandemic put substantial pressure on Edgemere, drove occupancy down, and drained cash, as revenues declined and refunds paid exceeded Entrance Fees collected. IL revenue is down 9.3% from 2020 driven by declining occupancy, despite increases in Monthly Service Fees of 1% of January 1, 2021, and 3% as of January 1, 2022. Edgemere’s IL occupancy rate dropped from 92% in 2018 to 73% in April 2021. Between 2017 and 2020, IL sales declined from fifty-five (55), to forty-one (41), to twenty-seven (27) to seventeen (17). IL sales rose to forty-eight (48) in 2021, but sales leads have plummeted due to negative publicity, and to date, there have only been three (3) IL sales in 2022. Further, many Residents are choosing to remain in their IL units instead of moving into AL units and are opting to hire home health aides instead of moving to The Plaza.
Negotiations with the Landlord
Edgemere is developed on land subject to the Ground Lease, which will expire in 2054. The pressures of the declining occupancy driven by the COVID-19 pandemic, caused Edgemere to breach certain covenants and, therefore, events of default were triggered under the Bonds and the Lease. The Landlord’s bad faith actions over the last year have substantially exacerbated those factors.
In December 2021, the Debtors, the Trustee, the Landlord and Lifespace, solely in its capacity as manager pursuant to the MSA (collectively with the Debtors, the Trustee, and the Landlord, the 'Parties'), entered into a Forbearance (the 'First Forbearance'). Pursuant to the First Forbearance, Edgemere paid the Landlord the September 2021 rent and reimbursed substantial professional fee expenses. Throughout the negotiation period the Landlord would go silent for periods of time.
On December 28, 2021, counsel for the Trustee circulated a draft extension of the Forbearance through March 31, 2022 as the Parties had previously discussed. The Landlord did not respond. After several attempts to contact the Landlord through counsel, a conference call was held with Landlord’s counsel on January 7, 2022, where counsel for the Landlord stated that his client was considering whether or not they would extend the Forbearance. On January 12, 2022, counsel for Edgemere set forth the position that among other things, the Landlord had acted in bad faith.
On January 14, 2022, the new counsel for the Landlord informed Edgemere that its client would not consider a forbearance extension, would not sell the real property and would not negotiate the terms of the Ground Lease. At or about the same time an individual purporting to be a consultant for the Landlord reached out to at least one Resident of the Community, and subsequently began communicating with the press about Edgemere.
The First Forbearance terminated on December 31, 2021, due to inaction by the Landlord. On March 7, 2022, the Debtors, the Trustee, and Lifespace executed the Second Forbearance Agreement (the 'Second Forbearance'). On March 7, 2022, the Landlord executed the Ground Lessor’s Landlord Estoppel (the 'Landlord Estoppel') for the benefit of Edgemere and the Trustee. Pursuant to the Landlord Estoppel, the Landlord certified that as of March 7, 2022, Edgemere cured the monetary events of default under the Lease and that Landlord was unaware of any other defaults under the Lease.”
As of the Petition Date, the Debtors owe a total of approximately $112 million consisting of bond obligations and unsecured obligations (the “Bond Obligations”). The following is an approximate overview of the Debtors’ consolidated capital structure as of the Petition Date:
About the Debtors
According to the Debtors: “Edgemere opened its doors in 2001, and immediately set a new standard for luxury senior living retirement communities in North Texas. It was the first Life Care community to land in Dallas and, for almost a generation now, it’s offered residents an unparalleled set of benefits.
Edgemere’s drive to deliver a top-tier experience is reflective of our vision for excellence in senior living. It’s a vision shared across all 15 members of the Lifespace Communities® family. Together, our missions remain focused on one thing — celebrating the lives of seniors in everything we do. This simple notion has led Lifespace and its multistate system of senior living communities to experience decades of success and financial stability and, even more importantly, earn the trust of thousands of team members, residents and their families.
Additionally, Edgemere’s status as a 501(c)(3) not-for-profit organization means all revenues are reinvested into the community. This not only fuels the development of better services, amenities and opportunities for our residents, but also ensures that in the event of a financial hardship that’s no fault of your own, you won’t be asked to leave the community."
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