Washington real estate magnate Conrad Cafritz, behind in payments on more than $1 billion in debt, has joined New York developer Donald Trump and a growing list of business owners who are working privately with lenders to keep their companies out of bankruptcy court.
Like Trump -- who recently refinanced his far-flung empire through private negotiations -- Cafritz probably will be taking better care of himself and his lenders than if he filed for protection under federal bankruptcy laws, legal and real estate experts said yesterday.
"The process is cheaper, quicker and economically better for all parties," said David R. Kuney, a bankruptcy attorney with the Washington law firm David & Hagner.
Cafritz may be able to retain more property in a private restructuring -- known as a "workout" -- than he would in bankruptcy, sources said. Creditors, too, may recoup more of their original loans and interest in a workout than in bankruptcy, where Cafritz might be forced to dump large amounts of real estate onto an already glutted market at fire-sale prices.
A workout can also avoid some -- although not all -- of the enormous fees for lawyers, accountants and consultants that can suck creditors and debtors alike dry. Legal fees alone can reach millions of dollars a year in a major bankruptcy filing.
Cafritz himself is attempting to sell lenders on the idea that they will gain more if they work with him out of court and give him about three years to sell or refinance his holdings, which include the Georgetown Inn hotel, the Freestate Raceway site in Laurel and the Holiday Inn Crowne Plaza in Crystal City.
According to a proposal Cafritz has made to his creditors, he owes about $1.1 billion to about 70 lenders around the world, but he would raise considerably less than that if he were forced to sell his properties today. The recent decline in the value of those properties -- and Cafritz's inability to stay current on his interest payments -- have combined to bring his operation to the edge of bankruptcy.
Cafritz and Trump are not alone in restructuring their debts in a real estate climate that is politely described as "sluggish." The list of local developers who have been renegotiating loans includes Dominic F. Antonelli Jr., chairman of Parking Management Inc.; Dwight Schar, chairman of NVR L.P., the Washington area's biggest home builder; and Pete T. Scamardo, chief executive of Centennial Cos., a major Northern Virginia developer.
Under a private workout plan, lenders can extend the time for repayment of a loan, lower interest rates or allow interest to accrue for later repayment by the borrower. At the same time, lenders often demand and receive a larger ownership stake in the borrower's properties.
There are other disadvantages in a bankruptcy proceeding, legal experts said.
In a bankruptcy, "the court has more control, the process is slower and the administrative expenses are higher," said Howard S. Jatlow, an attorney with Dickstein, Shapiro & Morin. Jatlow, whose firm represents Cafritz's creditors, declined to comment on Cafritz, but said that out-of-court workouts generally can be beneficial for both sides.
"The Cafritz example will become a model for cases like this," Kuney said.
Any type of financial restructuring was once considered an embarrassment in the business world, but as defaults have become more prevalent, lenders and borrowers are now more concerned about maintaining their flexibility and less concerned about saving face.
Some experts said that one reason lenders favor private workouts is because the publicity about loan defaults that often accompany bankruptcy court filings can depress the value of their stocks and bonds. But others, such as shareholders of financial institutions, might find that information useful.
Yesterday, some bonds of Perpetual Financial Corp., the parent of one of Cafritz's major lenders, lost 25 percent of their value. Traders said the drop was due in part to news of Perpetual's loans to Cafritz and his financial troubles.
Real estate investors who borrowed heavily and find themselves unable to meet their interest payments are typically going to give up more and more control of their empires and become managers of what they own for a fee, legal experts said.
In the Cafritz case, he "wants to retain a management contract to enable him to get current fees and income and retain an equity position in his partnerships," said one source.
While workouts are increasingly favored over bankruptcy filings in major cases, bankruptcy retains certain advantages for borrowers, including the right of the borrower to stop paying interest and to cancel some contracts. If lenders lack confidence in a borrower, they may prefer that a bankruptcy judge control the process, though bankruptcy proceedings often take years.
Even in workouts, the negotiations can be endless and consensus among parties hard to achieve.
"The law firms involved in the Cafritz workout are working around the clock," said Kuney. "Can you imagine getting 70 people to agree?"
Cafritz has said that he expects to keep the restructuring of his loans out of court. However, legal experts said that if major lenders are unhappy with the plan, they could force Cafritz into involuntary bankruptcy and seek to impose their own reorganization plan..